Practice question · Multiple choice
Volcker raised interest rates above 20% in 1980-81. The immediate result was:
Hints
- Very high interest rates crush borrowing and spending.
- The pain was deliberate, the goal was credibility.
Show the answer
A. A severe recession
Why
The Volcker disinflation worked but at the cost of the deepest postwar recession (to that date). The lesson: inflation expectations, once anchored high, require pain to break, but once broken, they stay down.
Practise Oil Shocks and Stagflation
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