Which two economic conditions challenged assumptions of activist monetary policy in the 1970s?
A) increased aggregate demand and decreased short-run aggregate supply
B) low inflation and low unemployment
C) low inflation and high unemployment
D) high inflation and high unemployment
E) declining real gross domestic product (GDP)and high unemployment

Question

Quizplus · Accepted Answer

The two economic conditions that challenged assumptions of activist monetary policy in the 1970s were high inflation and high unemployment, also known as stagflation. This went against the traditional Phillips Curve model, which suggested a trade-off between inflation and unemployment that could be manipulated through monetary policy. The combination of high inflation and high unemployment presented a new challenge for policymakers who were faced with a dilemma of choosing between combatting inflation or promoting growth and employment.

Which Two Economic Conditions Challenged Assumptions of Activist Monetary Policy