In order to reduce the high inflation and high unemployment of the 1970s, the Federal Reserve decided to raise interest rates to astronomical levels. How can high-interest rates cure high inflation and high unemployment? What are the consequences of such a policy?
In order to reduce the high inflation and high unemployment of the 1970s, the Federal Reserve decided to raise interest rates to astronomical levels. How can high-interest rates cure high inflation and high unemployment? What are the consequences of such a policy?
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Related questions
(1) What is the effect of wage indexation on the relation between inflation and unemployment?
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(a) As indexation increases, inflation becomes less sensitive to the difference between the unemployment rate and the natural rate.
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(b) No effect
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(c) As indexation increases, inflation becomes more sensitive to the difference between the unemployment rate and the natural rate.
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(d) As indexation increases, inflation becomes less sensitive to the natural rate.
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(2) When inflation has been persistent, as was the case in the United States during the 1970s, low unemployment rates will likely be associated with:
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(a) low natural rates of unemployment. |
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(b) high but stable rates of inflation. |
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(c) high natural rates of unemployment. |
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(d) increases in the inflation rate. |
(3) For this question, assume that the Phillips curve equation is represented by the following equation:
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(a) a reduction in the markup over labor costs (i.e., a reduction in m). |
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(b) an increase in the markup over labor costs. |
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(c) an increase in the inflation rate over time. |
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(d) a decrease in the inflation rate over time. |
