Why was fiscal policy NOT helpful in overcoming stagflation in the 1970s?
A) because fiscal policy is aimed at both aggregate demand and aggregate supply, but the problem was related to demand only
B) because fiscal policy is aimed at both aggregate demand and aggregate supply, but the problem was related to supply only
C) because fiscal policy is aimed at aggregate demand only, but the problem was related to aggregate supply
D) because fiscal policy is aimed at aggregate supply only, but the problem was related to aggregate demand

Question

Why was fiscal policy NOT helpful in overcoming stagflation in the 1970s?  
A) because fiscal policy is aimed at both aggregate demand and aggregate supply, but the problem was related to demand only 
B) because fiscal policy is aimed at both aggregate demand and aggregate supply, but the problem was related to supply only 
C) because fiscal policy is aimed at aggregate demand only, but the problem was related to aggregate supply 
D) because fiscal policy is aimed at aggregate supply only, but the problem was related to aggregate demand

Quizplus · Accepted Answer

Fiscal policy is aimed at managing aggregate demand through government spending, taxation, and borrowing. However, during the 1970s stagflation, the economy experienced a supply-side shock due to high energy prices and increased costs of production, which caused a decline in aggregate supply even as aggregate demand declined. Fiscal policy would not have been helpful in overcoming stagflation because it was a problem related to aggregate supply, not aggregate demand. Therefore, fiscal policy would have been ineffective in addressing the root cause of stagflation.

Why Was Fiscal Policy NOT Helpful in Overcoming Stagflation in the 1970s