Question 3:

The figure below plots the United States federal funds rate and 3-month commercial paper rate along with the deviation of the logarithm of the U.S. consumer price index from trend for the inflationary years after 1965.

Question 3 Figure

It is clear from the figure that when the inflation rate (slope of the deviation of log CPI from trend) was high the Federal Reserve system tightened monetary policy by raising domestic interest rates. The inflation therefore occurred despite the tight monetary policy.

True or false?