Answer to Question #283537 in Macroeconomics for kika

Question

2. As the economy slipped into recession in 1980 and 1981, the Fed was under enormous pressure to adopt an expansionary monetary policy. Suppose it had begun an expansionary policy early in 1981. What does the text’s analysis of the inflation-unemployment cycle suggest about how the macroeconomic history of the 1980s might have been changed?

Answer 1

In times of recession, the Federal Reserve usually pursues an expansionary monetary policy. Open market operations are regulated using this type of monetary policy. During the 1980-1981 recession, the Federal Reserve Bank increased the money supply while lowering the interest rate. It was a critical time for the Fed to deal with such problems during the 1980 recession. In such a situation, the Federal Reserve purchased a large number of Treasury bills in order to boost consumer spending by making loans more affordable. With an increase in GDP, consumer spending increased the nation's production rate of goods and services. At the same time, people's national income in the United States increased by a significant amount. During the Great Recession, the unemployment rate was nearly 24%. Almost a third of those employed in the automotive and mobile industries have lost their jobs. As a result, the reduction in the interest rate for obtaining a loan for their investment needs gained traction once more as the production of goods and services increased.

However, before 1980, the Inflation-Unemployment cycle saw the first signs of recession. It established a rate of interest that was affordable to investors. The rate of inflation took the form of hyperinflation. To balance the rate of inflation, the money supply was increased to the optimum rate by introducing the concept of deficit spending in conjunction with inflation control, which had a significant effect, and the unemployment rate was reduced from 10.8% before 1980 to 7.2 percent in 1981. Using macroeconomic concepts, a new government was formed to address the problem of unemployment.