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How stagflation is created

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In the 1970s, the United States had a situation of stagnation (little economic growth) and inflation. The likely cause of this situation were the oil shocks of the 1970s.

A. Assume that we start the 1970s in a situation of full-employment (short-run and long-run equilibrium). Explain using the AS/AD model, how stagflation is created. Be specific on what curve(s) move, which way (please use right and/or left; not up and down).

B. Was the Federal Reserve (and/or Federal Government) incompetent for not solving these problems during the 1970s? Explain your answer by determining the choices policy makers had at that time using the AS/AD model.

C. In 1982, the FED raised interest rates very aggressively. Use the AS/AD model to determine the likely outcome of their choice in terms of GDP growth and inflation.

Reference no: EM132592966

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