Oil Crisis Case Study

870 Words 4 Pages
Central Bank Policies of the United States and Japan during 1970 Oil Crises The oil crises began as an unfortunate outcome of the Arab-Israel War during 1973 (U.S. State Department). Many countries imported oil produced in Arabic countries, while also supporting Israeli military. Mutual relationships with these countries amidst a war became a problem for Arabic countries and resulted in decreased exports and increased prices of oil. Central banks were forced to fight the economic problems caused by the oil crises with a response of specific monetary policies. The economic recovery for the United States and Japan due to central bank policies, brought motivation to analyze the control of central banks within this paper. The United States uses …show more content…
The effects on individual consumption, business investment, and money supply led to the macroeconomic problems. Using different methods of macroeconomic study, economists acquire a general perspective of economic problems. One of the simplest graphs to understand is the supply and demand graph. It’s the use of this graph that helps in understanding higher prices during the oil crises; lower supply equals higher demand price, and higher supply equals lower demand prices. However, supply and demand are not the only factors that affect the economy. There are factors such as the interest rates, and inflation, that the federal reserve can essentially control. Interest rates are changed based on the type of output gap affecting the economy. The general rule is that higher interest rates represent an expansionary gap, while lower interest rates represent a recessionary gap. During this recession of the 1970’s in the U.S., interest rates decreased by very little, and the Federal Reserve increased the money supply causing high rates of inflation. This created a perfect storm for the federal reserve and called for an increase in interest rates to reduce the inflation, according to the Keynesian …show more content…
Also, businesses were unable to predict the future of their finances, which led to decreased investment and higher unemployment rates. Another factor that contributed to unemployment was the wage push that President Nixon mandated across the board for businesses. This wage push forced businesses to pay employees at higher prices. The state of the economy made it impossible to maintain the higher wages, so unemployment increased as businesses tried to avoid bankruptcy. The planned aggregate expenditure equation used by the federal reserve had unforeseen holes in calculating the effects of the higher interest rates; Lower interest rates = ^(increased) consumption and investment = ^(increased) Planned Aggregate Expenditure = (tax rate multiplier) x Y(output) (Aguiar-Conraria et

Related Documents