ABSTRACT
This chapter is concerned with macroeconomic policy and the business cycle, and the analysis is at the aggregate rather than the sectoral level. The greater magnitude of recessions since the mid-1970s resulted from the combination of the Organization of Petroleum Exporting Countries (OPEC) shocks and the restrictive reaction of macroeconomic policy. Probably the most significant development affecting both the business cycle and the productive structure in the industrial countries since the mid-1970s has been the rise in energy costs caused by the OPEC oil price increases in 1973-1974 and 1979-1980. The OPEC shocks raised the price level directly because of the increases in input costs to production of energy-intensive goods. The implications of alternative monetary responses to the OPEC shocks have been critically analyzed in several theoretical studies. The initial recovery, commencing in the United States in the spring of 1975, was led by a reversal of the inventory cycle following the loosening of fiscal and monetary policy.
