Question

Research an historical example of inflation (greater than 10% in the US or greater than 15% in any other country):

• Summarize the time-frame, duration and rate of inflation
• Analyze the root causes of the inflation
• Describe interest rates during the inflationary period
• Describe the major economic consequences of the inflation
• Explain how they were able to control the inflation (if they were)

Answer 1

The inflation is rise in the price level in simple terms. If a basket of goods and services was $100 a year before then a 5% inflation rise means the same basket is $105 in current period. A moderate inflation is acceptable in the economy but a high level of inflation reduces the buying power of the marginal section and it also has adverse effects on the economy.

The US had been through such high inflation in the 1980s. The inflation rate in the economy surged to almost 15% in March 1980. The inflation was quite under control in the early 1970s. However, the 'Gold Standard' was abolished in the 19733 which has pegged the value of the currency to the gold. The abolishing of the 'Gold Standard' affected the US dollar and it was depreciated in the market. That made imports far costlier and created the inflation in the economy.
It goes on increasing and soon the touched the double digit mark.

The Nixon government at the time tries to curb the inflation by introducing wage-price control but that has affected the economic activity negatively. The economic slowdown and rising inflation created a situation of 'Stagflation'. The Fed adopted a very strange policy of alternate raising and decreasing of interest rate which questioned the credibility of the Fed to tame the inflation.

In such a situation, Paul Volcker assumed the chair of Fed. Paul Volcker raised the Fed funds rate to a record of 22.36% in July 1981. That affected the credit off-take and overall economy. The economy waded into the recession and unemployment hit the 10% mark. The Fed chairman dubbed as villain but within two years the inflation tamed at 3% and Fed has been able to end the 'Great Inflation'.

Paul Volcker who was tall at 6 feet and 7 inches turned out to be a towering person in the economic world whose legacy is still evident with Volcker Rule.