Part B Inflation Scenario: In the late 1970's and early 1980's the U.S. was facing rapidlyrising inflation which was mostly caused by expansionary economic policies. The governmentincreased spending on the Vietnam Conflict and social "safety net" programs while the FederalReserve maintained low interest rates. In 1975, the U.S. economy was at full employment,however inflation was much higher than the 2-3% inflation rate the Federal Reserve likes totarget. This is represented by Point B on the graph below:Explain the trade-offs associated with the dis-inflationary policies. Be sure to explain why the trade-offs exists using your knowledge of Aggregate Demand

Short-Run Phillips Curve U.S. inflationary problems from 1975-1982* 12% A Inflation 9% B Rate 3% C 0% 2.5% 5% 10% 15% SRPC Unemployment Rate