In the late 1970s, oil prices rose sharply and at the same time, U.S. policymakers pursued expansionary fiscal and monetary policies. As a result, real GDP stayed at potential output, while the implicit price deflator jumped 8.1%. If the Fed's goal was to reduce inflation, which of the following would also occur?

Question

Quizplus · Accepted Answer

If the Fed's goal is to reduce inflation, it would pursue contractionary monetary policy, which would lead to an increase in interest rates and a decrease in aggregate demand. As a result, inflation would be reduced, but output and employment would also decrease, leading to an increase in unemployment. Therefore, the correct choice is an increase in unemployment and an increase in interest rates (C).

In the Late 1970s, Oil Prices Rose Sharply and at the Same