the economics of money, banking, and financial markets

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26.3 The Role of Credibility and a Nominal Anchor

1. 
   

   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

   
   


2. 
   

   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

   
   


3. 
   

   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