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

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 uses discretion in conducting monetary policy. Initially, households and firms expect high inflation. Following an 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