Final answer:
A higher than expected rate of inflation in the short run leads firms to increase production resulting in lower unemployment as firms hire more workers. Additionally, a rise in the supply of funds in the financial market will lead to a decline in interest rates.
Step-by-step explanation:
A higher than expected rate of inflation in the short run can lead firms to increase production. This adjustment often happens because firms see the increased prices as an opportunity to make more profit by selling more goods at higher prices before wages catch up. In the short term, this leads to B. Lower unemployment. This is because as firms ramp up production to take advantage of higher prices, they often need to hire more workers. Thus, an increased rate of inflation can temporarily lead to a boost in employment as firms expand their workforces to meet the higher demand and make the most of the inflation-caused increase in prices.
Regarding the changes in the financial market that could lead to a decline in interest rates, the correct answer is C. a rise in supply. An increase in the supply of funds available for borrowing, perhaps due to higher savings rates or more investments entering the market, tends to push down interest rates because more funds are chasing the same level of borrowing demand.