What is the result of contractionary fiscal and monetary policies if an economy is suffering stagflation?
A)Unemployment may be cured but at the cost of higher inflation.
B)Inflation may be cured but at the cost of higher unemployment.
C)It will increase the levels of both unemployment and inflation.
D)It will decrease the levels of both unemployment and inflation.

Question

Quizplus · Accepted Answer

Contractionary fiscal and monetary policies both aim to reduce aggregate demand, which can help to control inflation. However, if an economy is experiencing stagflation, it means that inflation is high and unemployment is also high. Contractionary policies can help to reduce inflation but they can also worsen unemployment. Therefore, the best choice is B, which states that inflation may be controlled but at the cost of higher unemployment.

What Is the Result of Contractionary Fiscal and Monetary Policies