Explain the Role of "Expectations" and "Credibility" in Monetary Policy

question 202

Essay

Explain the role of "expectations" and "credibility" in monetary policy when the policy goal is fighting inflation and keeping it low.

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Definitions:

Retention for Investment

The practice of holding back a portion of earnings or profits for reinvestment in the business, rather than distributing them as dividends.

Disposition of Earnings

Decisions made by a company regarding the allocation of its net income, including dividends distribution and retained earnings.

Cash Payment

A transaction in which money (in the form of cash) is given by one party to another in exchange for goods, services, or to settle a debt.

Signaling Effect

The phenomenon where actions by a company provide clues or signals to the market about its potential performance or financial health.