Suppose that there is a negative aggregate supply shock and the central bank commits to an inflation rate target.
A)If the commitment is credible,the public's expected inflation will remain unchanged.
B)Credible policy produces better outcomes on both inflation and output in the short run.
C)Policies that are not credible produce worse economic contraction.
D)all of the above.
E)both A and C.

Question

Quizplus · Accepted Answer

A credible commitment to an inflation rate target means the public's expected inflation will remain unchanged, as they trust the central bank to achieve its target despite the shock. This credibility can mitigate the negative effects of the shock on both inflation and output, making outcomes better in the short run compared to a situation where the policy is not credible. Non-credible policies can indeed lead to worse economic outcomes, including deeper contractions, as they fail to anchor expectations effectively.

Suppose That There Is a Negative Aggregate Supply Shock and the Central