Madeline Perales, Paulina Ortega, Rea McComb, & Juliann Vega
stagflation of the 1970's
why Is thIS event considered a critical milestone in U.S. economic history?
The 1970 stagflation crisis was a turning point in US economic history because it marked the beginning of the end of the postwar economic boom & the start of a period of economic stagnation.
Causes of Stagflation in the 1970's
Stagflation is a combination of slow economic growth and rapidly rising prices.
Prices rapidly rose due to and increase in oil prices.
The U.S. was not growing economically due to growing federal budget deficits.
During the 1973 Arab-Israeli War the United States aided the Israeli military in a resupply. In response Arabic members of the Organization of Petroleum Exporting Countries (OPEC) placed an embargo on the U.S.
Rising Prices
Deficits arose from the Vietnam War and Great Society spending.
Slow Economic Growth
Unemployment and inflation both rose rapidly contradicting the principle of the Phillips curve.
gov response
Increase Gov Spending
The government decided to increase government spending, with the intention of leading to higher growth, but can also lead to inflation.
Lower Interest Rates
The government began to lower interest rates to counter the downturns in aggregate demand with the goal of getting stable prices by aiming for a 2% average rate overall.
Evaluation
Inflation got so high that two recessions were needed to reduce it. The rising interest rates lowered output and employment as prices continued to increase. The government's response was not effective in providing a solution out of stagflation.
Connection to macroeconomic terms and concepts
- Phillips Curve: States that inflation and unemployment have a stable and inverse relationship-stagflation goes against this idea. Unemployment was rising as well as inflation
- Increase in oil prices shifted SRAS to the left-Price levels go up but real GDP decreases
- Supply Side Shock: causes an increase in costs or disruption to production. Causes left shift in SRAS
- Supply Side Shock leads to cost-push inflation
- Cost-Push Inflation: Rising prices (oil) due to higher costs of production or higher costs of raw materials
key terms & individuals
: Richard Nixon: The 37th President of the United States who served from 1969 to 1974.
: Gerald Ford: The 38th President of the United States who served from 1974 to 1977.
: Jimmy Carter: The 39th President of the United States who served from 1977 to 1981.
: Paul Volcker: The Chairperson of the Federal Reserve from 1979 to 1987.
: Milton Friedman: An American economist who was a proponent of free-market capitalism.
Stagflation: A situation where there is high inflation and low economic growth.
OPEC (Organization of Petroleum: A group of countries that control the production and pricing of oil. Exporting Countries)
Oil embargo: A ban on oil exports from OPEC countries to the US and other countries that supported Israel during the Yom Kippur War.
Energy crisis: A period when there was a shortage of oil and gas, resulting in high prices and long gas lines.
Phillips curve: A theory that suggests there is an inverse relationship between inflation and unemployment.
Wage-price spiral: A cycle of rising wages and prices that leads to higher inflation.
Supply-side economics: An economic theory that advocates for lower taxes and less regulation to stimulate economic growth.
Volcker Shock: A series of monetary policies implemented by Paul Volcker in the late 1970s and early 1980s to combat inflation.
OPEC price controls: Limits on the price of oil set by OPEC.
Deregulation: The removal of government regulations on businesses and industries.
What is the significance of this event in shaping the U.S. economy?
The 1970 stagflation crisis had a significant impact on shaping the US economy by exposing the vulnerabilities of the postwar economic system and highlighting the need for more sustainable economic policies!
RESOURCES & CITATIONS
“1970s Energy Crisis - Causes, Effects, OAPEC.” History.Com, www.history.com/topics/1970s/energy-crisis. Accessed 23 May 2023.
“Arab Oil Embargo.” Encyclopædia Britannica, www.britannica.com/event/Arab-oil-embargo. Accessed 23 May 2023.
“Energy Crisis.” National Museum of American History, 1 Apr. 2021, americanhistory.si.edu/american-enterprise-exhibition/consumer-era/energy-crisis.
Nielsen, Barry. “Stagflation in the 1970s.” Investopedia, 5 Apr. 2023, www.investopedia.com/articles/economics/08/1970-stagflation.asp#:~:text=Stagflation%20in%20the%201970s%20combined,currency%20rates%20contributed%20to%20stagflation.
Nielsen, Barry. “Stagflation in the 1970s.” Investopedia, 5 Apr. 2023, www.investopedia.com/articles/economics/08/1970-stagflation.asp.
“Oil Crisis of the 1970s.” Oil Crisis of the 1970s - Energy Education, energyeducation.ca/encyclopedia/Oil_crisis_of_the_1970s. Accessed 23 May 2023.
“Stagflation.” Economics Help, www.economicshelp.org/blog/glossary/stagflation/. Accessed 23 May 2023.
