Stagflation

An economy simultaneously experiences persistently high inflation, weak or negative real growth, and rising unemployment. This condition is called:

1. A.DisinflationDisinflation is a slowing rate of inflation, not high inflation paired with weak growth.
2. B.StagflationCorrect. Stagnant output with high unemployment and high inflation together define stagflation.
3. C.DeflationDeflation means falling prices, the opposite of the high inflation described.
4. D.Demand-pull inflationDemand-pull inflation arises from strong demand and typically accompanies low unemployment.

Why: Stagflation is the simultaneous occurrence of stagnant output with high unemployment and high inflation. It typically follows an adverse supply shock, such as a sharp rise in energy prices, which raises costs and reduces output at the same time. Stagflation is difficult for policymakers because tightening to fight inflation deepens the downturn, while stimulating to fight unemployment worsens inflation.

An economy is experiencing simultaneously rising unemployment and rising price levels while GDP contracts. This condition is best described as:

1. A.Demand-pull inflationIncorrect - demand-pull inflation occurs during expansion, not contraction.
2. B.StagflationCorrect - contraction plus rising unemployment plus inflation is stagflation.
3. C.DisinflationIncorrect - disinflation is a slowing rate of inflation, not rising prices amid contraction.
4. D.A deflationary spiralIncorrect - deflation means falling prices, but prices here are rising.

Why: Stagflation is stagnant growth plus high unemployment plus inflation occurring together. Demand-pull inflation accompanies growth; disinflation is a slowing rate of inflation; deflation is falling prices.