1980 s Double Dip Recession

Topics: Inflation, Monetary policy, Keynesian economics Pages: 5 (1401 words) Published: December 4, 2014
1980’s Double Dip Recession Overview

I. Introduction
The 1980-1982 Double Dip recession brings up the curiosity of how the stagflation of the seventy’s affected the early eighty’s in which it caused the Fed and the USA congress to be switching back and forth from stimulus and restraints causing us to fall to our first recession. Then not till later we will see that Paul Voucher Chairman of the Board of Governors use heavy monetary restraints to control the inflation and ending the first recession only to ending up pushing us back into the second recession of our Double Dip. II. Cause of the Recession

The high inflation rates that started climbing since the year of 1976 was one of the underlying components of the first recession in 1980 it forced the hand of the Fed and Paul Volcker to start driving up interest rates to new highs trying to keep inflation rates to a more stable condition. The increase in driving up high interest rates created an increase in unemployment due to their inversely relationship this created us to enter our second dip of the recession. The inflation was under control by the time we entered the year of 1982 but the cost of getting our inflation rate from 13.3% in the year of 1979 back to a stable number of 3.8% in the end of 1982 was tremendous since unemployment roused to a staggering 10.8% in the year of 1982 (course syllabus). This inflation problems that started since the 1950’s when the inflation rose to 3% due to the Korean war and up to 4.7% in the 1960’s due to Vietnam involvement foreshadowed the growing impediment of the inflation rate slowly growing faster and at a rate in which the Fed could not easily control and the Fiscal policy makers ignored (http://www.nber.org/chapters/c7753.pdf) The indecision of the Fed to be able to attack either the Unemployment or the Inflation was also a factor since their action to switch back and forth to try and control both made the problem worsen. So by the time came when they decided to attack inflation no matter what it produced the unemployment to start climbing high and to the double digits. Which caused the United States to enter the second dip of the recession to happen since the high inflation rates caused the businesses to stop investing more during the times of 1980 through 1982 (Thayer Watkins Syllabus website).

Also the decisions of the Nixon Presidential time made its decision of tackling inflation no matter what no matter what the unemployment also might be since they couldn’t take both at the same time (Secrets of the Temple: How the Federal Reserve Runs The Country from http://www.investopedia.com/articles/economics/09/1970s-great-inflation.asp). This decision then also made the both the Fiscal and Monetary Policies to focus on Inflation causing the U.S. to go into the first recession of the double dip due to high inflation then also because of fiscal restraints put in play by the legislature and president. This caused a drop in aggregate Demand since higher inflation cost makes it go decrease and increases the unemployment. III. Fiscal Policy

The Reagan years of presidential election started to spend much more money on military defense increasing its spending on those assets trying to boost up the aggregate demand since the Recessions of aggregate demand decreases and government spending can help the demand line not fall down to low levels. They used a lot of stimulus packages to cutting tax rates and helping the wealthy cut their taxes to new lows of around 28% a steep decrease from the previous year average of 70% taxes this indeed helped the American Public to create their investments and spend their money more since the income to people increased resulting in an increase in aggregate demand. Like the laws that passed to help reduce Tax Cuts were Economic Recovery Tax Act in 1981 which reduced tax on incomes of individuals with a tax rate of above 33% and faster depreciation of write-offs for business equipment and...
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