Reduces output below potential output

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What was the Fed's mistake in causing the Great Inflation of the 1970s?

They mistakenly thought that the decrease in output was because of a negative demand shock that reduces output below potential output, but in truth the productivity slowdown was a change in potential output and not something that monetary policy could overcome.

They thought oil prices would be lower than they actually were.

They thought the economy was more sensitive to interest rate changes than actually is.

They did not assume sticky prices were in effect.

Reference no: EM131388365

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