Answer to Question #93763 in Macroeconomics for Musbahu Ahmad Ibrahim

Question

what are the possible explanation for the recent failure of fiscal and monetary policy to solve the stagflation problem?

Answer 1

Stagflation is an economic condition that combines slow growth and relatively high unemployment with rising prices or inflation. Standard macroeconomic protections against inflation or unemployment are considered ineffective against stagflation.

The complexity of the policy is due to the fact that the normal reaction to the components of stagflation - recession and inflation - is diametrically opposite. Governments and central banks respond to recessions through expansionary monetary and fiscal policies, but inflation is usually fought with restraining monetary and fiscal policies. This puts politicians in a difficult position.

The main reason that monetary and fiscal policies are largely ineffective against stagflation is that these instruments were based on the assumption that a simultaneous increase in inflation and unemployment is not possible.

Here you can find measures, that government cаn take to solve the stagflation problem:

https://www.investopedia.com/ask/answers/040615/what-actions-or-policies-can-government-agency-take-counteract-and-end-stagflation-economy.asp