What is the term for the economic phenomenon where high inflation is combined with stagnant economic growth?
Show answer & explanation
Correct answer: C
Explanation
Correct Answer
Stagflation
Explanation
Stagflation is an economic phenomenon characterized by a combination of stagnant economic growth, high unemployment, and high inflation. The term is a portmanteau of 'stagnation' and 'inflation.' It presents a difficult dilemma for policymakers, as actions designed to lower inflation may exacerbate unemployment, while measures to stimulate economic growth can further increase inflation.
Key Points
Stagflation occurs when an economy faces low Gross Domestic Product (GDP) growth and rising prices simultaneously, breaking the traditional economic theory that inflation and growth move together.
A major cause of stagflation is often a supply shock, such as a sudden rise in the price of a critical commodity like oil, which increases production costs across industries.
The term was famously used during the 1970s global energy crisis when many developed economies faced prolonged recessions alongside high double-digit inflation.
Additional Facts
The term was first coined in 1965 by British politician Iain Macleod during a speech in the House of Commons.
Traditional Keynesian economic models previously suggested that inflation and high unemployment could not coexist, a belief challenged by the stagflation era.
Central banks usually struggle to manage stagflation using traditional monetary policies since raising interest rates to curb inflation can further damage economic growth.
Important Questions
Question: Which two English words are combined to form the economic term 'Stagflation'?
Answer: Stagnation and Inflation.
Question: During which decade did the global economy famously experience widespread stagflation due to major oil supply shocks?
Answer: The 1970s.