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Stagflation was associated with two things: high spending on the Vietnam War, and OPEC oil price hikes. To illustrate this, let's take for granted that inflation is "too much money chasing too few goods." That's really a statement about two things: inflation very much can be driven by having fewer goods with the same amount of money. This is why Germany and Zimbabwe are bad examples, because both of them involved a real goods collapse. Likewise, oil supply shock can easily drive large inflation.

In other words, the way to reconcile stagflation with the text you quoted is, "full capacity" was lower in the 70s, so we had inflation without full employment. And to be fair, the text you quoted should be "full capacity OR full employment."

Quantitative easing is also very different from what you might think, but in a sense, QE was also the ultimate refutation of, at least, the money multiplier view. The Fed injected far more base money than necessary to maintain the prime rate, and what happened? The money multiplier fell. So really the Fed had the story backwards there, or else they were trying to invoke some voodoo magic.




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