When the central bank has credible policy, the economy is likely to be:
A) at the natural rate because unexpected inflation equals zero.
B) expanding because the credibility of the policy makes the public optimistic.
C) stable because inflation is lower than expected.
D) expanding because inflation is lower than expected.

Question

Quizplus · Accepted Answer

Credible policy by the central bank ensures that inflation expectations are well-anchored, meaning that actual inflation aligns with the target. This stability in expectations helps the economy operate at its natural rate, where unexpected inflation equals zero, as agents do not anticipate the central bank deviating from its policy goals.

When the Central Bank Has Credible Policy, the Economy Is