Question

Which of the following best describes stagflation?

a) a decline in the general price level and is often caused by a reduction in the money supply and consumer demand
b) indicates a decline in the rate of inflation
c) denotes an increase in the general level of prices
d) occurs when inflation and unemployment rise and the general growth of the economy is slow as business output falls

Answer 1

Stagflation describes a period of high inflation, high unemployment, and slow economic growth. It contradicts typical Keynesian economics which expect unemployment and inflation to move in opposite directions. The 1970s oil crisis is an example of a supply shock that caused stagflation.

Step-by-step explanation:

Stagflation is defined as a situation in the economy where the inflation rate is high, the economic growth rate slows down, and unemployment remains steadily high. It presents a dilemma for economic policy, since actions designed to lower inflation may exacerbate unemployment.

Historically, the term stagflation was first used in the 1960s by a British politician who combined the words 'stagnation' and 'inflation'. The concept gained wider recognition during the 1970s when many countries, including the United States, experienced it. Traditional Keynesian economics struggled to explain stagflation because it posed an irregularity: inflation and unemployment were increasing at the same time, contrary to the usual economic behavior where they move in opposite directions. Stagflation can be triggered by supply shocks, such as the mid-1970s oil crisis, or by changes in the public’s inflation expectations, causing a shift in aggregate supply.