Monetary Policy in Southland
In Southland the Department of Finance is responsible for monetary policy. Southland has had an inflation rate of 25% for many years.
-Refer to Monetary Policy in Southland. Suppose that the Southland 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 had expected that the Department of Finance would reduce inflation but only to 22%. Then

Question

Quizplus · Accepted Answer

Unemployment rises because the actual inflation rate is lower than the expected rate (22%), leading to higher real wages and reduced demand for labor. It would have risen more if people had been expecting the original 25% inflation, as the gap between expected and actual inflation would have been larger.