What is the economic term used to describe a situation where high inflation occurs simultaneously with stagnant economic growth?
Show answer & explanation
Correct answer: D
Explanation
Solution: The correct answer is (D) Stagflation.
Explanation:
☛ Stagflation is an economic condition characterized by a combination of stagnant economic growth, high inflation, and high unemployment.
☛ The term is a portmanteau of "stagnation" and "inflation".
☛ This condition is particularly challenging for policymakers because tools used to lower inflation (such as raising interest rates) typically increase unemployment and slow down growth, while tools used to stimulate growth often worsen inflation.
☛ It was notably experienced by major global economies during the oil crisis of the 1970s.
Extra Exam-Relevant Facts:
☛ Depression: A severe and prolonged downturn in economic activity that is much deeper and longer-lasting than a recession, marked by massive unemployment and bankruptcies.
☛ Recession: A widespread drop in economic activity across the economy, typically defined as two consecutive quarters of negative GDP growth.
☛ Reflation: A fiscal or monetary policy designed to stimulate economic growth and expand the money supply to counter deflationary pressures.
☛ Phillips Curve: Traditionally suggests an inverse relationship between inflation and unemployment, but stagflation fundamentally contradicts this theory.
Important One-Liners for Upcoming Exams:
☛ Who coined the economic term 'Stagflation'? → Iain Macleod (in 1965)
☛ Which economic curve shows the relationship between unemployment and inflation? → Phillips Curve
☛ What term describes a persistent decline in the general price level of goods and services? → Deflation
☛ What is an extremely rapid and out-of-control inflation called? → Hyperinflation
☛ Which index is primarily used in India to measure headline inflation? → Consumer Price Index (CPI)