Question

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 undertakes a public relations campaign to convince people that it will soon change monetary policy to reduce inflation to 12.5%. if flosserlanders believe their government then which, if any, curve(s) shift left?

Answer 1

A) the short-run but not the long run Phillips curve

Step-by-step explanation:

The short run Phillips curve shows an inverse relationship between inflation rate and unemployment. The higher the inflation rate, the lower the unemployment. But on the long run, the Phillips curve shows that there is no relationship between unemployment and inflation.

One of the greatest failures of classical economics is that is doesn't consider expectations, and many times expectations are extremely important in both consumer and supplier behaviors. If suppliers bevel that the inflation rate will decrease sharply (by 50% in this case), they will keep there current production output but they will not increase the price of their goods or services that much because they will fear others will also keep prices under control. Expectations of lower inflation will also affect consumers' behavior since they will not be willing to purchase products whose prices increased.

The problem with expectations is that they can be good or bad, and f reality doesn't follow, then they can easily urn around.