Cause for Stagflation of the 1970s

[136or142]

I assume my reply to your post was the reason behind you asking this:

"1.Keynesian economics failed to address the problem of inflation of the 1970s (starting in the late 1960s.)  Keynesian theory held that unemployment and inflation could not rise at the same time, they argued that a nation could have a little more inflation for a little less unemployment. 

Essentially the idea behind this was that due to the circulation of money, there was a fiscal multiplier effect to government spending.  The government would put money into the economy and due to it being spent multiple times, jobs would be created.

Monetarists showed that in normal economic times (i.e no recession) new money introduced into the economy without an increase in productive capacity (or output) would just result in inflation: "too much money chasing too few goods."  They showed "in the long run, the fiscal multiplier is zero" (or "dead" in the original quote.)

So, this change in economic theory removed the argument for governments to try to 'fine tune' the economy to reduce unemployment."


I think there are two ways to answer your question: either with an analogy or with a simplified mathematical explanation, unfortunately, I'm not smart or capable enough to come up with either.

If you ask me what you don't understand about my post, I might be able to figure something out.

[136or142]

On the inflation part, the main thing was the accommodative monetary policy of the Federal Reserve (at that time, ultimately the policies of Richard Nixon, Gerald Ford and Jimmy Carter since the independence of the Federal Reserve had not fully been established at time time) primarily in terms of printing money:

"Inflation is always and everywhere a monetary phenomenon in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output." Milton Friedman