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% and that it actually reduces inflation to that level.Suppose that the public was very skeptical and in fact thought the Hyperion Department of Finance was going to raise inflation to 30% so it could increase its expenditures.Then

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When the Department of Finance reduces inflation from 25% to 12.5%, there would be a decrease in unemployment. However, if the public had been expecting 25% inflation, they would have adjusted their expectations accordingly, and there would have been less of a decrease in unemployment. On the other hand, if the public had been expecting 35% inflation, they would have been more skeptical, causing a greater decrease in unemployment when inflation is reduced to 12.5%. Therefore, unemployment rises, but it would have risen less if people had been expecting 25% inflation.