The Fed pursued policies resulting in which combination of levels in the 1970s and early 1980s to combat inflation?

• A. Low; Inflation
• B. Low; Recession
• C. High; Recession
• D. High; Inflation

Answer: (D)

When the Fed fights inflation, it uses contractionary monetary policy by raising interest rates to slow spending and investment. That tighter money supply cools inflation, but it also slows the economy, typically driving up unemployment and producing a recession in the short run. In the late 1970s and early 1980s, the Fed did just that under Volcker: rates were pushed very high, inflation eventually came down, but unemployment rose sharply and a recession followed. So the period is best described by a high level of unemployment associated with a recession, not by high inflation. The other pairings don’t match what happened: inflation remained a concern before the tightening and fell only after the recession began, so a combination implying low unemployment or low inflation isn’t what characterized that era.