During 2009, a country wants to reduce its inflation rate while maintaining its unemployment rate at its natural unemployment rate.To achieve these goals, the government should
A) announce a credible increase in the inflation rate.
B) announce a credible slowdown in the inflation rate.
C) surprise the public with an increase in the inflation rate.
D) surprise the public with a decrease in the inflation rate.
E) announce a credible slowdown in the inflation rate and then actually increase the inflation rate.

Question

Quizplus · Accepted Answer

To reduce inflation while maintaining the natural rate of unemployment, the government should announce a credible plan to slow down inflation. This will help manage inflation expectations and prevent the public from engaging in inflationary behavior while at the same time maintaining employment levels. Surprising the public with either an increase or decrease in the inflation rate is unlikely to be effective in achieving the desired outcomes. Additionally, announcing a credible plan to slow down inflation and then actually increasing inflation would erode the government's credibility and make it more difficult to manage inflation in the future.

During 2009, a Country Wants to Reduce Its Inflation Rate