Comment on the ability of a credible nominal anchor to allow policy makers to exploit a short-run trade-off between unemployment and inflation

What will be an ideal response?

In the wake of a negative supply shock, policy makers may wish to implement expansionary policy to reverse the decline in economic activity. If this is understood as a temporary, "emergency" measure, rather than an abandonment of a commitment to price stability, expected inflation may decline even as aggregate demand is rising. However, under normal circumstances, any attempt to reduce unemployment and tolerate an increase in inflation will not be supported by credibility. On the contrary, such a policy must signal a lack of commitment to price stability; the loss of credibility confirms the illusory nature of the trade-off.