Prior to the 1972 election, many economists believed that th…
Prior to the 1972 election, many economists believed that the economy was close to potential output (Point A in the graph below). It is rumored that President Nixon pressured the Federal Reserve Chairman Arthur Burns to use expansionary monetary policy (autonomous easing of the money supply) to make employment numbers look even better going into the election. A few years later, the oil shortage hit the United States, causing a significant supply shock. Which of the following explains why Nixon’s pressure on Burns was a bad idea in the long-run?
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