-Consider Figure 12.6.You are chairman of the Federal Reserve in 1975.You believe potential output follows the dotted line after 1973,but in actuality,it follows the line denoted "True potential output." The current state of the economy is given by the curve "Actual output." Given the information in the figure,you __________,because you believe the economy is in a __________;but your advice instead __________.

Question

Quizplus · Accepted Answer

You would lower interest rates because you believe the economy is in a recession, but your advice would instead accelerate inflation since the actual output is above the true potential output.