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Why did OPEC introduce a supply shock in the 1970s and how did the US solve this cost push inflation?

#economics #inflation #supply #opec

Answers (1)

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Opec countries created the oil embargo in response to the U.S. decision to re-supply the Israeli military during the Yom Kippur war between Israel and surrounding Arab nations. The Federal reserve attempted to control inflation through manipulating interest rates to encourage growth, but the economy was suffering from stagflation (decrease in output aswell as increase in prices).

This brought about the idea of supply-side economic theory, which embraced lower marginal tax rates and cutting regulation to encourage production

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