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 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