Suppose expected inflation and actual inflation are both relatively high,and unemployment is at its natural rate.If the Fed then pursues a contractionary monetary policy,which of the following results would be expected in the short run?
A)Expected inflation would exceed actual inflation,and unemployment would exceed its natural rate.
B)Expected inflation would exceed actual inflation,and unemployment would be below its natural rate.
C)Actual inflation would exceed expected inflation,and unemployment would exceed its natural rate.
D)Actual inflation would exceed expected inflation,and unemployment would be below its natural rate.

Question

Quizplus · Accepted Answer

If the Fed pursues a contractionary monetary policy, it will reduce the money supply and increase interest rates. This will lead to a decrease in aggregate demand and output in the short run, which will cause a decrease in the demand for labor and an increase in the unemployment rate. However, because both expected inflation and actual inflation are relatively high, there is likely to be downward pressure on real wages, which will reduce the natural rate of unemployment. As a result, unemployment will exceed its natural rate, and expected inflation will exceed actual inflation.

Suppose Expected Inflation and Actual Inflation Are Both Relatively High,and