A significant productivity slowdown occurred during the 1970s and 1980s. A large part of it occurred in industries closely related to the energy crises of the 1970s. (Besides the “Oil Shocks” section in the text, you can read a brief summary of an article by William Nordhaus of Yale University about these developments in the NBER Digest, www.nber.org/digest/jun05/w10950.html.)
a. Use the aggregate demand and supply model to show the effects of the energy crises and productivity slowdown on the economy if spending growth remains unchanged.
b. Suppose that unaware of the productivity slowdown at the time, monetary authorities increased the growth rate of money in order to stimulate spending growth, or AD, and boost employment. What impact would this have on the economy?
c. Review Figures 32.1, 32.2, and 31.2 (The Inflation Rate in the United States) and determine if it seems like the scenario described in this problem might have been possible. Why?