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Business Cycles: Oil prices increase and Stagflation in the 1
Transcript of Business Cycles: Oil prices increase and Stagflation in the 1
- Since oil is a main commodity, its price increase affected many producer's profits, causing prices to rise and unemployment to increase. The U.S. was not growing economically but prices were, creating this state of stagnation, leading to Stagflation.
- In the start of the 1970's, strict government monetary policy was implemented, which caused contraction in the Business cycle.
What happened to Oil prices and inflation?
As shown above, the increase in oil prices had a negative affect on GDP growth. The producer's costs went up with inflation, and GDP was not able to expand due to higher unemployment and less production.
U.S. Output in 1970's
- Oil prices quadrupled and unemployment rate was at 8.8%. It went from avg $3 to around $12 per barrel
Oil prices in 1970's
Inflation in 1970's
Business Cycles: Oil price increase and Stagflation in the 1970's
The “great inflation” of the 1970’s was a time where economic growth was extremely weak and the unemployment rate hit double digits. This was caused by certain events in the Middle East, which lead to a sharp cut in world oil production and caused the price of oil to soar. This spike in the cost of oil caused production costs to rise, which reduced the quantity of aggregate output supplied. This surge in the price of oil ultimately caused an increase in overall consumer prices that caused a rise in the nominal wage. A nominal wage is the dollar amount of the wage paid. This nominal wage grew because many wage contracts included cost of living allowances that automatically raised the nominal wage when consumer prices spiked. The 1970s was a decade full of stagflation. Stagflation is the combination of inflation and falling aggregate output. These falling output levels cause a rise in unemployment and a decrease in people’s purchasing power.