Monetary Policy in Highland

question 305

Multiple Choice

Monetary Policy in Highland
Highland has had inflation of 15% for many years. Highland establishes a new central bank, the Bank of Highland, with the hopes of reducing the inflation rate.
-Refer to Monetary Policy in Highland. The Bank of Highland reduced inflation to its announced goal of 5%. However the unemployment rate was on average higher for many years after. A newspaper editorial argues that the unemployment rate had moved to this higher natural rate because (1) by itself the decrease in inflation had permanently increased unemployment and (2) that at the same time the central bank was fighting inflation the government of Highland had made a large increase in the minimum wage. Which of these arguments is consistent with the Phillip's curve model?

• A)both explanations 1 and 2
• B)neither explanation 1 nor 2
• C)explanation 1 but not explanation 2
• D)explanation 2 but not explanation 1

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