Refer to the following figure when answering the following questions.
Figure 12.9: Change in Inflation by Quarter
-Consider Figure 12.9. You are Federal Reserve chairman Greenspan and today's date is the second quarter of 1997 (1997.2). Given the information you have, using the Phillips curve, to stabilize the economy you would ________ interest rates, risking ________.
A) raise; recession
B) raise; inflation
C) lower; inflation
D) lower; higher unemployment
E) Not enough information is given.

Question

Refer to the following figure when answering the following questions.
Figure 12.9: Change in Inflation by Quarter 
-Consider Figure 12.9. You are Federal Reserve chairman Greenspan and today's date is the second quarter of 1997 (1997.2). Given the information you have, using the Phillips curve, to stabilize the economy you would ________ interest rates, risking ________.
A) raise; recession 
B) raise; inflation 
C) lower; inflation 
D) lower; higher unemployment 
E) Not enough information is given.

Quizplus · Accepted Answer

According to the Phillips curve, when inflation is high, unemployment tends to be low, and when inflation is low, unemployment tends to be high. In the second quarter of 1997, inflation is decreasing, which means unemployment is likely to increase. To stabilize the economy, the Federal Reserve should lower interest rates, which will increase borrowing, spending, and economic activity, potentially leading to higher inflation. Therefore, the best choice is C, lower interest rates to combat potential increases in unemployment due to decreasing inflation.

Refer to the Following Figure When Answering the Following Questions