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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

Go to the St. Louis Federal Reserve FRED database, and find data on the personal consumption expenditure price index (PCECTPI). Convert the units setting to "Percent Change from Year Ago, " and download the data. Beginning in January 2012, the Fed formally announced a 2% inflation goal over the "longer-term."

a. Calculate the average inflation rate over the last four and the last eight quarters of data available. How does it compare to the2% inflation goal?

b. What, if anything, does your answer to part (a) imply about Federal Reserve credibility?

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

Various survey-based measures of inflation expectations are available reflecting consumer, market, and economists" outlooks. For instance, the Survey of Professional Forecasters (SPF) is available from the Philadelphia Federal Reserve at https//www.philadelphiafed.org/research-and-data/ real-time-center/survey-of-professional-forecasters/, while the well-known University of Michigan consumer inflation expectations survey is available at https://fred st1ouisfed org/series/MICH. Compare the most recent readings of inflation expectations of the SPF and Michigan survey to actual CPI inflation. In general, which one seems to be more accurate?

Outline the benefits and costs of sticking to a set of rules in each of the following cases. How do each of these situations relate to the conduct of economic policies?

a. Going on a diet

b. Raising children

Robert Lucas won the Nobel Prize in economics. Go to http:/nobelprize.org/nobel_prizes/economics/ and locate the press release on Robert Lucas. What was his Nobel Prize awarded for? When was it awarded?
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