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 that the Flosserland Department of Finance has run a public relations campaign claiming it will reduce inflation to 12.5% but it actually raises inflation to 30%. Suppose that the public had expected that the Department of Finance would reduce inflation but only to 22%. Then

A. unemployment falls, but it would have fallen less if people had been expecting 25% inflation.
B. unemployment rises, but it would have risen less if people had been expecting 12.5% inflation.
C. unemployment falls, but it would have fallen less if people had been expecting 12.5% inflation.
D. unemployment rises, but it would have risen less if people had been expecting 25% inflation.

Answer 1

A. unemployment falls, but it would have fallen less if people had been expecting 25% inflation.

Step-by-step explanation:

Due to the Flosserland Department of Finance it decreased the inflation to the 12.5%. In the case when the inflation is too high so it would develop the high unemployment but when the FDE plans to decreased it to 12.5% so only 22% would be decreased

Now when the inflation fall to 12.5% so it rise the unemployment as people predicted the inflation to be 25% but if the inflation is decline to 12.5% so the unemployment would also be decline

Therefore the option a is correct