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 was very skeptical and in fact thought the Southland Department of Finance was going to raise inflation to 30% so it could increase its expenditures. Then

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Unemployment rises because the public expected higher inflation (30%) than what actually occurred (12.5%), leading to a negative surprise in inflation expectations, which typically results in higher unemployment. If people had been expecting 25% inflation, the surprise would have been smaller, and unemployment would have risen less.