Written Assignment
In the government, the Federal Reserve has the responsibility of maintaining sustainable growth of the economy through high employment and stable prices. To achieve the objectives, fed monitors the economy through removing or adding money in the system. During the economic recession in 1980 and1981, the fed was under enormous pressure to adopt an expansionary monetary policy, but that did not happen until during the summer in 1982 (Feldstein, 2007). There were several reasons for the cautious stance in 1981. For instance, although the economy was in a recession, there was an increased rate of money supply in the market above targets leading to inflation, and there was substantial expectation shared by fed that the economy could begin to expand in the second quarter of the year (Feldstein, 2007). Using the expansionary monetary policy in 1981 could cause more harm to the economy.
Inflation would continue, and the unemployment rate would be on the rise, supposing an expansionary policy begun in early 1981. Considering that expansionary policy key actions during recession entail lowering reserve ratio, decreasing discount rate, and buying government securities (Amadeo, 2020), beginning it in 1981 would lead to more money in the market. Such boom time would put the economy at risk of overheating and inflation due to increased liquidity. The demand created would be unhealthy since more money would be available for all, and business would fail to meet such demand. Besides, hiring will, in turn, reduce as companies will fail to meet the rising wage rate leading to increased unemployment. For that reason, expansionary monetary policy would lead to more harm than stabilization of the economy. The delay in the use of an expansionary monetary policy tool was a right decision. It helped in allowing the economy to first stabilize the economy through demand and supply without influence from other sources. During that period, some contractionary monetary policy tool would serve to help in reducing the available money.
References
Amadeo, K. (2020). Expansionary Monetary Policy. The Balance. Retrieved from https://www.thebalance.com/expansionary-monetary-policy-definition-purpose-tools-3305837.
Feldstein, M. (Ed.). (2007). American economic policy in the 1980s. University of Chicago Press.