A contractionary monetary policy can reduce the inflation rate without causing a rise in unemployment if expectations are formed rationally and monetary policy is
A) combined with expansionary fiscal policy.
B) carried out in total secrecy.
C) publicly announced and credible.
D) combined with contractionary fiscal policy.

Question

Quizplus · Accepted Answer

A contractionary monetary policy can reduce the inflation rate without causing a rise in unemployment if expectations are formed rationally and monetary policy is publicly announced and credible. If the public believes that the central bank is committed to reducing inflation, they will adjust their expectations and factor it into their decision-making process, resulting in a lower inflation rate without causing an increase in unemployment.

A Contractionary Monetary Policy Can Reduce the Inflation Rate Without