Monetary Policy in Mokania
Mokania has had inflation of 15% for many years. Mokania establishes a new central bank, the Bank of Mokania, with the hopes of reducing the inflation rate.

-Refer to Monetary Policy in Mokania.The Bank of Mokania reduced inflation to its announced goal of 5%.However,people were expecting inflation to fall to 7% and there was a favorable supply shock.In the short run which of the following made unemployment lower than otherwise?
A)both people expecting inflation to fall to 7% instead of 5%,and the favorable supply shock
B)neither people expecting inflation to fall to 7% instead of 5%,and the favorable supply shock
C)only the favorable supply shock
D)only people expecting inflation to fall to 7% instead of 5%

Question

Monetary Policy in Mokania
Mokania has had inflation of 15% for many years. Mokania establishes a new central bank, the Bank of Mokania, with the hopes of reducing the inflation rate.

-Refer to Monetary Policy in Mokania.The Bank of Mokania reduced inflation to its announced goal of 5%.However,people were expecting inflation to fall to 7% and there was a favorable supply shock.In the short run which of the following made unemployment lower than otherwise?
A)both people expecting inflation to fall to 7% instead of 5%,and the favorable supply shock
B)neither people expecting inflation to fall to 7% instead of 5%,and the favorable supply shock
C)only the favorable supply shock
D)only people expecting inflation to fall to 7% instead of 5%

Quizplus · Accepted Answer

The favorable supply shock increased output and employment.