If the monetary authorities follow policies that keep the annual rate of inflation steady and low (for example, 2 percent), which of the following is most likely to occur?
A) a high rate of unemployment because people will anticipate a higher rate of inflation
B) considerable fluctuations in real GDP because the monetary authorities are not constantly adjusting monetary policy in light of current business conditions
C) higher real interest rates because decision makers will fail to anticipate the 2 percent rate of inflation
D) an unemployment rate that is at or near the natural rate of unemployment because the actual rate of inflation will not be much different than what people expect

Question

Quizplus · Accepted Answer

If the monetary authorities follow policies that keep the annual rate of inflation steady and low, then people will begin to expect this rate, and decision makers will adjust their behavior to account for it. Therefore, there will not be significant changes in output or employment due to unexpected inflation, and real interest rates will be close to the nominal interest rates minus the expected rate of inflation. This combination will result in an unemployment rate that is at or near the natural rate of unemployment.

If the Monetary Authorities Follow Policies That Keep the Annual