You Are a Staff Economist with the Federal Reserve

Multiple Choice

You are a staff economist with the Federal Reserve. The chairman says to you, "The rate of change in inflation is too high, and I think the Phillips curve is horizontal. What should we do to reduce these inflationary increases?" How do you respond?

A) "Because the Phillips curve is flat, we can do nothing to change the rate of inflation, as it does not respond to changes in output."
B) "Because the Phillips curve is flat, we need to increase interest rates a lot, as the change in inflation is not very responsive to changes in output."
C) "Because the Phillips curve is flat, we need to decrease interest rates a lot, as the change in inflation is not very responsive to changes in output."
D) "Because the Phillips curve is flat, we need to increase interest rates a lot, as the change in inflation is infinitely responsive to changes in output."
E) "You are not giving me enough information."