Public policy by the principal developed country (DC) governments since about 1979 has accepted, and probably caused, this interest upsurge. These governments, reacting against and inappropriately Keynesian response to the first (1973) oil price shock, decided to squeeze out inflation (and inflationary expectations) after the second (1978) shock. Around 1978-1984, this squeeze was attempted mainly by restraining the growth of the money supply, which led to increases in the nominal rate of interest. At the same time, the United States public sector deficits (and perhaps those in some other developed countries) added market-based upward pressure on interest rates. Rates charged by leading public institutions to borrowing governments – even on old loans – since the late 1970s have responded quickly to market conditions. There is no reason to doubt that these changes are passed on to final borrowers, especially in view of pressures by donors upon developing country governments to phase out interest rate subsidies.

After the second oil shock, principal developed country governments decided to fight inflation. According to the text, this was accomplished through

Item 3 - an increase in the interest rate caused by the tightening of the money supply;