Question
Initially, the economy is in its equilibrium where the inflation rate equals the expected inflation rate. Suppose actual inflation falls by 3 percentage points due
Initially, the economy is in its equilibrium where the inflation rate equals the expected inflation rate. Suppose actual inflation falls by 3 percentage points due to contractionary monetary policy. If expected inflation falls by 5 percentage points at the same time, then
A. the unemployment rate will fall in the short run. But unemployment will return to its natural rate in the long run because actual inflation will fall further by 2 percentage points.
B. the unemployment rate will fall in the short run. But unemployment will return to its natural rate in the long run because expected inflation will fall further by 2 percentage points.
C. the unemployment rate will rise in the short run. But the natural rate of unemployment will also fall in the long run because actual inflation will fall further by 2 percentage points.
D. the unemployment rate will rise in the short run. But unemployment will return to its natural rate in the long run because expected inflation will rise by 2 percentage points.
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