In the equation for the short-run aggregate supply curve, π = πe + 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 = πe + γ  + ρ, an improvement in the credibility of monetary policy is represented by a change in ________.

Quizplus · Accepted Answer

In the equation for the short-run aggregate supply curve, π = πe + γ 11eab3ba_70bd_3ba4_a5fb_ad36dc5c8a93_TB5034_11 + ρ, expected inflation (πe) is a key determinant of the short-run aggregate supply. An improvement in the credibility of monetary policy would lead to a decrease in expected inflation (πe), which in turn would shift the short-run aggregate supply curve to the right, resulting in lower inflation and higher output. Therefore, A is the correct answer.

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