A monetary contraction is most successful when it is credible,namely when:
A) disinflation supersedes inflation.
B) the effect of fiscal policy is weakening.
C) market participants expect the central bank to carry through its tough stance.
D) market participants are uncertain about the current state of the economy.

Question

Quizplus · Accepted Answer

A credible monetary contraction occurs when market participants believe that the central bank will follow through on its intended policy actions, which will effectively constrain the money supply and increase interest rates. This belief can be reinforced through clear communication from the central bank regarding its objectives and policy actions. Therefore, option C is the correct answer as it states that market participants expect the central bank to carry through its tough stance. Options A, B and D are not directly related to the credibility of a monetary contraction.

A Monetary Contraction Is Most Successful When It Is Credible,namely