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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

Suppose country A has a central bank with full credibility, and country B has a central bank with no credibility. How does the credibility of each country's central bank affect the speed of adjustment of the aggregate supply curve to policy announcements? How does this result affect output stability? Use an aggregate supply and demand diagram to demonstrate.

In Japan, the government and central bank have enacted policies recently to raise inflation permanently from persistently low levels, however inflation continues to remain near zero. How, if at all, might credibility of the central bank explain the low inflation persistence?

“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

How does a credible nominal anchor help improve the economic outcomes that result from a positive aggregate demand shock? How does a credible nominal anchor help if a negative aggregate supply shock occurs? Use graphs of aggregate supply and demand to demonstrate.

Suppose two countries have identical aggregate demand curves and potential levels of output, and γis 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.
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