ECONOMICS
INFLATION
|
Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
|
|
|
the policy conflict with the objectives
|
|
|
increasing taxes will help control the inflation but will potentially make the UE worse
|
|
|
because monetary and fiscal policy are not defined to work together, they only deal with one thing at a time
|
|
|
because it is a conflict best shown on a Lorenze curve
|
Detailed explanation-1: -If the MPC cut interest rates to try and increase GDP, they could make inflation worse. Therefore demand-side policies struggle to solve stagflation they can only solve one particular aspect.
Detailed explanation-2: -Solutions to stagflation Monetary policy can generally try to reduce inflation (higher interest rates) or increase economic growth (cut interest rates). Monetary policy cannot solve both inflation and recession at the same time.
Detailed explanation-3: -Neo-Keynesian theory distinguished two distinct kinds of inflation: demand-pull (caused by shifts of the aggregate demand curve) and cost-push (caused by shifts of the aggregate supply curve). Stagflation, in this view, is caused by cost-push inflation.
Detailed explanation-4: -Wages and prices ratchet up. The lost lesson from the 1970s is that shocks, which sharply reduce real national disposable income, lead to cost-push inflation. Unlike demand-pull inflation, rising prices cause rising unemployment, instead of falling unemployment causing rising prices. Hence stagflation.