This thesis uses a macro model with a profit maximizing supply side to derive policy responses to stagflation. A dynamic profit maximizing theory of the firm's price and output adjustment process is first developed and then tested empirically. The role of market structure receives particular concern. The price and output adjustment process so modeled then becomes the supply side of a macro model. The full macro model depicts the interaction of the familiar Keynesian demand side of the economy with the micro based supply side. The steady state version of this model is subjected to input supply shocks and optimal stabilization policy responses are derived. These policy responses are optimal given the posited objective function and the macroeconomic structure of the economy. It follows that the self-interested (profit maximizing) behavior of microeconomic agents constrains the conduct of stabilization policy. General inferences about the nature of optimal policy responses to stagflation are drawn, and directions of further research are discussed.
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