Monetary Policy in Flosserland

question 17

Multiple Choice

Monetary Policy in Flosserland

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 has run a public relations campaign claiming it will reduce inflation to 12.5% and that it actually reduces inflation to that level.Suppose that the public had expected that the Department of Finance would reduce inflation but only to 22%.Then

• A)unemployment falls,but it would have fallen more if people had been expecting 12.5% inflation.
• B)unemployment falls,but it would have fallen more if people had been expecting 25% inflation.
• C)unemployment rises,but it would have risen more if people had been expecting 12.5% inflation.
• D)unemployment rises,but it would have risen more if people had been expecting 25% inflation.

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Definitions:

Wage Taker

An individual or entity that accepts the prevailing wage rates in the market due to the inability to influence them.

Wage Rate

A set amount of money given by an employer to an employee for services rendered, usually specified on an hourly or annual basis.

Purely Competitive

A market structure characterized by many buyers and sellers, free entry and exit, and a product so standard that no one controls the market price.

Imperfectly Competitive

A market structure characterized by a few dominant firms that have control over prices and high barriers to entry, limiting perfect competition.