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 both...

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 both central banks announce an autonomous easing policy to reduce the unemployment rate,

a) How does the credibility of each country’s central bank affect the speed of adjustment of the aggregate

supply curve to policy announcements?

b) How does this result affect output stability?

(Use aggregate supply and demand diagrams to demonstrate)