Economics Case

Stagflation refers to a recession together with inflation. This is caused by a supply shock or cost push inflation, which means not enough supply for the big demand, leading to rise in prices and decrease in quantity produced. Blinder says that inflation occurs from the growth of aggregate demand and not enough money to keep up with the supply.

The Employment Act introduced in 1946 consisted in the government stimulating the economy by fulfilling the employment demand. In 1979 there were crop s fail everywhere. This caused the average price to rise a lot. All food prices increased by 20%, causing inflation. There must be a balance between unemployment and inflation to have a stable economy. Unfortunately when unemployment rises, usually means that inflation is decreasing. In 1992 the inflation rate was 5% and the unemployment rate was 4%. A year later the inflation rate was 8.5% and the unemployment rate was 5%. People was very frustrated.

In 1974 the Middle East and the U.S.A. were in conflict. The prices of oil increased a lot. Gasoline prices were raised by 40%. In the past inflation occurred by too much growth, but now unemployment was rising and inflation growing. The economy was slowing down but prices kept rising. The food and the energy supply were rising every day. This was cause by a supply shock or cost push inflation together with a recession, called stagflation. To overcome this economy the government controlled wages and prices to create a balance.