Question : Stagflation is a situation characterized by:
Option 1: High inflation and high unemployment
Option 2: Low inflation and high unemployment
Option 3: High inflation and low unemployment
Option 4: Low inflation and low unemployment
Correct Answer:
High inflation and high unemployment
Solution : The correct answer is (a) High inflation and high unemployment.
It is an economic condition where there is a combination of stagnant economic growth, high inflation rates, and high unemployment rates. This is considered to be a challenging scenario for policymakers because it deviates from the conventional belief that inflation and unemployment have an inverse relationship, known as the Phillips curve. Stagflation is often associated with supply-side shocks, such as significant increases in the prices of key commodities or disruptions in production.
