Table of Contents
IN NORMAL TIMES
- People are earning more and more money.
- Thus are capable of paying higher prices for the same quantity of goods.
- Now there is less money now chasing the same quantity of goods.
- Accordingly, policymakers are often advised to maintain a certain inflation rate to ensure that Unemployment is kept to a minimum and the economy is operating at full capacity.
CASE OF OPEC
- In the early and mid-1970s, OPEC
- Decided to cut supply and sent oil prices soaring across the world.
- On the one hand, the rise in oil prices constrained the productive capacity of most western economies that heavily depended on oil, thus hampering economic growth.
- On the other hand, the oil price spike also led to inflation and commodities became more costly.
WHAT IS STAGFLATION?
- Stagflation is an economic scenario where an economy faces both High inflation and low growth at the same time.
SOLUTION?
- Some economists suggest that policymakers should stop worrying about inflation.
- Instead focus exclusively on boosting aggregate demand in the economy.
- Others, however, are more cautious about advocating a big-spending.
- Monetary easing in the last one year has only raised prices without leading to higher growth rates.
- So they advocate supply-side reforms.
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