Figure 12.7: Output

Multiple Choice

Figure 12.7: Output
-Consider Figure 12.7. You are chairman of the Federal Reserve in 1975. You believe potential output follows the dotted line after 1973, but in actuality, it follows the line denoted "True potential output." The current state of the economy is given by the curve "Actual output." Given the information in the figure, you ________, because you believe the economy is in a ________, but your advice instead ________.

A) lower interest rates; recession; accelerates inflation
B) raise interest rates; recession; accelerates inflation
C) keep interest rates the same; boom; accelerates inflation
D) lower interest rates; boom; increases unemployment
E) Not enough information is given.