Question

In: Economics

It has been argued that the experience of Paul​ Volcker's fight against inflation during the late...

It has been argued that the experience of Paul​ Volcker's fight against inflation during the late 1970s and early 1980s indicates that firms and workers

A.

had rational expectations and that they trusted Fed announcements.

B.

had adaptive expectations by changing their expectations of future inflation only after the current inflation rate had fallen.

C.

preferred high unemployment to high inflation.

D.

Both A and B are correct answers.

Solutions

Expert Solution

The answer is: D) Both A and B are correct answers.

Volcker helped shape American economic policy for decades, notably by leading the Federal Reserve's brute-force campaign to subdue inflation in the 1970s and '80s. The 1970s was the decade of inflation in the United States. While it may be surprising to some that the average inflation rate for the decade as a whole was only 6.8%, this rate is double the long-run historical average and nearly triple the rate of the previous two decades.

Rahul Sunny answered 2 years ago
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