Why was there high inflation/unemployment in the 1970's?

Answer 1

High oil prices explain about half of it. The other half is attributable to productivity slowdown; between 1973 and 1979, productivity in the U.S. grew by mere 0.6% a year as opposed to 2.3% between 1960 and 1973.

A macroeconomics textbook by Abel and Bernanke (if I remember correctly) has a chapter-long discussion of it...

Answer 2

It is a classic example of how in the real world the market economy adjusts rather slowly sometimes to a change in supply or demand.

Firstly there was already inflationary momentum in 1973 becasue the world economy was booming -- growing faster than the NAIRU - non-accelerating-inflation-rate-underlying.

Secondly when OPEC acted as an effective cartel and quadrupled oil prices, the demand for oil was revealed to be very price-inelastic in the short term. Ditto the supply (it took 9 years for an oil glut to emerge as a result of new sources being developed.) In 1974 and 75 especially, real purchasing power was transferred to the oil producing countries, but in the short run all they could do with some of it was save it. Reserves (dead money held by central banks) rose and gross total world consumption took a dip. Hence, recession. Therefore unemployment.

In the medium term, of course, OPEC countries' spending rose to match their purchasing power and the world economy got going again.

Answer 3

Inflation occurs as there is too much spending in the country itself where there is very high outflow of fund. High unemployment is caused the rapid increase in population growth, where there is more in supply exceeds supply causing negative economic growth, apart from that there is unemployment in terms of : - seasonal, cyclical etc.

Answer 4

Stagflation was mostly caused by oil prices, I suggest looking at the wikipedia entry on stagflation:

http://en.wikipedia.org/wiki/Stagflation

Answer 5

Hippies.