Monetary Policy in Hyperion
In Hyperion the Department of Finance is responsible for monetary policy. Hyperion has had an inflation rate of 25% for many years.
-Refer to Monetary Policy in Hyperion.Suppose that the Hyperion Department of Finance has run a public relations campaign claiming it will reduce inflation to 12.5% but that it actually leaves inflation at 25%.Suppose that the public had expected that the Department of Finance would reduce inflation,but only to 20%.Then

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The public expected inflation to fall to 20%, but it actually remained at 25%. This means that the real interest rate is higher than expected, which will lead to a decrease in investment and a rise in unemployment. However, the unemployment rate would have fallen more if people had expected inflation to fall to 12.5%, because the real interest rate would have been lower and investment would have been higher.