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Suppose that oil prices hit an all time high of $100 a barrel

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Suppose that oil prices hit an all time high of $100 a barrel, driving U.S. inflation up to 7% per year. At the same time, increasing foreign competition has generated unacceptably high levels of unemployment in the U.S. You are the Chair of the Federal Reserve. What do you suggest?

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Solution Summary

This solution discusses decision making and suggestions made by the Chair of the Federal Reserve.

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The situation described is called stagflation, in economic terms. What happens is that as inflation climbs, in this case to 7%, and unemployment also climbs, it reduces the chances of any monetary policy that can be initiated ...

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