An analysis of economic activity and inflation for the period 1965-1980 utilizing Keynesian Nonmarket Clearing Model

The two major areas of study in this thesis are: (1) a Keynesian, nonmarket clearing model interpretation of economic activity during the period 1965-1980 and (2) a Keynesian analysis of the causes of inflation during the period. In order to complete the study, data were gathered and analyzed for fiscal policy, monetary policy, and other events having economic impact.

When examining the data, it was determined that the Keynesian, nonmarket clearing model provided mixed results in explaining economic activity. For instance, the tax cut in 1964 resulted in economic changes correctly predicted by the Keynesian model. In 1968, however, the tax increase did not work as expected by some Keynesian analysts possibly due to the expansionary monetary policy. Other Keynesian programs, including the voluntary wage and price guideline program of the Carter administration, also failed to achieve desired results.

Moreover, the stagflation in 1970 was not anticipated by Keynesian analysts. The monetarist theorists explained the stagflation of the 1970's as resulting from the increased inflationary expectations of economic agents. Workers anticipating higher future inflation increased their wage demands even with high unemployment in the economy. However, for portions of the 1970's there continued to be a tradeoff between inflation and unemployment as would be expected by Keynesian analysts.

Also, the proponents of the Keynesian model correctly explained the demand-pull inflation of the 1960's, the supply shock of the middle 1970's, and the price and wage inertia of the late 1970's.