Figure 12.6: IS-MP Curve
-Start from any equilibrium in Figure 12.6 to answer the following question. In 1980, U.S. inflation hit about 14 percent; Federal Reserve chairman ________ engineered a decline in inflation by ________ rates, shown in the figure as movement from point ________.
A) Volcker; raising inflation; b to c
B) Bernanke; raising interest; b to d
C) Volcker; lowering interest; c to b
D) Volcker; raising interest; b to c
E) Greenspan; lowering interest; a to b

Question

Figure 12.6: IS-MP Curve 
-Start from any equilibrium in Figure 12.6 to answer the following question. In 1980, U.S. inflation hit about 14 percent; Federal Reserve chairman ________ engineered a decline in inflation by ________ rates, shown in the figure as movement from point ________.
A) Volcker; raising inflation; b to c 
B) Bernanke; raising interest; b to d 
C) Volcker; lowering interest; c to b 
D) Volcker; raising interest; b to c 
E) Greenspan; lowering interest; a to b

Quizplus · Accepted Answer

The question refers to the period when the U.S. inflation hit about 14 percent, which was in the late 1970s and early 1980s. At that time, Paul Volcker was the Federal Reserve chairman who implemented a tight monetary policy to lower inflation. As shown in Figure 12.6, this involved raising interest rates, which is represented by a movement along the IS-MP curve from point b to point c. Therefore, the correct answer is choice D: Volcker; raising interest; b to c.