The main determinant of how quickly expected inflation adjusts to changes in monetary policy is
A)the slope of the Phillips curve.
B)the slope of the short-run aggregate supply curve.
C)the credibility of the Central Bank.
D)the degree of indexation in the economy.

Question

Quizplus · Accepted Answer

The credibility of the central bank affects how quickly expected inflation adjusts to changes in monetary policy. If the central bank is highly credible, then their commitment to low inflation may lead to a faster adjustment of expected inflation to changes in monetary policy. Conversely, if the central bank is not credible, then it may take longer for expected inflation to adjust as agents may not fully believe the central bank's commitment to low inflation. The slope of the Phillips curve, the slope of the short-run aggregate supply curve, and the degree of indexation in the economy may also impact inflation dynamics, but none are as directly related to the speed of inflation adjustment as central bank credibility.

The Main Determinant of How Quickly Expected Inflation Adjusts to Changes