Inflation and the Search for Stability

In this document we will discuss about Inflation and the Search for Stability and below are the summary points of this document:- Inflation and its effects on the economy, particularly during the 1970s and 1980s. Inflation occurs when there is a general increase in the price level of commodities and services over time, leading to decreased purchasing power. The rate of inflation is an important measure of this phenomenon. During the 1970s, there was a global economic slowdown due to various factors, including the energy crisis, the fall of the Bretton Woods system, and stagflation. In Europe, there were high levels of unemployment and structural rigidity that prevented free market operation, leading to high inflation and strikes. The government intervened by implementing contractionary monetary policies to reduce spending and control inflation.

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Inflation and the Search for Stability
Introduction
Inflation is known to take place when there is an increase in the general level of price
of the commodities and services in the economy over a long period of time. When there will
be rise in the price level, each unit of currency are known to buy fewer goods and services.
The inflation are known to affect the economies in both positive as well as in negative ways.
One of the chief measure of inflation is the rate of inflation.
In the year 1970, the stock market had suffered a huge amount of loss for the eighteen
month period. For this reason, the economic growth was quite became quite weak in nature
which resulted in rising to huge level of unemployment. The economic slowdown takes place
when the growth of the gross domestic product slows. The 1970s were known to be the worst
decade in case of the industrialized countries. There had been energy crisis which also took
place in the 1970s. The economic slowdown in that period of time took place because world
war. In many places there were presence of both high unemployment and high rate of
inflation. The recession in the case of United States have known to last till 1975.
Reasons behind the slowdown of the economic growth in the 1970s are
In case of United States
The recession which took place in 1970s was a period of stagnation in the Western
World that have known to end the economic expansion which started taking place after the
World War II. During this period there had been high rate of unemployment with high of
inflation which have known to exist simultaneously. One of the reason of the stagnated
economic growth is due to the oil crisis in the year 1973. Another reason is the fall of the
Bretton Woods system which took place after the Nixon shock.

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There was also result of stagflation in the 1970, where stagflation is known to be a
combination of the economic growth, high inflation and high level of unemployment.
European zone
The recession in case of the United States are known to have lasted till 1975 in the
United Kingdom. The gross domestic product have known to decrease by four percent
depending on the source. There had been oil crisis which resulted to the downturn in the
United Kingdom. There was also the double digit inflation in that period of time which have
increased to more than twenty percent. Two of the factors that have resulted to the recessions
in the 1970s in the European zone was due to high rate of inflation and strikes.
In the 1980s, there have been unemployment in Europe which has reached high
levels. The annual unemployment rate in Europe have rose sharply in the year 1981. The
structural rigidities in Europe took place as result of weak labour market performance when
compared to the United States. The term structural rigidity means that some set of the
institution prevent he markets from operating freely. One of the reason is that there had been
wage compression in the both education as well as in the occupation system which seems to
be quite higher in the euro area which resulted to decentralised setting of the wage. It have
been found that the wage distribution had been highly compressed in case of Europe. The3
high rate of unemployment took place in Europe as a result of structural rigidity. Countries
that have known to suffer the first recession have also suffered the second recession since the
recovery from the first had been quite difficult and they took a long time.
Structural rigidity in Europe
The period of 1970s and 1980s had been the period of economic volatility. There had
been a deep recession in the year 1981 when the government have started trying to control

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inflation. The recession have known to affect manufacturing which have resulted to
unemployment to more than three million. The significant problem of the United Kingdom in
1980 had been the high rate of inflation where during the late 1970s, the inflation have
reached to twenty percent. High level of unemployment had been very high in the
manufacturing sector of Wales and Scotland.
Government intervention
Therefore, the government had taken various steps for controlling inflation as
inflation leads to increased spending. With the help of contractionary monetary policy, the
government can control inflation. The contractionary monetary policy will help in recuing
spending since with the less money available, people will have less money to spend. The
government increases the rate of interest, increasing the reserve requirements and also by
reducing the money supply. When the government reduces the money supply, people will
have less money in hand to spend. This particular policy will be reducing the amount of
money in circulation since that part of the money will be going to the government’s pocket
and into banks. When the reserve requirements are increased, banks are known to hold back
their money and they only have to lend small part of money to the consumers. Therefore,
decreasing the spending will be significant in case of inflation since it will reduce the growth
of the economy and the inflation.

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