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ECON MACRO

5th Edition
William A. McEachern
ISBN: 9781337000529

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ECON MACRO

5th Edition
William A. McEachern
ISBN: 9781337000529
Textbook Problem

Fiscal policy effective when the U.S. economy was experiencing stagflation during the 1970s? Why or why not?

To determine

whether fiscal policy was effcetive during the stagflation of 1970s in the US along with the reasons for the same.

Concepts Introduced Fiscal Policy- It is the government’s plan of action or strategy with respect to the public revenue and expenditure to influence the nation’s economy.

Stagflation- Stagnation implies low economic growth rates and high rate of unemployment in the economy. Inflation, on the other hand, a persistent rise in the prices over a given period of time. An economic phenomenon whereby the stagflation and inflation simultaneously define a country’s economy is called stagflation.

Explanation

The oil supply shock, cost-push inflation, unemployment and recession defined the US economy along with few other industrialized economies across the globe during the 1970s. The unprecedentedcharacteristics of the economy, not only forced the Keynesian school of economic thought to moderate its theory but introduced to the world the new economic phenomenon which was a portmanteau of inflation and stagnation, stagflation.

While the Consumer Price Index(CPI) reached an average annual of 12.4% in 1980 which was far above the US historical standards, the crude oil was peaking at a price per barrel of $117.71 during 1979. The GDP growth was hovering at a low of near 3% during the period witnessing a negative growth in 1980. The unemployment rates were bubbling like never before cruising to heights since 1979 with the trend permeating the early 1980s asymptotically to 10% to be lower only since 1984...

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