Question

12. US experienced Stagflation in 1970s, the Government responded by
conducting _____ policy to reduce ____ but increased _____.

a.) Expansionary;         inflation;          output gap

b.) Contractionary;     inflation;          output gap

c.) Expansionary;         output gap;       inflation

d.) Contractionary;       output gap;       inflation

hint "option (a) is NOT correct"

Answer 1

Correct option: (b)

Reason: Since the US economy was experiencing high rates of inflation during the 1970 stagflation, it adopted a contractionary monetary policy of increasing the federal funds rate to control money supply and thus inflation. However, it didnt work too well for the economy and ended up increasing the output gap.

Answer 2

 Answer:

The correct choice is b.) Contractionary; inflation; output gap.

Explanation:

• Stagflation = High inflation + High unemployment (output gap).

• The government used contractionary policy (e.g., raising interest rates) to reduce inflation, but this worsened the output gap (unemployment).

 

Answer:

                          $\boxed{{\displaystyle b}}$