Q. “It is a situation in an economy when inflation and unemployment both are at higher levels” is related to which of the following?
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 stagflationary 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.
- When the economy is passing through the cycle of stagnation (i.e., long period of low aggregate demand in relation to its productive capacity) and the government shuffles with the economic policy, a sudden and temporary price rise is seen in some of the goods—such inflation is also known as stagflation.
- Stagflation is basically a combination of high inflation and low growth.
Source: TMH Ramesh Singh