Question

Describe the stages of the great inflation between 1965 and 1982.

Answer 1

In 1960, Federal monetary policy officials believed that expansionary monetary policy would lead to full employment. Expansionary monetary policy leads to elevated inflation as money supply is high. They thought that it could induce economic growth, its target was 4% unemployment rate. Thus inflation continued to pick up throughout 1970's , which led to implementation of drastic steps to control the money supply in the economy. They raised the interest rates so that inflation could be reduced by pulling money into the banking system and lessening the quantity in the economy. Businesses failed afterwards as they had to take capital at a very high interest rate.

Thus the first stage was they were targeting unemployment and growth by implementing expansionary monetary policy, After 1970's they implemented tightening monetary policy. Oil prices were also high and defense spending was huge during the Vietnam war, which might have also increased inflation. In 1965 inflation rate was 1.6% and rose to 13.5% in 1980.