Suppose an economy is experiencing stagflation. What monetary and fiscal policy proposal would you make? How...

Suppose an economy is experiencing stagflation. What monetary and fiscal policy proposal would you make? How would they work? Draw graphs to support your answer.

Expert Solution

Stagflation occurs when there is an increase in inflation and also at the same time an increase in unemployment and lower economic growth.

Thus stagflation is stagnation plus inflation.

So the demand side policies , monetary &fiscal policy combination can't solve the issue

Bcoz expansionary fiscal & monetary policy is needed to fight with recession whereas to control inflation , we need to use contractionary policies , thus the two remedies for two problems are diametrically opposed in working.

Thus the other proposal is to implement supply side policies,

1) wage control: the stagflation can be caused by rising wages (powerful trade unions). Thus one solution is that government intervenes to limit wage rises.

In theory, limiting wage increases can break the cycle of wage inflation and help to improve the economic situation

2)control cost push inflation:

increase aggregate supply (AS) through supply-side policies, for example, privatisation and deregulation to increase efficiency and reduce costs of production.

Rahul Sunny answered 2 years ago

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