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No unread replies.No replies.DB 3: Stagflation
Watch the above videos. Once you have done this click on the above link "Stagflation DB" and create a thread with at least one page answering and explaining the following:
- What factors contributed to the stagflation of the 1970s?
- How did Volker deal with the high inflation?
- Did high oil prices cause the stagflation or was it something else?
- Is the Fed independent? If so, how do our leaders ensure they maintain the best interests of the public?
- How does Milton Friedman establish his view that inflation is a monetary issue?
- According to Friedman, do trade unions cause inflation by pushing up wages and the cost of production?
- After you post your narrative, reply to at least two other student's comments. Explain why you agree, or better yet, find others that take a different position and explain why you disagree.
Explanation & Answer
Attached.
Running head: STAGFLATION
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Stagflation
Student’s Name
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STAGFLATION
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Stagflation
Stagflation is a term derived from stagnation and inflation. It is an economic cycle
characterized by slow economic growth and high unemployment, accompanied by an increase in
the general level of prices. It is a period of economic recession. Knotek and Khan (2014) state
that stagflation is believed to be an unnatural economic condition because, in a functional market
economy, slow economic growth prevents inflation. In effect, there is a drop in consumer
demand that keeps prices from rising. However, stagflation can occur when the Fed expands the
money supply and simultaneously constrain supply (Knotek & Khan, 2014).
Q 1:
Stagflation in the 1970s was caused by the monetary policy of the Federal Reserve that
was unsustainable, whereby the money supply was growing faster than the economy. According
to Philadelphia Fed (2015), the Federal Reserve had responded to unemployment by using its
monetary policy to increase the demand for goods and services. The result of the low
unemployment before the 1970s was a phenomenon known as the wage-price spiral. Stagflation
was thought to be also attributed to the OPEC oil embargo of 1973, which caused an increase in
prices as well as shortages all the U.S. Milton Friedman, an American economist, was among the
first people to predict stagflation. Friedman indicated that inflation occurs when the Federal
Reserve pumps too much money in the economy. He suggested the formula for inflation: too
much money wanting to buy a few goods.
Q 2:
When Paul Volcker was appointed in 1979 as the Federal Reserve Chairman, he
implemented the Friedman's monetary policy. Philadelphia Fed (2015) indicates that Volcker
increased interest rates, thereby reducing the flow of money into the economy. In effect,
STAGFLATION
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significant recession and high unemployment was experienced in the early 1980s; nonetheless,
inflation came back manageable levels, and the economy stabilized.
Q 3:
The high oil prices were not the cause of stagflation in the 1970s. Even though the high
prices are always thought to be a contributory factor, the real cause was the Fed’s unsustainable
monetary policy. This policy that was based on the Keynesian economics stated that an increase
in money supply could promote eco...
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