In the early 1980s, the chairman of the Federal Reserve, Paul Volcker, announced that inflation was too high and that monetary policy makers would attempt to lower it. Part of the plan to lower inflation was to raise real interest rates. Using a diagram like Figure 14.3, show the short-term and long-term outcome of this policy. Start your analysis at a condition of zero GDP gap and an inflation rate

(actual and expected) of 10 percent. After you have complete your analysis, look back at Figure 12.2 in Chapter 12 to see if your predicted outcome matches up with what actually happened.