Question

There is a spike in oil price which has caused stagflation. Higher prices (inflation) have risen while Real GDP has slowed down.

What are some decisions the Government/Central Bank can do to influence the economy during stagflation/high oil prices? Explain.

Answer 1

Stagflation is a situation where economy faces inflation,unemployment,decrease in GDP and slow economic growth.This worsely effects the economy by slowing down its growth.Government adopts and imposes various plans,policies and strategies to eradicate stagflation and to accelerate economic growth.Central bank and government has a chance to either boost economic growth or to control inflation.Central bank can reduce interest rates which boosts economic growth.If interest rates and return rates are reduced then economic growth increases but costs of goods and services remain high.On the other hand if interest rates are rised then costs of goods and services will be decreased with decrease in economic growth.So,its better if government and central bank reduces interest rates which hikes up economic growth as inflation and uemployment can be reduced by several other methods.Government and central bank can start imposing low interest rates and growth of economy can be accelerated.

To reduce inflation and unemployment,government should increase its output level.By ordering companies and factories to rise their output level,there will be requirement and need for more manpower which increases for demand workers and by this unemployed people will be provided with livelihood by decreasing rate of unemployment.This reduces unemployment rate and even inflation gets into control as there will be more supply of goods due to rise in level output.Costs of goods and services will get down as more number of goods and services are produced.In this way,unemployment and inflation can be controlled and even gross domestic product will be increased.Another major issue during stagflation is spike in oil rates.Stagflation starts from rise in cost of oil .Oil rate can be controlled only by decreasing its usage.Government should influence people of economy to reduce the usage of oil.They should try avoid using their own vehicles and should prefer using public transport which reduces the overall usage of oil and might deteriorate the oil rates.

Hence,in this way government and central bank should take decisions to influence the economy during stagflation.These decisions and steps might help to overcome stagflation and high oil rates.