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Stagflation

Stagflation refers to an economic condition characterized by stagnant economic growth, high unemployment, and rising inflation. This combination is particularly challenging for policymakers, as efforts to reduce inflation through monetary tightening can further suppress economic growth, while efforts to stimulate the economy can worsen inflation. Stagflation is considered an unusual and difficult situation for economies, as it defies traditional economic models.

Example

In the 1970s, many countries, including the U.S., experienced stagflation, with slow economic growth, rising inflation, and high unemployment rates.

Key points

• A combination of stagnant economic growth, high inflation, and high unemployment.

• Difficult to address with traditional monetary policies.

• Often caused by supply shocks or poor economic policies.

Quick Answers to Curious Questions

Stagflation can result from supply shocks, such as rising oil prices, or poor economic policies that fail to balance inflation and growth.

Actions to reduce inflation can worsen unemployment, and measures to stimulate the economy can lead to higher inflation.

Stagflation combines high inflation with stagnant growth and unemployment, unlike typical inflation, which occurs in growing economies.

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