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 ________.

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 ________.

Quizplus · Accepted Answer

An improvement in the credibility of monetary policy means that people and firms will expect lower inflation in the future. This reduces their inflation expectations and shifts the short-run aggregate supply curve downwards, resulting in lower current inflation and higher output. Thus, a change in expected inflation is represented by an improvement in the credibility of monetary policy.

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