In the equation for the short-run aggregate supply curve,π =
+ γ
+ ρ,an improvement in the credibility of monetary policy is represented by a change in ________.
A)expected inflation
B)the price shock
C)the sensitivity of inflation to the output gap
D)the output gap

Question

In the equation for the short-run aggregate supply curve,π = 
+ γ 
+ ρ,an improvement in the credibility of monetary policy is represented by a change in ________.
A)expected inflation 
B)the price shock 
C)the sensitivity of inflation to the output gap 
D)the output gap

Quizplus · Accepted Answer

An improvement in the credibility of monetary policy leads to a reduction in expected inflation. This, in turn, shifts the short-run aggregate supply curve downward. Thus, an improvement in monetary policy credibility is represented by a change in expected inflation, option A.

In the Equation for the Short-Run Aggregate Supply Curve,π =