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What is the dilemma faced by policymakers in oil prices increases in a sudden during a...

What is the dilemma faced by policymakers in oil prices increases in a sudden during a long-run equilibrium?

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Ans) Increase in oil prices causes cost-push inflation. This presents a dilemma to policymakers because if they try to target inflation by reducing aggregate demand, then they will have to compromise with national output as national output will decrease further. And if they try to increase the output by increasing aggregate demand then inflation will rise further. That is, increase in oil prices may cause stagflation. Stagflation is increase in inflation with decrease in national output.

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