The American Stagflation Episode 1981

Table of Content

Introduction and Features 2

Keynesian Theory 2

Milton Friedman 2

Causes of Stagflation 2

Stagflation during the 1980’s Recession 2

Supply Side Factors 2

Demand Side Factors 2

Policy Remedies 2

Statistical Facts and Figures 2

Detailed Statistics 2

Investment 2

The effects of American Stagflation on the US economy 2

The effects of American Stagflation on the world economy 2

Supply side policies: 2

GDP Gap 2

Industrial capacity 2

Unemployment 2

Introduction and Features

Well, by the standards of a lot of countries, by Latin American standards, it wasn't so bad.

Paul A. Volcker

So how bad was it that made the then Federal Reserve chairman, Paul Volcker, to make this pacifying statement?

Stagflation [stægˈfleɪʃən]: (Economics) a situation in which inflation is combined with stagnant or falling output and employment

Noun [blend of stagnation + inflation]

The term was coined by a British politician Iain Macleod as, a situation when the inflation rate as well as the unemployment rate in an economy is constantly high. Both these rates (their sum defined by some as the ‘misery rate’) affect everyone, from the richest to the poor. Thus, the gravity of such a situation cannot be understated. But what makes all the more peculiar is the fact that any policy measure undertaken to arrest one rate usually worsens the other.

Economists offer two principal explanations for why stagflation occurs. First, stagflation can result when the productive capacity of an economy is reduced by an unfavorable supply shock, such as an increase in the price of oil for an oil importing country. Such an unfavourable supply shock tends to raise prices at the same time that it slows the economy by making production more costly and less profitable.

Second, both stagnation and inflation can result from inappropriate macroeconomic policies. For example, central banks can cause inflation by permitting excessive growth of the money supply,...