In 1979, the inflation rate reached about 14 percent. The Federal Reserve ________ interest rates, sending the economy into a(n) ________. When doing so, the Federal Reserve knew this would be the case because of the ________.
A) raised; expansion; Phillips curve
B) raised; recession; Phillips curve
C) raised; recession; Okun relationship
D) lowered; recession; Phillips curve
E) lowered; expansion; Phillips curve

Question

Quizplus · Accepted Answer

The Federal Reserve raised interest rates, which led to a recession. This is supported by choice B, as it matches the outcomes of the events in the question. The Phillips curve, which shows the relationship between unemployment and inflation, is not mentioned in relation to the Federal Reserve's decision to raise interest rates. The Okun relationship measures the relationship between GDP growth and unemployment, which also is not mentioned in the question. The answer cannot be choices A or E, as they suggest that raising interest rates leads to an expansion, which is not the case here. Similarly, the answer cannot be choice D, as lowering interest rates would not lead to a recession.

In 1979, the Inflation Rate Reached About 14 Percent