The Great Inflation of the 1970s in the United States Term Paper

The Great Inflation of the 1970s in the United States - Term Paper Example From this research it is clear that the Great Inflation of the 1970s was a period that epitomized the United States’ struggle with double-digit inflation rates beginning early in the 1970s until early 1980s. As asserted by many authors and in many literatures, post World War II economists and politicians toyed with certain ideas proposed by Keynesian economics. According to this type of economics, it is possible to trade off inflation and employment to achieve some economic stability and growth, albeit for a short-term objective. According to this school of thought, small amounts of inflation could be allowed to help lower unemployment rates, thereby, attaining higher overall economic output. The main weakness of the Keynesian economics was that despite the fact that inflation may lead to increased employment; such a strategy only has short-term effects. For example, a lot of cash in circulation results in boosted demand for goods and services and a corresponding drop in inter est rates. Interestingly, people always mistake this influx in money supply with wealth, thus, increase their spending and demand for goods and services. Unfortunately, it would later require a higher rate of inflation to achieve the same economic effects. In the case of the Great Inflation of the 1970s, the United States was experiencing both high unemployment and inflation, a situation that the Keynesian economists would somehow consider impossible. ... ore, although a central bank may tirelessly try to formulate and implement monetary policies that would curb inflation, the immediate negative economic effects of these policies and political pressures force most central banks relenting and inflation returning (Bulkley, p135). Simply put, inflation refers to a general increase in the prices of goods and services and/or cost of living over a given period. Accompanying this increase in prices is the weakening of a currency, implying that such a currency buys fewer items than before the inflation. In other words, the purchasing power of a currency is reduced day by day, which is measured by the rate of inflation. The rate of inflation is the percentage change in the general price index, calculated as an annual figure. Although a high inflation rate is bad for an economy, a zero or a negative one is equally bad unlike a low inflation rate, which is beneficial to a country. For instance, a high inflation is found to interfere with the beh aviors of consumers who may want to buy their requirements in advance, fearing further increases in commodity prices (White, p10). This consumer behavior has an effect of stabilizing the market by way of creating preventable shortages. This paper explores the Great Inflation of 1970s in the United States concerning its background, effects, causes, and the monetary policies in the preceding and succeeding years. The Great Depression Most scholars, economists and historians have described the Great Inflation of the 1970s as one of the biggest economic gaps in the history of not only the United States but also of other countries around the world. Also described as the biggest domestic blunder ever for the United States, the Great Inflation of the 1970s played a rather central role in the