Question

You are studying abroad in Australia for a semester. Unemployment has been creeping up and currently stands at 6%. This rate is getting a little too high for comfort, so the central bank of Australia decides to do something about it. When you arrived in the country, inflation was hovering around 3% and had been at that level for a few years. The central bank’s action leads inflation to increase to 5%.A. What happens to unemployment in the short run if inflation is expected to be 0%? [it rises, it falls, or it remains the same]B. What happens to unemployment in the short run if citizens of Australia have adaptive expectations? [it rises, it falls, or it remains the same]C. What happens to unemployment in the short run if citizens of Australia have rational expectations? [it rises, it falls, or it remains the same]

Answer 1

Answer and Explanation:

A. It would fall (Because of inflation going to 0, the average prices would go down and as a result corporate would want to hire employees as people would have purchasing power to buy products and services)

B. It would Fall (Since adaptive expectations means having contingencies in place of adversities. Therefore, people would be prepared.)

C. It will remain the same (Rational expectations means that people would predict that the unemployment would go down so it won't affect)