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 that it intends to reduce the inflation rate to 5%.If it actually reduces inflation to 3% and people were expecting inflation to fall only to 8%,then
A)unemployment falls but it would have fallen by more if the Bank of Mokania had reduced inflation to 5% rather than 3%.
B)unemployment falls but it would have fallen by less if the Bank of Mokania had reduced inflation to 5% rather than 3%.
C)unemployment rises but it would have risen by more if the Bank of Mokania had reduced inflation to 5% rather than 3%.
D)unemployment rises but it would have risen by less if the Bank of Mokania had reduced inflation to 5% rather than 3%.

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 that it intends to reduce the inflation rate to 5%.If it actually reduces inflation to 3% and people were expecting inflation to fall only to 8%,then
A)unemployment falls but it would have fallen by more if the Bank of Mokania had reduced inflation to 5% rather than 3%.
B)unemployment falls but it would have fallen by less if the Bank of Mokania had reduced inflation to 5% rather than 3%.
C)unemployment rises but it would have risen by more if the Bank of Mokania had reduced inflation to 5% rather than 3%.
D)unemployment rises but it would have risen by less if the Bank of Mokania had reduced inflation to 5% rather than 3%.

Quizplus · Accepted Answer

When inflation is reduced more than expected, unemployment tends to rise due to the short-term trade-off between inflation and unemployment, known as the Phillips curve. However, if inflation had been reduced to 5% instead of 3%, the rise in unemployment would have been less severe.