Question

a) Use AS-AD to show an economy that is in stagflation. Clearly explain in 2-3 sentences,...

a) Use AS-AD to show an economy that is in stagflation. Clearly explain in 2-3 sentences, what is happening with the actual price level, actual unemployment, and actual output.

  1. List one specific fiscal policy tool available to policy makers to help address the problem described in (a) above. Explain in 2-3 sentences, what happens to the actual price level, actual output, and actual unemployment after the successful use of fiscal policy tool you just described.
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Answer #1

In stagflation following things happen

1. output decrease, price level increase which shows the increase in inflation rate and employment decrease

presented in the graph.

the only real solution could be enhancing the supply-side by increasing in productivity. this enable higher growth without inflation. here in this policy, we are trying to eliminate structural unemployment by enhancing labor skills. that will lead to higher productivity and output will be more and the price will be back to the original position or less.

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