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 the Flosserland Department of Finance has run a public relations campaign claiming it will reduce inflation to 12.5% and actually reduces inflation to that level.Suppose at first that the public thought inflation would only drop to 18%,but eventually become convinced that the inflation rate will stay at 12.5%.
A)unemployment rises in the short run,and remains higher than it's original value in the long run.
B)unemployment rises in the short run,and is the same as it's original value in the long run.
C)unemployment falls in the short run,and is lower than it's original value in the long run.
D)unemployment falls in the short run,and is the same as it's original value in the long run.

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 the Flosserland Department of Finance has run a public relations campaign claiming it will reduce inflation to 12.5% and actually reduces inflation to that level.Suppose at first that the public thought inflation would only drop to 18%,but eventually become convinced that the inflation rate will stay at 12.5%.
A)unemployment rises in the short run,and remains higher than it's original value in the long run.
B)unemployment rises in the short run,and is the same as it's original value in the long run.
C)unemployment falls in the short run,and is lower than it's original value in the long run.
D)unemployment falls in the short run,and is the same as it's original value in the long run.

Quizplus · Accepted Answer

In the short run, unexpected lower inflation can lead to higher unemployment due to sticky wages. In the long run, unemployment returns to its natural rate as expectations adjust.