Consider two similar economies hit by the same temporary negative supply shock.In the economy with the more credible monetary policy,there will be ________.
A)smaller increases in both inflation and the real interest rate
B)a smaller increase in inflation and larger increase in the real interest rate
C)a smaller increase in inflation and larger decrease in output
D)a smaller increase in output and larger increase in the real interest rate

Question

Quizplus · Accepted Answer

A more credible monetary policy means that the central bank has established a track record of keeping inflation low and stable. Therefore, when faced with a temporary negative supply shock, the central bank is more likely to react in a way that does not threaten inflation expectations. As a result, the increase in inflation and real interest rates will be smaller compared to an economy with less credible monetary policy. Additionally, smaller increases in inflation and real interest rates are less likely to harm output growth.

Consider Two Similar Economies Hit by the Same Temporary Negative