Monetary Policy in Highland

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 its efforts made the unemployment rate rise by 10 percentage points for a year while output fell by 30 percent for a year. Which of the following is correct?

A) Initially people's inflation expectations had been higher than 5%. The sacrifice ratio was 3.
B) Initially people's inflation expectations had been higher than 5%. The sacrifice ratio was 1.
C) Initially people's inflation expectations had been lower than 5%. The sacrifice ratio was 3.
D) Initially people's inflation expectations had been lower than 5%. The sacrifice ratio was 1.