Monetary Policy in Flosserland

In Flosserland, the Department of Finance is responsible for monetary policy. Flosserland has had an inflation rate of 25% for many years.

-Refer to Monetary Policy in Flosserland.Suppose that the Flosserland 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 Flosserland Department of Finance was going to raise inflation to 30% so it could increase its expenditures.Then
A)unemployment falls,but it would have fallen less if people had been expecting 25% inflation.
B)unemployment falls,but it would have fallen less if people had been expecting 35% inflation.
C)unemployment rises,but it would have risen less if people had been expecting 25% inflation.
D)unemployment rises,but it would have risen less if people had been expecting 35% inflation.

Question

Monetary Policy in Flosserland

In Flosserland, the Department of Finance is responsible for monetary policy. Flosserland has had an inflation rate of 25% for many years.

-Refer to Monetary Policy in Flosserland.Suppose that the Flosserland 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 Flosserland Department of Finance was going to raise inflation to 30% so it could increase its expenditures.Then
A)unemployment falls,but it would have fallen less if people had been expecting 25% inflation.
B)unemployment falls,but it would have fallen less if people had been expecting 35% inflation.
C)unemployment rises,but it would have risen less if people had been expecting 25% inflation.
D)unemployment rises,but it would have risen less if people had been expecting 35% inflation.

Quizplus · Accepted Answer

If people were expecting 25% inflation, then they may have been prepared for the possibility of a rise in unemployment as the Department of Finance implements policies to reduce inflation. However, if people were skeptical and thought inflation would actually rise to 30%, they may have adjusted their expectations and behavior accordingly, potentially leading to a more significant rise in unemployment than if they had expected 25% inflation. Therefore, if unemployment does rise due to the Department of Finance's actions, it would likely have risen less if people had been expecting 25% inflation instead of 30% or higher.