Which of the following is NOT a lesson to draw from the work of the Federal...

Which of the following is NOT a lesson to draw from the work of the Federal Reserve under Chairman Volcker when combatting stagflation? (a) fiscal policy is a critical complement to monetary policy when fighting high inflation rates; (b) choking off the supply of bank reserves can strangle money supply growth; (c) the process of strangling money supply growth reduces inflation expectations and eventually brings down long-term interest rates; (d) lower long-term interest rates would help to stimulate demand for the most interest-rate sensitive components of the economy.

Expert Solution

The answer is:-

a) fiscal policy is a critical complement to monetary policy when fighting high inflation rates

Volcker did not use fiscal policy to fight stagflation since he relied on radical monetary policy to do so. Volcker fought 10% annual inflation rates with contractionary monetary policy and doubled the fed funds rate from 10.25% to 20% in 1980.

Rahul Sunny answered 2 years ago

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