Question

In the months immediately following Volcker's October 6, 1979 announcement

Group of answer choices

A. both nominal and real interest rates increased dramatically.
B. real interest rates increased, but nominal interest rates decreased because expected inflation came down.
C.real interest rates decreased, but nominal interest rates remained unchanged because inflation expectations stayed high.
D.nominal interest rates decreased, but real interest rates remained high.
E.nominal interest rates decreased, causing an increase in investment spending.

Answer 1

Following Volcker's 1979 announcement, both nominal and real interest rates increased significantly. This was part of a deliberate policy to curb high inflation rates by tightening the money supply and raising interest rates, leading to a severe recession and rising unemployment as aggregate demand fell.

Step-by-step explanation:

In the months immediately following Volcker's October 6, 1979 announcement, the correct answer is A. both nominal and real interest rates increased dramatically. Federal Reserve Chairman Paul Volcker's policy to tackle inflation involved slowing money growth and raising interest rates.

This was a clear and advertised policy shift that resulted in the highest real interest rates in recent times, as the money supply was tightened to constrain inflation. As a result, both nominal and real interest rates increased because inflation expectations remained high for a while, even as the Fed took decisive action to quell inflation.

By 1983, inflation had reduced significantly, but the high-interest rates had already induced a severe recession. This underscores the real impact that monetary policy can have on the economy, as heightened real interest rates can lead to a decline in aggregate demand and subsequent recessions, as evidenced by the back-to-back recessions in 1980 and 1981-1982 and the rise in unemployment rates during that period.