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Fact 28.4.2
The Reserve Bank of New Zealand signed an agreement with the New Zealand government in which the Bank agreed to maintain inflation inside a low target range. Failure to achieve the target would result in the governor of the Bank losing his job.
-Consider Fact 28.4.2. Choose the correct statement.
A)The short-run Phillips curve shifted downward because people believed that the Bank of New Zealand was serious about meeting the new low inflation target.
B)A movement occurred down along the short-run Phillips curve because although the inflation rate fell, expectations did not change.
C)Neither actual inflation nor expected inflation changed, and there was no change in the short-run Phillips curve.
D)The short-run Phillips curve was abolished and New Zealand now has only a long-run Phillips curve.
E)The short-run Phillips curve shifted leftward because when inflation expectations fall, the natural unemployment rate decreases.

Question

Quizplus · Accepted Answer

The agreement between the Reserve Bank of New Zealand and the government created a credible commitment to maintaining low inflation, which led to a downward shift in the short-run Phillips curve. This is because people believed that the Bank was serious about meeting the new low inflation target, leading to lower inflation expectations and thus a lower inflation rate for any given level of unemployment.

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