PYQ Bank — UPSC Civil Services

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.