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Historical data indicates that the inflation rate started rising in 1960's from around 2% and then it peaked in 1980 at 13%, then it slowly started its trend down to around 2.0% which is now the average.

The Federal Reserve pursues a contractionary or expansionary policy by manipulating short-term nominal interest rates to control inflation. For example, during the inflation peak in 1979-82 the inflation rate, federal funds target rate, discount rate, and GDP numbers were:

	1979	1980	1981	1982
Inflation Rate	11	13	10	6
Federal Funds Target	14	18	12	8
Discount Rate	12	13	12	8
Real GDP Growth Rate	3	-.2	2	-2

The Federal Reserve used a contractionary policy by increasing the short-term nominal interest rates to reduce and control the inflation rate until 1980. Then in 1981, with the inflation rate coming down it pursued an expansionary policy by reducing the short-term nominal interest rates. The Federal Reserve increased and decreased the federal funds target rate in 1980, fourteen times beginning with 14% and ending with 18%. In 1981, it also changed the rate eight times beginning with 19% and ending with 12%. This shows that the Federal Reserve uses the short-term nominal interest rates as a tool to control inflation and pull the economy out of recessions.

A closer inspection of GDP in quarters showed the first sign of an economy slowing down in the second quarter of 1980, at -2% for one quarter. The economy fell into a recession in the last quarter of 1981, at -1%, which ended in the third quarter of 1982, at -.48%. With the economy plunging in the last quarter of 1981, the Federal Reserve responded by lowering the federal funds target rate from 20% down to 14%. Therefore, I conclude that the reason for the monetary expansion policy in 1980-82 was due to the Federal Reserves’ inclination to pull the economy out of a recession.

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