Supply Shocks, its Causes & MeasuresTithi Sarkar – B.Sc. Economics (SEM2) · Nov 1948 – Oct 1949 :Post-War RecessionUNEMPLOYMENT RATE: 7.
9%DECLINE IN GDP: 1.1%CAUSES: According to many people recession wascaused due to world war as many veterans were returning to work force in largenumbers and unemployment began to rise due to lack of jobs. The governmentdidn’t pay any heed towards the problem regarding unemployment but ratherfocused upon inflation.
Also it is said that fall in fixed investments was alsoone of the factors why recession occurred.MEASURES: Inorder to curb recession monetary tightening policies took place. · Jul 1953 – May 1954 :Post Korean War RecessionUNEMPLOYMENT RATE: 2.2%DECLINE IN GDP: 2.9%CAUSES: There was an inflationary period afterKorean War.
More dollars were invested in national security. Increase ininterest rates led to fall in aggregate demand. MEASURES: FED tightened the monetary policy in 1952 tocontrol inflation. · Aug 1957 – Apr 1958 :Eisenhower RecessionUNEMPLOYMENT RATE: 6.2%DECLINE IN GDP: 3.
3%CAUSES: Despite monetary tightening a year prior therecession to curb inflation, prices increased in US economy. It led to foreigntrade deficit.MEASURES: Budget balance was made. · Apr 1960 – Feb 1961:Rolling Adjustment RecessionUNEMPLOYMENT RATE: 6.9%DECLINE IN GDP: 3.
4%CAUSES: It’s called Rolling Adjustment for manycompanies of US including automobile. People started to buy foreign made carsand inventories were pulled down by industries. This led to decline in GNP andproduct.MEASURES: Recession was called to an end when PresidentKennedy called for government spending. · Dec 1969 – Nov 1970 :Nixon RecessionUNEMPLOYMENT RATE: 5.5%DECLINE IN GDP: 0.8%CAUSES: It followed a lengthy expansion. Even at theend of expansion inflation was increasing due to increase in deficits.
Thecontraction in economy was led by increase in government expenditure.MEASURES: Monetary policies were tightened. · Nov 1973 – Mar 1975 :Oil Crisis RecessionUNEMPLOYMENT RATE: 8.8%DECLINE IN GDP: 3.
6%CAUSES: Oil prices were quadrupled by OPEC. Therewas also stock market crash which led to stagflation recession in the US. Alsothere was an increase in government spending.MEASURES: Monetary policies were tightened. · Jan 1980 – Jul 1980 :Energy Crisis RecessionUNEMPLOYMENT RATE: 7.8%DECLINE IN GDP: 1.1 %CAUSES: Interest rates increased dramatically andunemployment rose.
MEASURES: FED contracted the money supply. · Jul 1981 – Nov 1982 :Iran/Energy Crisis RecessionUNEMPLOYMENT RATE: 10.8%DECLINE IN GDP: 3.6 %CAUSES: Iranstarted to export oil at irregular intervals and in low volumes as there was achange in the regime which led to rise in prices.MEASURES: Government enforced a tightened monetarypolicy to control rampant inflation.
· Jul 1990 – Mar 1991 :Gulf War RecessionUNEMPLOYMENT RATE: 6.8%DECLINE IN GDP: 1.5 %CAUSES: Kuwaitwas invaded by Iraq which led to a spike in the price of oil. Hence,manufacturing trade sales declined. Manufacturing was been moved offshore as the provisions of NorthAmerican Free Trade Agreement (NAFTA)kicked in. The leveraged buyout of United Airlines triggered a stock market crash.MEASURES: Monetary policies were tightened. · Mar 2001 – Nov 2001 :9/11 RecessionUNEMPLOYMENT RATE: 5.
5%DECLINE IN GDP: 0.3%CAUSES: Burst of dot com bubble and 9/11 attack.These are the reasons that led to contraction of the economy.MEASURES: Monetary policies were tightened.
· Dec 2007 – Jun 2009 :The Great RecessionUNEMPLOYMENT RATE: 10 %DECLINE IN GDP: 5.5%CAUSES: Thesubprime mortgage crisis led to housing bubble burst. The housing prices beganto fall and the government responded by injecting liquidity in to the bankingsystem which led to failure of many banks.MEASURES: The govt.
responded with a bank bailout and fiscalstimulus package. In India, there was a stagflation like situationaround 2013-14. Identify the policy measures taken by the then government andcomment if there were effective or not.There were basically three reasons why inflation i.
e.stagflation like situation subsided.1. Fall indomestic and global pricesMost importantly, prices of food and fuel that hadspiked during 2013 condensed. Even theprices of veggies plummeted 13.2% in December 2013 and January 2014 because ofgreater supply.
These prices helped farmers to bring more land undercultivation and produce more and more crops leading to oversupply in early2014. According to Economic Survey, “Higher production in 2013-14 has beenachieved by expanding acreage.” Also the fact that there has been decrease inthe prices of oil in June 2014 has helped the Indian economy. 2. Measurestaken by RBI RBI governor Raghuram Rajan understood the need to curb money flow to the hinterland through NREGA (National RuralEmployment Guarantee Act) and various agricultural loans.Raghuram Rajan increases the amount of loans toagriculture which will increase the investment and also push the rural wageshigher. The rural wage growth is one of the key factors. It has also being seen that rural inflation was higherthan the urban inflation.
So, RBI hiked repo rates by 0.25% to 8%. Later whenthe economy got stabilized instead of reducing the repo rates, RBI brought inmultiple cuts in the statuary liquidity ratio. 3. CurbingExportsThe last but not the least measure was the series ofchanges in prices of the agricultural products and also marketing policies.
They dis-incentivized agricultural exports and introduced curbs on the grainstock. They cracked down the rice reserves and sold it in the open market.