It has been argued that the experience of Paul Volcker's fight against inflation during the late 1970s and early 1980s indicates that firms and workers

Question

Quizplus · Accepted Answer

During that time, firms and workers were observed to have adaptive expectations. This means that they changed their expectations of future inflation only after the current inflation rate had fallen. This suggests that they did not have rational expectations and did not fully trust Fed announcements. Option B is incorrect because it assumes that firms and workers had rational expectations and trusted Fed's announcements. Option C is also incorrect because high unemployment would cause economic hardship for workers and firms, and thus, they would prefer low unemployment and low inflation simultaneously. Therefore, option A is the correct answer.

It Has Been Argued That the Experience of Paul Volcker's