Fight inflation for fear of causing too much unemployment

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Reference no: EM131112596

Assume a majority of governors are reluctant to increase interest rates to fight inflation for fear of causing too much unemployment in the short run. How is this situation most likely to affect the Fed's credibility?

A. If the Board of Governors has less "conservative" preferences than the public, it will be less tempted to pursue expansionary monetary policy and hence increase the Fed's credibility.

B. This could be troublesome for the Fed's credibility, as it might require more-than-necessary increases in interest rates to show the public that the Fed still focuses on fighting inflation.

C. The public's expectations about future inflation rates will increase and the Fed will focus more on fighting inflation, increasing the Fed's credibility.

D. This could be favorable for the Fed's credibility, as it might require less-than-necessary increases in interest rates to show the public that the Fed's priority on fighting inflation remains intact.

Reference no: EM131112596

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