stagflation occurs when high inflation combines with high unemployment and a low level of production. low unemployment and a high level of production. a drop in buying power and a rise in workers’ wages. a rise in buying power and a drop in workers’ wages.
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get stagflation occurs when high inflation combines with high unemployment and a low level of production. low unemployment and a high level of production. a drop in buying power and a rise in workers’ wages. a rise in buying power and a drop in workers’ wages. from EN Bilgi.
Inflation and Stagflation Flashcards
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Inflation and Stagflation
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Which federal agency calculates the Consumer Price Index (CPI)?
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US Bureau of Labor Statistics
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Stagflation occurs when high inflation combines with
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high unemployment and a low level of production.
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Terms in this set (16)
Which federal agency calculates the Consumer Price Index (CPI)?
US Bureau of Labor Statistics
Stagflation occurs when high inflation combines with
high unemployment and a low level of production.
Why is gasoline weighted more heavily than tomatoes in a calculation of the annual inflation rate in the United States?
Americans spend more money on gasoline than tomatoes, on average.
How does demand-pull inflation differ from cost-push inflation?
Demand-pull inflation is driven by consumers, while cost-push inflation is driven by producers.
Which scenario is an example of demand-pull inflation?
Consumers have more money to buy cars, and the prices of cars and car accessories rise as a result.
Consumers having more money to purchase computers will most likely result in
an increase in prices for computers and computer accessories.
Which is an effect of stagflation?
The value of a country's currency drops.
Typically, low inflation is a sign of
a healthy economy because it results from a steady rise in demand.
Which is the best definition of inflation?
a gradual increase in the price of goods and services
Typically, high inflation is a sign of
a struggling economy because wages cannot keep up with the increase in prices.
What is one consequence of stagflation?
The economy drastically slows down as money loses its buying power.
Demand-pull inflation happens when the demand for goods
increases
What are the signs of high inflation? Check all that apply.
Production begins to fall.
Interest rates increase.
Purchasing power falls.
Fewer fixed rate bank loans.
The inflationary spiral explains the causes and effects of high inflation.
The spiral usually begins with an increase in demand. What is the direct effect of this increase?
Producers raise prices to continue to make a profit.
Hyperinflation can occur when
the government prints a ton of money in order to pay off its debt.
Which scenario is an example of cost-push inflation?
An increase in workers' wages raises the production cost of cars, and car prices rise as a result.
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Verified questions
ECONOMICS
A survey is being planned to determine the mean amount of time corporation executives watch television. A pilot survey indicated that the mean time per week is 12 hours, with a standard deviation of 3 hours. It is desired to estimate the mean viewing time within one-quarter hour. The 95 percent level of confidence is to be used. How many executives should be surveyed?
Verified answer ECONOMICS
Suppose that all young women were channeled into careers as secretaries, nurses, and teachers; at the same time, young men were encouraged to consider these three careers and many others as well. a. Draw a diagram showing the combined labor market for secretaries, nurses, and teachers. Draw a diagram showing the combined labor market for all other fields. In which market is the wage higher? Do men or women receive higher wages on average? b. Now suppose that society changed and encouraged both young women and young men to consider a wide range of careers. Over time, what effect would this change have on the wages in the two markets you illustrated in part (a)? What effect would the change have on the average wages of men and women?
Stagflation Definition
Stagflation is the combination of slow economic growth along with high unemployment and high inflation.
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ECONOMICS MACROECONOMICS
Overview
UNDERSTANDING INFLATION
9 Common Effects of Inflation
How to Profit From Inflation
When Is Inflation Good for the Economy?
How Does Current Cost of Living Compare to 20 Years Ago?
Why Are P/E Ratios Higher When Inflation Is Low?
What Causes Inflation and Who Profits From It?
TYPES OF INFLATION
Understand the Different Types of Inflation
Wage Push Inflation Cost-Push Inflation
Cost-Push Inflation vs. Demand-Pull Inflation: What's the Difference?
Inflation vs. Stagflation: What's the difference?
WHAT DOES INFLATION IMPACT?
What is the Relationship Between Inflation and Interest Rates?
Inflation's Impact on Stock Returns
How Does Inflation Affect Fixed-Income Investments?
How Inflation Affects Your Cost of Living
How Inflation Impacts Your Savings
How Inflation Eats Away at Your Retirement Income
What Impact Does Inflation Have on the Dollar Value Today?
Inflation and Economic Recovery
UNDERSTANDING HYPERINFLATION
Hyperinflation
Why Didn't Quantitative Easing Lead to Hyperinflation?
Worst Cases of Hyperinflation in History
How the Great Inflation of the 1970s Happened
Stagflation UNDERSTANDING CPI Purchasing Power
Consumer Price Index (CPI)
Why Is the Consumer Price Index Controversial?
Core Inflation Headline Inflation RELATED TERMS (A-I) GDP Price Deflator Indexation
Inflation Accounting
Inflation-Adjusted Return
Inflation Targeting RELATED TERMS (J-Z)
Real Economic Growth Rate
Real Gross Domestic Product (GDP)
Real Income Real Interest Rate Real Rate of Return Wage-Price Spiral
Stagflation
By THE INVESTOPEDIA TEAM Updated February 23, 2022
Reviewed by ERIC ESTEVEZ
What Is Stagflation?
Stagflation is characterized by slow economic growth and relatively high unemployment—or economic stagnation—which is at the same time accompanied by rising prices (i.e. inflation). Stagflation can be alternatively defined as a period of inflation combined with a decline in the gross domestic product (GDP).
KEY TAKEAWAYS
Stagflation refers to an economy that is experiencing a simultaneous increase in inflation and stagnation of economic output.
Stagflation was first recognized during the 1970s when many developed economies experienced rapid inflation and high unemployment as a result of an oil shock.1
The prevailing economic theory at the time could not easily explain how stagflation could occur.
Since the 1970s, rising price levels during periods of slow or negative economic growth have become somewhat of the norm rather than an exceptional situation.
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Stagflation
Understanding Stagflation
The term "stagflation" was first used in the 1960s during a time of economic stress in the United Kingdom by politician Iain Macleod while he was speaking in the House of Commons.2 Talking about inflation on one side and stagnation on the other, he called it a "stagnation situation." It was later used again to describe the recessionary period in the 1970s following the oil crisis when the U.S. underwent a recession that saw five quarters of negative GDP growth.3 Inflation doubled in 1973 and hit double digits in 1974; unemployment hit 9% by May 1975.45
Stagflation led to the emergence of the misery index. This index, which is the simple sum of the inflation rate and unemployment rate, served as a tool to show just how badly people were feeling when stagflation hit the economy.
History of Stagflation
Stagflation was long believed to be impossible because the economic theories that dominated academic and policy circles ruled it out of their models by construction. In particular, the economic theory of the Phillips Curve, which developed in the context of Keynesian economics, portrayed macroeconomic policy as a trade-off between unemployment and inflation.
As a result of the Great Depression and the ascendance of Keynesian economics in the 20th century, economists became preoccupied with the dangers of deflation and argued that most policies designed to lower inflation tend to make it tougher for the unemployed, and policies designed to ease unemployment raise inflation.
The advent of stagflation across the developed world in the mid-20th century showed that this was not the case. As a result, stagflation is a great example of how real-world economic data can sometimes run roughshod over widely accepted economic theories and policy prescriptions.
Since that time, as a rule, inflation persists as a general condition even during periods of slow or negative economic growth. In the past 50 years, every declared recession in the U.S. has seen a continuous, year-over-year rise in the consumer price level.6 The sole, partial exception to this is the lowest point of the 2008 financial crisis—and even then price decline was confined to energy prices while overall consumer prices other than energy continued to rise.
Stagflation Theories
Because the historical onset of stagflation represents the demise of the dominant economic theories of that time, economists since then have put forth several arguments as to how stagflation occurs or how to redefine the terms of existing theories to explain it.
Stagflation
Definition - Stagflation is a period of rising inflation but falling output and rising unemployment. Causes of stagflation (with examples). Diagrams to show stagflation - and how to reduce.
Stagflation
Definition of stagflationStagflation is a period of rising inflation but falling output and rising unemployment.
Stagflaton is often a period of falling real incomes as wages struggle to keep up with rising prices.
Stagflation is often caused by a rise in the price of commodities, such as oil. Stagflation occurred in the 1970s following the tripling in the price of oil.
A degree of stagflation occurred in 2008, following the rise in the price of oil and the start of the global recession.
Stagflation is difficult for policy makers. For example, the Central Bank can increase interest rates to reduce inflation or cut interest rates to reduce unemployment. But, they can’t tackle both inflation and unemployment at the same time.
Video on stagflation
Diagram stagflation
Higher oil prices increase costs of firms causing SRAS to shift to the left.
AD/AS diagram showing stagflation (higher price level P1 to P2 and lower real GDP Y1 to Y2)
Causes of stagflation
Oil price rise Stagflation is often caused by a supply-side shock. For example, rising commodity prices, such as oil prices, will cause a rise in business costs (transport more expensive) and short-run aggregate supply will shift to the left. This causes a higher inflation rate and lower GDP.Powerful trade unions. If trade unions have strong bargaining power – they may be able to bargain for higher wages, even in periods of lower economic growth. Higher wages are a significant cause of inflation.Falling productivity. If an economy experiences falling productivity – workers becoming more inefficient; costs will rise and output fall.Rise in structural unemployment. If there is a decline in traditional industries, we may get more structural unemployment and lower output. Thus we can get higher unemployment – even if inflation is also increasing.Supply shocks. If there is disruption to supply chains, there prices will start rising. The supply shock will also cause decrease in unemployment. For example, in 2021, UK supply shocks caused moderate degree of stagflation.
Moderate stagflation
People may talk about stagflation if there is a rise in inflation and a fall in the growth rate (i.e. the economy is growing at a slower rate. This is less damaging than higher inflation and negative growth. But, it still represents a deterioration in the trade-off between unemployment and inflation.
Stagflation and Phillips Curve
The traditional Phillips curve suggests there is a trade-off between inflation and unemployment. A period of stagflation will shift the Phillips curve to the right, giving a worse trade-off.
Phillips curve shifting to the right, indicating stagflation (higher inflation and higher unemployment.
Stagflation in the 1970s
In 1974, we have an inflation spike of 25%, at the same time, we see negative GDP growth. This was caused by the oil price boom and also end of the Barber Boom.
This shows how in the 1970s, the US economy faced a worse trade off- there was higher inflation and higher unemployment. The Phillips Curve was shifting to the right.
Stagflation in 2010/11
In 2011, the UK experienced a rise in inflation to 5%, at the same time, the economy remained in depression with negative growth / very low growth.
This period of stagflation was caused by:
Higher oil prices Higher food prices
Impact of devaluation on the value of the Pound increasing import prices.
Impact of higher taxes, which increased inflation but reduced living standards.
see also: cost push inflation
Solutions to stagflation
There are no easy solutions to stagflation.
Monetary policy can generally try to reduce inflation (higher interest rates) or increase economic growth (cut interest rates). Monetary policy cannot solve both inflation and recession at the same time.
One solution to make the economy less vulnerable to stagflation is to reduce the economies dependency on oil. Rising oil prices are the major cause of stagflation.
The only real solution is supply-side policies to increase productivity, this enables higher growth without inflation. See: Solutions to Stagflation
In 2010/11, the Central Bank decided to keep interest rates low (at 0.5%) because they felt low growth was a bigger problem than some temporary cost-push inflation.
Misery index
The misery index is a measure of unemployment + inflation. Stagflation leads to rise in both unemployment and inflation so a high misery index indicates a period of stagflation. This shows in 2012, the UK experienced a misery index of nearly 14% due to high unemployment and inflation.
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