The Main Reason the Government Relied on a Restrictive Monetary

question 12

Multiple Choice

The main reason the government relied on a restrictive monetary policy to fight inflation during the late 1970s was that

• A) such a policy was strongly urged during the 1974 economic summit conference called by President Ford.
• B) such a policy is the only proven method for fighting inflation and unemployment at the same time.
• C) unemployment was then viewed as a more serious problem than inflation, and such a policy could boost employment.
• D) most observers during that time felt that inflation was due to excessive demand, not shortages.
• E) the resulting increase in interest rates would stimulate investment and expanded output.

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Definitions:

Operating Leverage

A measure of how sensitive a company’s operating income is to a change in its sales volume, emphasizing the cost structure between fixed and variable costs.

EBIT

A gauge of company profits, Earnings Before Interest and Taxes, leaves out the charges for interest and taxes to show raw earnings.

Sales

The transactions involved in selling goods or services in the normal course of business, generating revenue for the company.

DOL

Degree of Operating Leverage; a measure of a company's fixed costs as a percentage of its total costs, indicating how earnings before interest and taxes (EBIT) change in response to a change in sales volume.