Question

There are several economists who believe that The United States is entering stagflation now or will soon enter stagflation in the future.

Homework: Case study Find an article that explains “Stagflation of the 1970’s in The United States”. Summarize the article including the cause of stagflation and how stagflation was stopped. Express and support your opinion if The United States is in now or entering a period of stagflation. What should the government do to, if anything improve the current economic situation?

Answer 1

Stagflation in the 1970's by Barry Nielson updated Feb25 , 2020.

The economists till 1970 was of the opinion that there is an inverse relationship between inflation and unemployment ie when inflation is high unemployment will be low.They believed that increase in the demand for goods led to rise in prices and so firms expand and hire more workers, thus reducing unemployment .In 1970 there was Stagflation in US which means growth was slow and there was rise in prices. In reality in 1970, there was rising prices , rising unemployment, and poor economic growth because of cost push inflation of high oil prices.This was not in terms of Keynesian economic theory which stated that if the economy slows down,increase in money supply will lead to rise in price and fall in unemployment . So in 1970 in the US ,there was rising oil prices , high inflation , unemployment and recession and the cause of all these was rising oil prices. In order to control inflation Milton Friedman believed that the Fed should follow constrictive monetary policy. In 1979 the monetarist theory was implemented.

Stagflation means slow growth with rising inflation.Stag inflation can occur if policies of the government damage normal functioning of the government.Economists are of the opinion that US will enter recession in 2020 because of the trade wars . Business around the world will suffer and go down and as a result markets will tumble down.This will lead to losses in jobs .

The government should stop too much money to enter the economy in too less time so as to stop stagflation from taking place during recession.Milton Friedman believed that the cause of inflation is too much money chasing too little goods. It is necessary for the Fed to precisely anticipate the short term and long term performance of the economy.The aim of the Fed is to keep the prices in the economy stable and increase employment upto the maximum level.This can be achieved through monetary policy.