ollowing the end of WW2 (1945) , the US economy entered a golden age. The American economy boomed in the 50s. Throughout the decade, unemployment remained low at an average of 4.5%, soldiers who returned back from first WW2 and then the Korean War joined back to the civilian labor force, had families and the fertility rate increased. The 60s were still a great decade for the American Economy. During 60s, President J. F. Kennedy's government cut taxes to stimulate the economy (this is an example of an expansionary fiscal policy as you'll read in your textbook) and military spending increased due to the Vietnam War. Real GDP in the US grew at an average of 5% throughout this decade. This golden age of prosperity came to an end in early 70s. In 1973, Israel went to war against a coalition of Arab countries in the Middle East. During the Yom Kippur war, US and some other western countries in Europe declared their support for Israel. In retaliation, oil producing Arab countries in the middle east declared an oil embargo against America and those other western countries in Europe. Later in 1979, there was a revolution in Iran (which used to be a major political and military ally of the US in the middle east). After the 1979 revolution, political relations between Iran and the US hit a rock bottom and did not improve to this day. Iran is a major oil producer and after the revolution, the new government in Iran imposed an oil embargo against the US. The two events mentioned in the previous couple of paragraphs are commonly called the two oil shocks of the 70s. They are largely credited for ending the American economy's golden age. In economics, these oil shocks are studied as examples of negative aggregate supply shocks. You can read about them in chapter 34 of your textbook. part-a: Illustrate the impact of the oil shocks of 73 and 79 on the American economy using an aggregate demand supply plot. What happened to the inflation rate, output, and the unemployment rate in America in the wake of the two oil shocks? part-b: Inflation rate hit a record 13.3% in 1979 in the US following the Iranian revolution. To combat the rampant American inflation, President Jimmy Carter nominated Paul Volcker to serve as the chairman of the Board of Governors of the FED. Volcker's nomination was confirmed by the Senate and he took office on August 6th, 1979. Volcker was the quintessential inflation hawk and he raised the discount rate by 0.5% immediately after taking office. He continued combating inflation throughout the 80s by increasing interest rates all the way up to 20%! This contractionary monetary policy worked and inflation rate decreased to 3.7% by 1989. This period in the 80s is known as the Volcker disinflation in American economic history. Now illustrate the impact of Volcker's aggressive contractionary monetary policy on the American economy using your aggregate demand and supply plot from part a. part-c: Now suppose again that history taken an alternative turn. Instead of being concerned with the atrocious inflation rate, suppose President Carter's government in the late 70s had been concerned with the high unemployment rate. What policies could the government and the FED have followed to combat unemployment in late 70s? Explain in words and by using an aggregate demand and supply plot.
Following the end of WW2 (1945) , the US economy entered a golden age. The American economy boomed in the 50s. Throughout the decade,
This golden age of prosperity came to an end in early 70s. In 1973, Israel went to war against a coalition of Arab countries in the Middle East. During the Yom Kippur war, US and some other western countries in Europe declared their support for Israel. In retaliation, oil producing Arab countries in the middle east declared an oil embargo against America and those other western countries in Europe.
Later in 1979, there was a revolution in Iran (which used to be a major political and military ally of the US in the middle east). After the 1979 revolution, political relations between Iran and the US hit a rock bottom and did not improve to this day. Iran is a major oil producer and after the revolution, the new government in Iran imposed an oil embargo against the US.
The two events mentioned in the previous couple of paragraphs are commonly called the two oil shocks of the 70s. They are largely credited for ending the American economy's golden age. In economics, these oil shocks are studied as examples of negative
part-a: Illustrate the impact of the oil shocks of 73 and 79 on the American economy using an aggregate demand supply plot. What happened to the inflation rate, output, and the unemployment rate in America in the wake of the two oil shocks?
part-b: Inflation rate hit a record 13.3% in 1979 in the US following the Iranian revolution. To combat the rampant American inflation, President Jimmy Carter nominated Paul Volcker to serve as the chairman of the Board of Governors of the FED. Volcker's nomination was confirmed by the Senate and he took office on August 6th, 1979.
Volcker was the quintessential inflation hawk and he raised the discount rate by 0.5% immediately after taking office. He continued combating inflation throughout the 80s by increasing interest rates all the way up to 20%! This contractionary
Now illustrate the impact of Volcker's aggressive contractionary monetary policy on the American economy using your aggregate demand and supply plot from part a.
part-c: Now suppose again that history taken an alternative turn. Instead of being concerned with the atrocious inflation rate, suppose President Carter's government in the late 70s had been concerned with the high unemployment rate. What policies could the government and the FED have followed to combat unemployment in late 70s? Explain in words and by using an aggregate demand and supply plot.
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