Question

Explain the causes of stagflation in the 1970s in the United States, and describe its effects on Americans.

Answer 1

Answer:

Causes of stagflation in 1970:

1. The increase of oil prices and consequent increase of gasoline prices this phenomenon is known as cost push inflation.  

2. Higher level of unemployment

Explanation:

Stagflation is the lethargic economic growth, depicted in factors such as high unemployment, happening while there are high rates of inflation in a given economy.  

In 1970 the United States economy experienced stagflation because the oil prices reached historical high prices increases the cost of gasoline as well. As oil is the main raw material for producing gasoline the increase of oil prices caused a cost push inflation.

Usually economist believed that inflation was desirable as it was caused by the increase of demand, which mean that employment was being generated and therefore the need for consuming more goods and services was a logical explanation of the increase in demand. However, during the 70's this increase was the result of an externality (the increase of oil prices). At the same time the levels of unemployment rose in that decade creating the stagflation of the United States Economy.