Final answer:
Stagflation is the term used to describe the situation when an economy experiences high unemployment and high inflation at the same time. It challenges the conventional economic theory and was first observed in the U.S. during the recessions of the 1970s.
Step-by-step explanation:
Stagflation
Stagflation is the term used to describe the situation when an economy experiences high unemployment and high inflation at the same time. It is an unhealthy combination that traditionally Keynesian economics could not explain. Stagflation was first observed in the U.S. during the recessions of the 1970s and was characterized by stagnant economic growth, rising prices, and high joblessness.
Stagflation challenges the conventional economic theory that suggests unemployment and inflation have an inverse relationship. During stagflation, the economy faces a contradiction where rising prices erode the purchasing power of consumers while unemployment remains high, resulting in a decline in overall economic activity.