What contributed to stagflation’s demise between 1982 and 1989? How did these events affect aggregate supply and the Phillips Curve?
What will be an ideal response?
There was a deep recession from 1981 to 1982 that reduced the pressure for workers to increase wages and for firms to increase prices. Increased foreign competition also restrained domestic wage and price increases in the United States. The U.S. economy also underwent deregulation in many basic industries that stimulated more competition and further restrained price and wage increases. In addition, the monopoly and pricing power over oil by the OPEC cartel was weakened, thus reducing energy prices for consumers and businesses. These factors worked to reduce the per-unit cost of production and shift the economy’s short-run aggregate supply curve to the right and shift the Phillips Curve back to the left.
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