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IN NORMAL TIMES

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  • People are earning more and more money.
  • Thus are capable of paying higher prices for the  same quantity of goods.

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  • Now there is less money now chasing  the same quantity of goods.

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  • 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.

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SOLUTION?

  • Some economists suggest that policymakers  should stop worrying about inflation.
  • Instead focus exclusively on boosting  aggregate demand in the economy.

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  • 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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