"With surging oil prices, concerns about the hawkishness of the Federal Reserve and fears of Russian aggression in Eastern Europe, the mood on Wall Street feels like a return to the 1970s. Other than bell-bottoms, the only thing missing so far is stagflation, which occurs when an economy experiences rising inflation and slowing growth at the same time. Yet some investors now think that it is not far off. They are recalibrating their portfolios for an expected period of high inflation and weaker growth. Sanctions on top commodity exporter Russia have helped lift the price of Brent crude by some 80% in the last year to around $116 a barrel, stoking concerns that higher energy costs will continue pushing up consumer prices while pressuring global growth."

Source: Economic Times (2022)

1. Use the AD-AS model to examine the effect of surging oil prices on the Indian economy. Assume that initially the Indian economy is in a long-run equilibrium.

(20 marks)

1. What should policymakers do in this situation? Explain. (10 marks)