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60 views3 pages

Step-By-Step Explanation: Find Study Resources

life and science

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Vic smith
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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4/7/2021 [Solved] Suppose country A has a central bank with full credibility, and country B has a central bank

ountry B has a central bank with no credibility. Assume that in 2020, both... | Course Hero

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Hacettepe Üniversitesi / ECON / ECON 4050 / Suppose country A has a central bank with

Question 숤 Answered step-by-step

Suppose country A has a central bank with full credibility, and country B has a central bank with no credibility. Assume that in 2020, both
countries are hit with the same COVID-19 shock. If the central banks both announce an autonomous easing policy to reduce the unemployment
rate, how does the credibility of each country's central bank affect the speed of adjustment of the aggregate supply curve to policy
announcements? How does this result affect output stability? (Use an aggregate supply and demand diagram to demonstrate)

Business Economics Microeconomics ECON 4050 쉋

Answer & Explanation Solved by verified expert 숨 Rated 싙 Helpful

If central bank is credible then employment increases and output is stable.


If central bank is incredible then there is no increase in employment and output is unstable.

Step-by-step explanation

Credibility plays a important role in determining the effectiveness of the person.


An institute is credible if the public believes in the rule or strategy and through expectation about what the policy wants to achieve.Low
credibility can hinder the achievement as expectations are formed in context of mistrust.
If the central bank has full credibility then public believes in its goal and a slight change in the interest rate and increase investment
leading to more robust job creation.
If a central bank which has full credibility, adopts lose monetary policy to lower the interest rate and increase investment then the public
believes in central bank goal and act as expected by the central bank.
Covid-19 has led to the economic crises in many countries and to cope up with the crises and boost economy central banks are adopting
lose monetary policy by reducing interest rate on T-bills and increasing the money supply.
If the central bank is fully credible, then the aggregate supply curve fully elastic and the aggregate demand curve is downward sloping.
The lose monetary policy decrease interest rate and boost investment due to which the aggregate demand curve shifts to the right.
The impact is shown in figure below:

The increase in investment increases AD to AD' due to which Y increases to Y' and price remains constant at P.
When output increases job opportunities are created.

If the central bank have no credibility then the AS curve is vertical as shown in figure below:

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4/7/2021 [Solved] Suppose country A has a central bank with full credibility, and country B has a central bank with no credibility. Assume that in 2020, both... | Course Hero

The increase in money supply increases investment and shifts AD to AD' but AS is vertical so output remains constant at Y and price
increases to P'.

When output does not change, there is no increase in employment.

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