Monetary Policy in Mokania

question 48

Multiple Choice

Monetary Policy in Mokania
Mokania has had inflation of 15% for many years. Mokania establishes a new central bank, the Bank of Mokania, with the hopes of reducing the inflation rate.

-Refer to Monetary Policy in Mokania.The Bank of Mokania publicizes that it intends to reduce the inflation rate to 5%.If it actually reduces inflation to 3% and people were expecting inflation to fall only to 8%,then

• A)unemployment falls but it would have fallen by more if the Bank of Mokania had reduced inflation to 5% rather than 3%.
• B)unemployment falls but it would have fallen by less if the Bank of Mokania had reduced inflation to 5% rather than 3%.
• C)unemployment rises but it would have risen by more if the Bank of Mokania had reduced inflation to 5% rather than 3%.
• D)unemployment rises but it would have risen by less if the Bank of Mokania had reduced inflation to 5% rather than 3%.

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Definitions:

Production Efficiency

A state in which the economy or a production process can no longer produce additional amounts of a good without lowering the production level of another product.

Long-Run Equilibrium

A state in which all factors of production can be adjusted, market supply equals demand, and economic agents have no incentive to change their behavior, leading to a steady-state market condition.

Competitive Industry

An economic sector characterized by a large number of firms that compete with each other to sell similar products or services, leading to efficiency and innovation.

Price

The cost anticipated, necessary, or paid out in return for acquiring something.