ABSTRACT
In the immediate period following the collapse of the Bretton Woods system, monetary policy confronted two main challenges: Price instability in some cases hyperinflation, and High unemployment. In the middle of the abnormalities of the 1970s, rational expectations had implications for the once influential short-run Phillips curve or the theory that there is a tradeoff between inflation and unemployment. In his Treatise on Money, John Maynard Keynes distinguished between two types of inflation: Profit inflation and Income inflation. During the oil crisis, the growth of inflation, as measured by the consumer price index and the deflator, surpassed that of unemployment. The chapter discusses the monetarists challenged the Keynesian theory of expansionary monetary policy and linked it to stagflation. Since changes in monetary policy and changes in the general price level cannot incontrovertibly repudiate Phillips' argument, the market penetration of crude oil, and the second round effects of energy prices on related energy products, should be given serious consideration.
