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Nearly Eight Decades of Real GDP and Price Levels

For several years now the economy of US has been considered by so many researchers as running at the risk of deflation. This is because of the many phases that the economy has undergone from the period of depression to the period of stagnation. Deflation however has been the dominant issue in the economy of US implying that there has been a period of decline in the prices and consequently causing a broader index in prices. The US economic history has a link to eight decades which are considered very fundamental in the GDP and price levels in the States.

There was first the period before the great depression. This was the period in the 1970’s characterized by bankruptcy, unemployment rate going upto about 20% and an experienced contraction in the monetary ever. This was followed by another decade which was renamed the period after depression. During this period, there was a deep economic contraction, consumer spending fell and the real GDP dropped upto 28% making also prices drop upto 25%. The unemployment arte rose to about 35%.

The period of decrease in aggregate demand followed this period and it occurred between the years 1929-1933. It was characterized by the shift in the demand curve and the GDP fell to 25%, price levels also dropping to 20%. The period that followed named as the age of Keynes brought changes in the growth of GDP and price levels. During this period unemployment level decreased and there was increased government spending. This was due to the introduction of the theory of employment, money and interest by Keynes.

A period of stagnation (1973-1980) followed this period and the characteristics of this period include formation of price ceilings, inflation rate going upto 5%, increased oil prices and soaring food prices. During this period the GDP decreased, price level increased to about 20% and unemployment increased to 9%. The economy of the US recovered from 1980, and the GDP and price level went higher again. This was due to the ability of the states to combat inflation, increase the output and lower taxes of individuals.

The results were that unemployment rate went down to 10%, real GDP went up to 68% and the average inflation went down to 3%. This scenario is still felt today and the economy continues to do better and better e. g. today the employment rate is about 200% the GDP is about 80% and average inflation is about 2. 5%. Reference: Khan, A. (2002). Optimal Monetary Policy: World Economic Outlook, Washington, NBER Working Paper No. 9402

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