the economics of money, banking, and financial markets

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4. 
   

   Suppose that there is a negative 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 rise
   C) over time inflation will fall
   D) all of the above
   E) both A and C
   Answer: A
   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

   
   


5. 
   

   Suppose that there is a negative 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) economic contraction will be worse
   D) all of the above
   E) both B and C
   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

   
   


6. 
   

   Suppose that there is a negative aggregate supply shock and the central bank commits to an
   inflation rate target.
   A) If the commitment is credible, the public's expected inflation will remain unchanged.
   B) Credible policy produces better outcomes on both inflation and output in the short run.
   C) Policies that are not credible produce worse economic contraction.
   D) all of the above.
   E) both A and C.
   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