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In the late early 1980s, the Federal Reserve under the leadership of Paul Volcker, the Federal...

In the late early 1980s, the Federal Reserve under the leadership of Paul Volcker, the Federal Reserve implemented some unprecedented monetary policy. Describe this policy and the effects. Also, the effects of this policy were not fully anticipated by households and firms as many did not believe the Federal Reserve was actually committed to the policy action. How would results have different if households and firms had believed the Federal Reserve was committed to the policy?

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Paul volckar implemented very tight monetary policy to control inflation. It contained inflation and led to 1980-1982 recession.

If labour believed that Federer reserve was committed to policy, Labour would have increased demand as real wages would rise in future due to low inflation. Firms would not have expanded much output and employment would have fallen because of higher expected real wage. Thus aggregate supply would have shifted back and aggregate demand rightwards. The result would have been higher inflation

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