There Is an Election Coming Up A) Outcome a
B) Outcome B
C) Outcome C
D)

question 58

Multiple Choice

There is an election coming up. Conservatives are currently in government, and will be able to raise more money for the next federal election if they keep inflation and unemployment low. Conservatives can persuade firms whether or not to raise prices; Liberals can persuade the Bank whether or not to increase the money supply. The amount of money raised by each party and the resulting inflation and unemployment rates are given below. If the Liberals can move first, what will be the outcome of this game? $$\begin{array} { l l l } & \text { Raise prices } & \text { Don't raise prices } \\\hline \text { Conservative strategy } & \text { Outcome } \mathrm { A } & \text { Outcome B } \\\text { Raise } M & \text { Cons.: } \$ 40 & \text { Cons.: \$80 } \\& \text { Libs.: } \$ 60 & \text { Libs.: } \$ 20 \\& \pi = 8 \% & \pi = 0 \% \\& u = 8 \% & u = 6 \% \\\text { Liberal Strategy } & \text { Outcome } \mathrm { C } & \text { Outcome } \mathrm { D } \\\text { Don't raise } & \text { Cons.: } \$ 20 & \text { Cons.: } \$ 60 \\M & \text { Libs.: } \$ 80 & \text { Libs.: } \$ 40 \\& \pi = 8 \% & \pi = 0 \% \\u = 9 \% & u = 8 \% \\\hline\end{array}$$

• A) Outcome A
• B) Outcome B
• C) Outcome C
• D) Outcome D