If the public believes that the commitment to a nominal anchor is not credible,the effect of a positive aggregate demand shock is for ________.
A)short-run aggregate supply to shift down
B)short-run aggregate supply to remain unchanged
C)short-run aggregate supply to shift up
D)inflation,but not economic activity,to increase

Question

Quizplus · Accepted Answer

If the public doesn't believe in the commitment to a nominal anchor, meaning they don't have confidence in the central bank to keep inflation under control, they will expect higher inflation rates. This expectation leads to firms setting higher prices, causing a shift up in the short-run aggregate supply curve. As a result, there will be no increase in economic activity, but inflation will increase. Therefore, the correct answer is C - short-run aggregate supply will shift up.

If the Public Believes That the Commitment to a Nominal