DEPARTMENT OF ECONOMICS
A. HORTON COLLEGE OF BUSINESS AND PUBLIC ADMINISTRATION
UNIVERSITY OF LIBERIA
INTERMEDIATE MACROECONOMICS II SECTION 1
Submitted To : Mr. Mohammed S. Sambolah
Date of Submittion: March 10, 2023
Submitted By:
No.
Group II
Members
Name
…………………………………………………………………………………………… ID
Table of contents
I.
II.
III.
IV.
V.
VI.
VII.
Table of content
Introduction
Origin of the 1975 recession
Its effects
The economic policies employed
The economic school of thought
Conclusion / Remarks
INTRODUCTION
This paper is a research paper that focuses on the origins, causes and effects of the 1975 global recession,
the policies employed by government in order to restore to a growth trajectory and the economic school of
thought that was followed or used. It was research and presented by members of group two Section 1 Econ
310 of the University of Liberia.
The paper looks at key historical facts and information which led to the most famous global recession of
1973 to 1975 such as the oil embargo instituted by the OPEC on the united states of America and key
western allies on what they termed as a retaliation on the US and western countries involvement in the
Arab and Israel war, we also look at some other causes in the united states such as Nixon’s shock and his
fiscal policies and measures which also contributed to the recession in the united states.
As we go along, we shall also look at its effects on the world economy specifically to the United States and
we shall also discuss the economic policies instated or employed by governments to restores their
economies back to a growth trajectory. Lastly, we will state the economic school of thought that was
followed or employed by the US government in order to restore to the economy to growth trajectory and
we will conclude this by giving our views or remarks on the global recession of 1973-1975.
This paper solely focuses on the 1973-1975 global recession and mainly used the United States as our
research focus. It may contain some information from other scholars, academician and academics resources.
Therefore this may only be used as an academic presentation tool but not a policy making or reference tool.
THE ORIGIN OF THE GLOBAL RECESSION OF 1975
The most famous global recession of 1975 originated at the end of the year 1973 (October).
It came as a result of an oil embargo which was imposed by some OPEC members on some western
countries.
During the 1973 Arab Israel war, when some Arab countries such as Egypt and Pakistan decided to attack
Israel in order to retake some of the Arab peninsula which they believed was illegally occupied by Israel, in
response to military aid requested by the Israel state to the United States of America and some western
countries, the USA then headed by Mr. Richard Nixon send some military aid in military armory and
equipment worth $2 Billion US dollars. This caused anger among the Arab countries which did help Israel
pushed the Egyptian and Arabs subsequently winning the Arabs. In retaliation for the US and other
westerners helps to Israel, the OPEC (Organization of Petroleum Exporting Countries) which was mainly
comprised of Arab countries and headed by the Saudi Arabia back then, imposed an oil embargo on the
United States of America and other Western Countries such the Netherland, Portugal, Britain and other host
of European Nations who were mainly dependent on the Exported Arab nation’s oil. The OPEC members
also introduced cuts in the oil production.
With this embargo and the reduction in the oil and petroleum products which many industries at the time
depended for the source of energy for its productions, they were forced to cut productions or increased
cost, subsequently reducing employment and output thereby decreasing income and the level of
consumptions and aggregate demand in the economy. This caused a negative growth in the GDP for 5
consecutive quarters from 1973 to 1975.
Even though the oil shock was the major cause of the 1975 recession, but in the United States of America
the Nixon shock which is the result of Mr. Nixon’s fiscal measures such as the increase in the wage prices,
which kept prices for labor too high, reducing demand for labor and even forced businesses to lay off
workers. As a result there was an increase in the unemployment rate. Another policy he did was to take the
United States of America off the gold market or gold standard in response to a run on the gold held at fort
Knox, which led to inflation. The price of gold skyrocketed while the dollar’s value plummeted.
THE EFFECTS OF THE RECESSION ON THE ECONOMY
The 1975 global recession has a lot of negative or effect on the economy. Some of those effects were:
Decrease in output or Production as the many economies including the USA were hit by the oil embargo and
some fiscal measures which resulted to cost push inflation, it resulted to high cost of production to many
industries who depended on oil for the sources of production. The increase in the price of oil combined with
some fiscal measures such as increase in wages prices by the Nixon’s administration, led many firms to lay
off workers as the cost of labor increases, thereby causing a reduction in output (production). As there was a
decrease in output, it led to decrease in investment as many business experience a decrease in consumption
or the demand of goods and services decreased and combined with the increase in the interest rate by the
Fed. As the economy experienced a reduction in output and investment , increased in wages prices of labor,
many companies started laying off workers or employees to commensurate with high cost in production and
low output. Thereby leading to an increased in the rate of unemployment in the years 1973 to 1975.
The high unemployment rate, reduction in consumptions expenditure, reduction in output and production
and combined with stagflation (high inflation and low economic growth) led to the low economic growth
and subsequently continuous negative growth in the economy (GDP) for the following quarters up to the
beginning of 1976 with the coming of Ford administration and who instituted some fiscal measures and
policies that helped to put the economy back to a growth trajectory.
THE ECONOMIC POLICIES THAT WAS EMPLOYED DURING THE 1975 RECESSION
During the period from 1973-1975, the world was hit by major recession which was caused as a result of the
oil shock or embargo of 1973. It resulted to a high employment rate of 8.9%, fall in the (G.D.D.) Per capita of
3.4%, high inflation rate and low economic growth. In order to restore the economy back to a growth
trajectory, many countries employed a fiscal combined with monetary policies, in the United States of
America for example, its government employed both the fiscal and monetary policies. An example of these
fiscal policies was as follow:
a. Tax- cut : in order to encourage higher consumption, high investment and increase aggregate
expenditure or demand in the economy and output and reduced unemployment, the government
then headed by Mr. Ford proposed tax cuts to individuals and business firms. These tax cuts were
targeted at middle and lower income earners and the sole purpose to increase incomes in the form
tax returns to the households so that it will increase the purchasing power of the household thereby
increasing the demand for goods and services and then increasing investment thereby stimulate
economic growth. In reality marginal rate were not cut rather tax payers received tax credit in the
amount of $30, standard deduction was increased and refundable tax was enacted into law by the
end of 1976 by congress. As a result of this fiscal expansionary policy employed, it resulted to a
balance budget deficit of 1% of the G.D.P even though it jumped to 4.3% in the following year. But
the tax cut clearly did helped to increase consumption, thereby increasing aggregate demand and
output.
b. Extended unemployment compensation benefits: another fiscal expansionary policy employed by
the government was the extension of financial assistance to the unemployed in the form of financial
stimulus package or unemployment compensation benefits to the unemployed or those who lose
their employment status as a result of the recession. It was done solely to alleviate hardship faced
by households and encouraged consumption and thereby increasing investment and output. The
government also increases its expenditure level by investing in research such as the energy research
production program, construction of infrastructure such as roads and others.
c. Reduction in interest rate : in order to reduced the inflation rate then , the fed also implemented a
monetary policy by reducing the interest rate , by reducing the interest rate, it gave the commercial
banks also reduced their interest offered to business firm thereby encouraging investors to
inverters to borrow and as there was an increase in aggregate demand. It resulted to higher output
and resulting to a decrease in the inflation rate.
In conclusion with the employment of both the fiscal and monetary policies through expansionary
policies such as those above, the economy did not restore to normality or growth automatically but
it did put the economy back to a growth trajectory.
As in the following years there were a decline in inflation rate, unemployment rate and increased in
G.D.P per capita, economic growth.
THE ECONOMIC SCHOOL OF THOUGHT FOLLOWED TO RESTORED THE
ECONOMY TO A GROWTH TRAJECTORY
As the 1975 global recession hit the world economy in the 1973 to 75, in order to restore their
economies to normality and avoid the repetition of the great depression of the 1930s, many
governments or administrations opted to follow the Keynesian school of thought (who believed that
the government should intervene whenever there is recession, depression stagnation or
malfunctioning o in the economy in order to restore it.) By intervening Whereas in the united states
of America, the administration intervened by employing some of the Keynesian economics policies
such as the fiscal policies as the case of the tax cut, increased in government expenditure and the
offering of stimulus packages to the unemployed solely done by the government to boost aggregate
demand and increase investment and output.
CONCLUSION / REMARKS
From our Research, we can state that the most famous 1975 global recession started at the end of
1973 (October) and lasted until the end of 1975 and it lasted a period of 16 months.
It came as a result of some fiscal policies and measures employed by the Nixon administration in the
united states of America and the most famous oil embargo of the 1973 which was done by those
OPEC members who were mostly Arabs in retaliation to the USA and other western counties
intervention in the Arab Israel war.
The recession did had many effects on the world economy particularly in the united states where it
contributed to great budget deficit, a reduction in economics activities such as the decreased in the
aggregate demand, investment, output, stagflation and resulted to a low economic growth.
We observed the employment of some fiscal and monetary policies precisely, expansionary policies
such as the cut of taxes, increment in the government expenditure reduction in the interest rate by
the Fed which did help to restore the economy to a growth trajectory.
Lastly we did note that in order to restore the economy to a growth trajectory, with the advices of
economists, many governments followed the Keynesian school of thought by intervening in the
economy.