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26.3 The Role of Credibility and a Nominal Anchor
A credible nominal anchor ____.
A) can help overcome the time-inconsistency problem by providing an expected constraint on
discretionary policy
B) can help to anchor inflation expectations, which leads to smaller fluctuations in inflation
C) is required for a policy rule
D) all of the above
E) both A and B
Answer: E
Diff: 2 Type: MC Page Ref: 625 - 626
Skill: Recall
Objective List: 26.2 Characterize the discretionary versus nondiscretionary and rules versus
discretion policy debates
Suppose that there is a positive aggregate demand shock and the central bank commits to an
inflation rate target. If the commitment is credible, then ____.
A) the public's expected inflation will remain unchanged
B) the short-run aggregate supply curve will not shift
C) over time inflation will fall back down to the inflation target
D) all of the above
E) both A and B
Answer: D
Diff: 2 Type: MC Page Ref: 625 - 626
Skill: Recall
Objective List: 26.2 Characterize the discretionary versus nondiscretionary and rules versus
discretion policy debates
Suppose that there is a positive aggregate demand shock and the central bank commits to an
inflation rate target. But if the commitment is not credible, then ____.
A) the public's expected inflation will remain unchanged
B) the short-run aggregate supply curve will rise
C) over time inflation will fall back down to the inflation target
D) all of the above
E) both A and B
Answer: B
Diff: 2 Type: MC Page Ref: 625 - 626
Skill: Recall
Objective List: 26.2 Characterize the discretionary versus nondiscretionary and rules versus
discretion policy debates