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 had expected that the Department of Finance would reduce inflation but only to 22%.Then
A)unemployment falls,but it would have fallen more if people had been expecting 12.5% inflation.
B)unemployment falls,but it would have fallen more if people had been expecting 25% inflation.
C)unemployment rises,but it would have risen more if people had been expecting 12.5% inflation.
D)unemployment rises,but it would have risen more if people had been expecting 25% 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 had expected that the Department of Finance would reduce inflation but only to 22%.Then
A)unemployment falls,but it would have fallen more if people had been expecting 12.5% inflation.
B)unemployment falls,but it would have fallen more if people had been expecting 25% inflation.
C)unemployment rises,but it would have risen more if people had been expecting 12.5% inflation.
D)unemployment rises,but it would have risen more if people had been expecting 25% inflation.

Quizplus · Accepted Answer

Unemployment rises because the actual inflation rate is lower than expected (12.5% vs. 22%), leading to higher real wages and reduced demand for labor. It would have risen more if people had expected the original 25% inflation, as the discrepancy between expected and actual inflation would have been greater.