Assume That There Is a Short-Run Tradeoff Between Inflation and Unemployment

question 70

Multiple Choice

Assume that there is a short-run tradeoff between inflation and unemployment, that the central bank desires both low inflation and low unemployment, and that the central bank follows a fixed rule in conducting monetary policy. Initially, households and firms expect high inflation. Following a credible announcement by the central bank of a low-inflation policy, households and firms will ______ the central bank's announcement and ______ their expectations of inflation.

• A) believe; lower
• B) not believe; not change
• C) believe; not change
• D) not believe; lower

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Definitions:

Empiricism

A theory that states knowledge comes only or primarily from sensory experience.

Knowledge

The understanding, awareness, or familiarity gained through experience or study.

Observation

Observation involves carefully watching, listening, and noting the characteristics or behavior of a subject or phenomenon without direct interaction or manipulation.

Systematic Tests

Systematic tests are structured methods used to evaluate or measure specific characteristics, abilities, or processes in a consistent and standardized manner.