Stagflation In 1970s

The stagflation in 1970s increased the unemployment in USA due to stagnant business activity and persistent inflation rate. The residents of United States started expecting continuous increase in the prices of goods and service and as a consequence they bought more.

Consequence: Stagflation in 1970s

The continued increase in the price of goods and services eventually raised the demand and the increased demand raised the prices. This resulted in the demand for higher wages and that eventually pushed the prices further up. This state of the economy continued for a long period.

The government started to peg payments such as for Social Security, to CPI (Consumer Price Index), which helped the workers to combat inflation. With the passage of time, the government needed more funds, which eventually puffed up the budget deficit. This led to more government borrowings and consequently raised the interest rate . At the same time, the energy cost and the interest rates also climbed up. The business investment also dropped and unemployment reached embarrassing levels.

Measures

To combat economic instability, President Jimmy Carter (1977-1981) took some desperate steps. He increased government spending and constituted voluntary wage and price guidelines with an objective to control inflation although his attempts turned out unsuccessful.

Impact

In the 1980s, the government of United States loosened the controls on bank interest rates. In 1990, the loosened the regulation of local telephone service. The Federal Reserve Board refused to supply all the money to the inflation desolated economy and caused interest rates to raise. As a consequence, consumers spending and business borrowing decelerated suddenly and at the same time, the economy of the country fell into a period of recession. Until the 1980s, when Paul Volcker became the Chairman of the Federal Reserve Board, no efficient policy succeeded in stopping inflation in the U.S.