THE ECONOMICS OF MONEY,BANKING, AND FINANCIAL MARKETS 666

PA R T V I I Monetary Theory

634

As a result, aggregate output would rise, unemployment would fall, and the price
level would rise. Table 24-3 demonstrates that this is exactly what happened. The
unemployment rate fell steadily from 1964 to 1969, remaining well below what
economists now think was the natural rate of unemployment during that period
(around 5%), and inflation began to rise. As Figure 24-6 predicts, unemployment
would eventually begin to return to the natural rate level because of the economy s
self-correcting mechanism. This is exactly what we saw occurring in 1970, when
the inflation rate rose even higher and unemployment increased.
TA B L E 2 4 - 3

Unemployment and Inflation in the United States During the
Vietnam War Buildup, 1964 1970

Year

Unemployment Rate (%)

Inflation (Year to Year) (%)

1964

5.0

1.3

1965

4.4

1.6

1966

3.7

2.9

1967

3.7

3.1

1968

3.5

4.2

1969

3.4

5.5

1970

4.8

5.7

Source: Economic Report of the President.

Negative
Supply Shocks
in Canada,
1973 1975 and
1978 1980

TA B L E 2 4 - 4

In 1973, the Canadian and world economies were hit by a series of negative supply
shocks. As a result of the oil embargo stemming from the Arab Israeli war of 1973,
the Organization of the Petroleum Exporting Countries (OPEC) was able to engineer
a quadrupling of oil prices by restricting oil production. In addition, a series of crop
failures throughout the world led to a sharp increase in food prices. These events
caused the aggregate supply curve in Canada to shift sharply leftward, and as the
aggregate demand and supply diagram in Figure 24-7 (page 632) predicts, both the
price level and unemployment began to rise dramatically (see Table 24-4).

Unemployment and Inflation in Canada During the Negative
Supply Shock Periods, 1973 1975 and 1978 1980

Year

Unemployment
Rate (%)

Inflation
( Year to Year) (%)

Year

Unemployment
Rate (%)

1973

5.6

9.4

1978

8.3

1974

5.3

14.6

1979

7.4

9.5

1975

6.9

10.3

1980

7.5

10.9

Source: Statistics Canada, CANSIM Series D44950 and D15612.

Inflation
( Year to Year) (%)
6.5