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

Question

Quizplus · Accepted Answer

A credible commitment to a nominal anchor (such as an inflation target) means that monetary policy will adjust to stabilize the price level. In the event of a negative aggregate demand shock, the central bank would act to offset the shock's deflationary effects, thereby keeping the price level stable. This action primarily affects aggregate demand, not the short-run aggregate supply, which would remain unaffected.

If the Public Believes the Commitment to a Nominal Anchor