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Stagflation presents a policy dilemma because traditional Phillips Curve trade-offs break down—conventional expansionary policies risk accelerating inflation further. A Keynesian approach to stagflation, particularly when caused by supply shocks (as with oil prices or commodity inflation), recommends contractionary fiscal policy to manage aggregate demand while simultaneously implementing supply-side reforms to increase production capacity and reduce cost pressures.
Option A is theoretically contradictory as it combines opposing policies without clear direction.
Option B would worsen inflation, a major concern during stagflation.
Option D ignores the demand management aspect.
India faced stagflation challenges in 2022-23, requiring RBI to carefully balance growth concerns with inflation targeting while the government focused on supply enhancement.