Stagflation refers to an economy that is experiencing a simultaneous increase in inflation and stagnation of economic output. Stagflation was first recognized during the 1970’s, where many developed economies experienced rapid inflation and high unemployment as a result of an oil shock.
What was the nickname given to the combination of high unemployment and high inflation?
Stagflation is a combination of stagnant economic growth, high unemployment, and high inflation.
What happens when an economy faces both high unemployment and inflation?
Contractionary policies fight inflation- but can trigger unemployment and recession. What happens when an economy faces both high unemployment and inflation? Demand pull inflation is caused by: “Too much money chasing too few goods.”
Which scenario is an example of cost-push inflation?
The scenario that best fits an example of cost-push inflation is an increase in workers’ wages raises the production of cost of cars, and car prices as a result. Cost-push inflation takes place when there is an increase in overall prices as a result of an increase in the cost of materials and wages.
How does rising unemployment and unexpected inflation affect the economy?
As unemployment rates increase, inflation decreases; as unemployment rates decrease, inflation increases. Short-Run Phillips Curve: The short-run Phillips curve shows that in the short-term there is a tradeoff between inflation and unemployment. As unemployment decreases to 1%, the inflation rate increases to 15%.
What are the causes of cost-push inflation?
Cost-push inflation occurs when overall prices increase (inflation) due to increases in the cost of wages and raw materials. Cost-push inflation can occur when higher costs of production decrease the aggregate supply (the amount of total production) in the economy.
What happens to unemployment when inflation increases?
The Phillips curve shows the relationship between inflation and unemployment. In the short-run, inflation and unemployment are inversely related; as one quantity increases, the other decreases. In the long-run, there is no trade-off.
