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 - 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 - 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