An unanticipated shift to a more expansionary monetary policy that permanently increases the rate of inflation from 2 to 6 percent will
A) reduce unemployment in the short run, but unemployment will return to the natural rate in the long run.
B) reduce unemployment in the short run, but unemployment will exceed the natural rate in the long run.
C) increase unemployment in the short run, but unemployment will return to the natural rate in the long run.
D) exert an unpredictable impact on unemployment in the short run, but unemployment will return to the natural rate in the long run.

Question

Quizplus · Accepted Answer

An unanticipated expansionary monetary policy can temporarily reduce unemployment below the natural rate due to increased demand and price/wage stickiness. However, in the long run, as expectations adjust, unemployment returns to the natural rate.

An Unanticipated Shift to a More Expansionary Monetary Policy That