In 1981 Fed policy created a severe recession because the Fed
A) increased aggregate supply to reduce the inflation rate.
B) undertook a surprise reduction in the inflation rate.
C) announced a credible inflation reduction program.
D) undertook a surprise increase in the inflation rate.
E) announced a credible inflation increase program.

Question

Quizplus · Accepted Answer

The correct answer is B because the Fed's surprise reduction in the inflation rate in 1981 involved a sharp increase in interest rates and a contractionary monetary policy, leading to a severe recession. The Fed's goal was to curb the high inflation rate that had been plaguing the economy for years, but the abruptness of the policy change resulted in significant economic costs.

In 1981 Fed Policy Created a Severe Recession Because the Fed