Suppose that there is a positive aggregate demand shock and the central bank commits to an inflation rate target. But if the commitment is not credible,then
A)the public's expected inflation will remain unchanged.
B)the short-run aggregate supply curve will rise.
C)over time inflation will fall back down to the inflation target.
D)all of the above.
E)both A and B.

Question

Quizplus · Accepted Answer

If the commitment of the central bank to an inflation rate target is not credible, the public will not believe that the central bank will act to bring inflation back to the target level. As a result, the expected inflation rate will not change, and the short-run aggregate supply curve will shift upward as firms adjust their output and price expectations. This will result in higher inflation and lower output in the short run. Over time, inflation may or may not fall back to the target level, depending on whether the central bank can regain credibility and convince the public that it is committed to its inflation rate target.

Suppose That There Is a Positive Aggregate Demand Shock and the Central