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Chapter 25: Q.12 (page 676)

In general, how does credibility (or lack thereof) affect the aggregate supply curve?

Short Answer

Expert verified

When individuals expect more inflation, the aggregate supply curve will shift upwards in the short run.

Step by step solution

01

Content Introduction

Let us look at credibility of the central bank and the aggregate supply curve and tend to make analysis.

02

Content Explanation

People's expectations of inflation would be significantly lower if the central bank had high credibility, because we just trust the central bank. We expect they will follow an anti-inflationary strategy. When individuals expect more inflation, the aggregate supply curve will shift upwards in the short run.

Another factor is that we believe the central bank's confidence is significantly stronger, thus we forecast lower inflation. So, in essence, when I get the supply curve to shift to the right, we'll see the short.

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Most popular questions from this chapter

Go to the St. Louis Federal Reserve FRED database, and find data on the core PCE price index (PCEPILFE) and the spot price of a barrel of oil (WTISPLC). For both variables, convert the units setting to "Percent Change from Year Ago, " and download the data from 1960 to the most recent available data.

a. Identify periods in which oil price inflation is 80%or higher.

b. In the periods identified in part (a), how many months was oil price inflation 80% or higher? What was the average core inflation rate during each of those episodes?

c. Based on your answers to parts (a) and (b) above, what can you conclude about the credibility of more recent monetary policy compared to its credibility in the earlier periods?

How would an unexpected change in the equilibrium real fed funds rate be an argument against using a Taylor rule for monetary policy implementation?

In some countries, the president chooses the head of the central bank. The same president can fire the head of the central bank and replace him or her with another director at any time. Explain the implications of such a situation for the conduct of monetary policy. Do you think the central bank will follow a monetary policy rule, or will it engage in discretionary policy?

Suppose two countries have identical aggregate demand curves and potential levels of output, and ฮณis the same in both countries. Assume that in 2019 , both countries are hit with the same negative supply shock. Given the table of values below for inflation in each country, what can you say, if anything, about the credibility of each country's central bank? Explain your answer.

โ€œThe more credible the policymakers who pursue an anti-inflation policy, the more successful that policy will be.โ€ Is this statement true, false, or uncertain? Explain your answer
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