Central bank credibility may be established by ________.

Question

Quizplus · Accepted Answer

The appointment of individuals to the Fed with a strong aversion to inflation is one key way to establish central bank credibility. This is because a credible central bank is expected to keep inflation low and stable, and having leaders who are committed to this goal can help build public trust in the central bank's ability to achieve this objective.

B, C, and D are not effective ways to establish central bank credibility. Quicker responses to negative aggregate supply shocks may help stabilize the economy, but they do not necessarily build trust in the central bank's overall credibility. Greater coordination between monetary and fiscal policy may be beneficial for policy effectiveness, but it does not directly address the issue of credibility. Finally, appointing central bankers who are hawkish on defense may signal a commitment to low inflation, but it does not guarantee that the central bank will be able to achieve its goals in practice.

Central Bank Credibility May Be Established by ________