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 publicizes its intent 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
A)unemployment rises but it would have risen by more if people had expected inflation to be 6%.
B)unemployment rises but it would have risen by less if people had expected inflation to be 6%.
C)unemployment falls but it would have fallen by more if people had expected inflation to be 6%.
D)unemployment falls but it would have fallen by less if people had expected inflation to be 6%.

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 publicizes its intent 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
A)unemployment rises but it would have risen by more if people had expected inflation to be 6%.
B)unemployment rises but it would have risen by less if people had expected inflation to be 6%.
C)unemployment falls but it would have fallen by more if people had expected inflation to be 6%.
D)unemployment falls but it would have fallen by less if people had expected inflation to be 6%.

Quizplus · Accepted Answer

If people had expected inflation to fall only to 10% but the Bank of Mokania is successful in reducing it to 5%, they will likely perceive the decrease in inflation as overly aggressive, which could lead to a decrease in demand for goods and services, causing unemployment to rise. However, if people had expected inflation to fall to 6%, the decrease in inflation would be perceived as in line with expectations, reducing the negative impact on demand and keeping unemployment relatively lower compared to the scenario where people expected a smaller decrease in inflation. Therefore, unemployment rises but it would have risen by less if people had expected inflation to be 6%.