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

To combat inflation, the Fed would aim to reduce the aggregate demand, which would result in a decrease in output and increase in unemployment. To decrease aggregate demand, the Fed would increase interest rates, making it more expensive for consumers and businesses to borrow and spend. Therefore, an increase in unemployment and an increase in interest rates would occur.

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