Reference no: EM133677385

Questions

1. Stagflation can occur when there is a sudden shock that decreases supply. Prices increase, profit margins are reduced, and outcome slows. This can occur when there is an imbalance of fiscal and monetary policies that creates a situation where unemployment and inflation occur simultaneously. Stagflation can also occur with monetary tightening such as when the interest rate rises or there is a reduction in the money supply.

Stagflation: What Is It, Definition, And Causes | Seeking AlphaLinks to an external site.

2. To balance low inflation and low unemployment, sometimes communicating inflation expectations and providing certainty can guide behavior through adaptive or rational expectations, as was described in class. Adaptive - based on recently observed inflation; Rational - based on current and prospective policies (Slide 7, Lecture 6, Part 9). Monetary policy can lower interest rates, to stimulate activity and reduce unemployment. Fiscal policy could increase government spending, or decrease taxes, to increase output and reduce unemployment. There can also be labor measures such as job training that can promote labor markets.

3. A major challenge is that both economic magnitude and morale are closely related to shock events. Some of the items that caused shocks to aggregate supply that were mentioned in the book included droughts that destroyed crops, enactment of laws that require firms to reduce pollutants (which passes the expense to be a burden to the consumer), the pandemic, union aggressiveness, or the oil cartel competition, all have a level of political unrest. In addition, any impact with unemployment creates stress and uncertainty in living. Depending on the decision-makers, some will favor decisions focusing on inflation and outcome, while others may favor lowering unemployment.

Mankiw, N Gregory. (2022) Macroeconomics. 11th Ed. Worth Publishers, Macmillan Learning. p273.