Question

Which factors would be mentioned in an accurate description of stagflation? check all that apply?

Answer 1

A high inflation rate
A high level of unemployment
A low level of production

Answer 2

Stagflation is the worst case scenario an economy can achieve.

Usually, in cases of recession the demand decreases and prices fall, reducing inflation. On the contrary, in times of economic euphoria, if monetary policy is performed erroneously, inflation occurs.

However, in a situation of stagflation, recessive economic stagnation occurs along with the rise in inflation. At the same time, this scenario also has unemployment.

The reasons for stagflation come from misguided economic policies. The case of Brazil in 2015 is a good example. The country has made an expansive fiscal policy that has caused loopholes in the public accounts causing recession. In parallel, the monetary policy adopted in the same period stimulated inflation rather than controlling it. The result was a stagflation.