Monetary Policy in Flosserland

question 41

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 was very skeptical and in fact thought the Flosserland Department of Finance was going to raise inflation to 30% so it could increase its expenditures.Then

• A)unemployment falls,but it would have fallen less if people had been expecting 25% inflation.
• B)unemployment falls,but it would have fallen less if people had been expecting 35% inflation.
• C)unemployment rises,but it would have risen less if people had been expecting 25% inflation.
• D)unemployment rises,but it would have risen less if people had been expecting 35% inflation.

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Definitions:

Induced Consumption

The portion of spending by households that increases with their income, demonstrating how consumer spending is influenced by changes in income.

Autonomous C

Consumer spending that does not depend on current income, influenced by factors like confidence and wealth, key for understanding economic fluctuations.

Induced C

Refers to the consumption that varies with income levels; as income increases, so does the consumption level.

Autonomous Consumption

the level of consumption that occurs when income is zero, representing the expenditures necessary to meet basic needs.