Explanation: Stagflation is a situation in an economy when inflation and unemployment both are at higher levels, contrary to conventional belief.

• Such a situation first arose in the 1970s in the US economy (average unemployment rate above 6 per cent and the average rate of inflation above 7 per cent) and in many Euro-American economies.
• This took place as a result of oil price increases of 1973 and 1979 and anticipation of higher inflation. The stag-flationary situation continued till the early 1980s.
• Conventional thinking that a trade-off existed between inflation and unemployment (i.e., Phillips Curve) was falsified and several economies switched over to alternative ways of economic policies, such as monetarist and supply-side economics.

Source: Ramesh Singh