 Last time we introduced the idea of stagflation. What happens if prices in the economy go up dramatically, like in the oil price shocks of the 1970s? We saw that the aggregate supply curve shifts up, prices go up, but output falls and unemployment increases. This faces the government with a big dilemma, what should the government do about stagflation? Well, if the government is mostly concerned about higher prices and inflation, the government can have a contractionary fiscal policy, raise taxes, lower government expenditure, and that will shift in the aggregate demand curve. Prices will fall from P1 to P2, but unfortunately, output will also fall. So by lowering prices, they also lower output and increase unemployment. If the government, on the other hand, were more concerned about unemployment, the government could expand aggregate demand, try this at home, you'll see that they could expand aggregate demand, engage in lower taxes or higher government spending. That will raise output, but at the cost of raising prices further. So the government is on the horns of a dilemma by helping to solve one problem, they make another problem worse. We call this a trade-off.