Question

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

Short answer

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

Step-by-step solution

Content Introduction

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

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.