Question

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

Short answer

True. A credible anti-inflation programme will reduce inflation faster and at lower costs if expectations influence wage and price setting.

Step-by-step solution

Content Introduction

The reality that inflation expectations have a significant impact on the actual behavior of inflation. As a result, people's inflation expectations will shift depending on how trustworthy these politicians are. It's a very credible policymaker who claims that they're going to undertake anti-inflationary policies, and that as people's inflation expectations fall, low inflation may be predicted.

Content Explanation

If a little less credible policymaker claims to be anti-inflationary, and we don't believe them, we should expect considerably higher inflation. And these expectations work to alter the aggregate supply curve in the short run in the other direction. So, if we expect low inflation, we can expect the short run aggregate supply curve to shift to the right, cutting inflation even further. If we were expecting more inflation, however, the short run aggregate supply curve would move to the left, pushing inflation even higher.

As a result, low inflation expectations are associated with fantastic policymakers, whereas higher inflation is associated with less credible policymakers.