The main determinant of how quickly expected inflation adjusts to changes in monetary policy is
A)the slope of the Phillips curve.
B)the slope of the short-run aggregate supply curve.
C)the credibility of the central bank.
D)the degree of indexation in the economy.

Question

Quizplus · Accepted Answer

The credibility of the central bank plays a vital role in how quickly expected inflation adjusts to changes in monetary policy. If a central bank has a strong reputation for keeping inflation under control, then the public will be more likely to believe that their policies will be effective in combating inflation, leading to faster adjustments in expected inflation. Conversely, if a central bank has a poor reputation for controlling inflation, then it may take longer for expectations to adjust. Therefore, option C is the best choice.

The Main Determinant of How Quickly Expected Inflation Adjusts to Changes