Author Question: Holding all else constant, an economic expansion in Mexico should decrease the demand for U.S. ... (Read 22 times)

HudsonKB16 · **on:** Jun 29, 2018

Holding all else constant, an economic expansion in Mexico should decrease the demand for U.S. dollars.

Indicate whether the statement is true or false

Question 2

Why is the credibility of the Fed's policy announcements particularly important?

What will be an ideal response?

wfdfwc23 · **Reply #1 on:** Jun 29, 2018

Answer to Question 1

FALSE

Answer to Question 2

The credibility of policy announcements is important for the effectiveness of monetary policy because a more credible policy allows the Fed to have a greater impact on the expected inflation rate. In particular, a credible policy of disinflation will cause the short-run Phillips curve to shift down more rapidly than if the policy is less credible, thereby making the increase in the unemployment rate smaller and briefer.