Inflationary window is a dangerous critical point in the capitalist economy system. When the economy approaches the inflationary window, it means there has been a lack of coordination and cooperation between private and public sectors. If the inflationary window left unchecked, it will cause crowding out effect and crowding out will cause inflation. In order to counter the trend, the government and Federal Reserve could use fiscal and monetary policies to intervene the economy.
During a boom, employment levels are high and people have excessive money to spend. And government should step back and let the private sector do whatever they want to do. However, if both government and private sector act actively (both sectors spend excessive money in the market), the price of goods and services will increase. If the government decided to print more money or borrow to spend, it will cause inflation. The inflationary window is the point right before the peak in the Keyness business cycle. When the economy approaches the inflationary window, the price level of goods and service will be high, which means each unit of currency buys fewer goods and services. When the price is high, there will be fewer motives for the private sector to invest, which is an essential component in the economic market. Investment, showing as I in the aggregate demand equation, is a primary engine of economic growth (Alesina and Perotti, 1996). When I decrease, less capital will be allocated to the market and companies are likely to shrink their scales by hiring less employees. Thus, the unemployment rate will rise causing the reduction of savings because people will start to use their savings when they are unemployed. When the savings decreases, the interest rate will go up and cause even less capital investment (Metzler, 1951). .
To fix the inflationary window and prevent inflation, we can take a soft landing policy. Soft landing is a modification of Friedmans theory because the Friedmans initial theory there would never be inflationary window if the increasing rate of money supply was reasonable and consistent.