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    Question

    Consider a country that is experiencing

    stagflation—high inflation combined with high unemployment. Which of the following policy options is most appropriate to address this issue?  
    A Expansionary fiscal policy to reduce unemployment Correct Answer Incorrect Answer
    B Contractionary monetary policy to lower inflation Correct Answer Incorrect Answer
    C Implementing price controls to reduce inflationary pressure Correct Answer Incorrect Answer
    D Supply-side policies to increase productivity and economic efficiency Correct Answer Incorrect Answer
    E Increasing government subsidies to support employment Correct Answer Incorrect Answer

    Solution

    • Stagflation (stagnant growth + high inflation) cannot be solved by typical demand-side policies . 
    • Supply-side policies (D) , such as improving infrastructure, reducing regulations, and promoting investment, help increase output and reduce costs , addressing both inflation and unemployment. 
    • Expansionary fiscal (A) or monetary policy (B) could worsen inflation , and price controls (C) create shortages . 

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