When Reagan came into his Presidency he was faced with an economy that was in recession; the prime interest rate was 15 ½ percent, the unemployment rate was over 7 percent and inflation was running close to 14 percent a year. Reagan and his advisors took a conservative approach to solving the problem and looked to supply-side, or trickle down' economics to accomplish their goal of bringing the country out of this recession and stimulating new growth. .
The economic policy of this time was known as Reaganomics', and it emphasized using monetary policy to combat inflation, and lower marginal tax rates to restore the reward for work, saving and investing and to boost productivity and growth. Many demand side advocates predicted that this would only increase inflation, unemployment, and lead to a general decline in the economy. .
Contrary to these predictions the economy recovered at a rate even faster than the Reagan administration had predicted. .
The major problem with the policy at this time was that the congress was still led by demand-side liberals. They said that these tax-cuts would produce a budget surplus and instead of using this surplus to offset the revenue loss from taxes, they just increased their spending, which caused the national debt to increase from one to four trillion dollars from 1981 to 1986. Another problem with this supply side ideology was that it was seen as giving the rich more of an advantage, because they were getting more of a tax break than less wealthy peoples. However this was the whole point of the trickle down idea. If you can increase the benefits to the people at the top then those benefits should trickle down to the lower classes, and stimulate economic growth throughout the economy. .
Throughout this period monetary policy, implemented by the independent Federal Reserve Board, commonly known as the Fed, was used to try to fine tune the short term economic situation by manipulating the interest rate, and the money supply, through it's control over the banking system.
