Monetary Policy in Highland
Highland has had inflation of 15% for many years. Highland establishes a new central bank, the Bank of Highland, with the hopes of reducing the inflation rate.
-Refer to Monetary Policy in Highland. The Bank of Highland publicizes that it intends to reduce the inflation rate to 5%. If it is successful in doing so but people had expected inflation to fall only to 10%, then

Question

Quizplus · Accepted Answer

If people had expected inflation to fall to 10%, then the reduction to 5% would have been greater than anticipated. This means that the Bank of Highland would need to implement more contractionary monetary policy, which would lead to higher unemployment. However, if people had expected inflation to fall to 6%, then the reduction to 5% would have been smaller than anticipated. This means that the Bank of Highland would need to implement less contractionary monetary policy, which would result in lower unemployment than expected. Therefore, the actual outcome of unemployment rising would have been less severe than if people had expected inflation to fall to 6%.