Stagflation

Written by Fmi.Online Friday November 11, 2022
Stagflation is the economic phenomenon in which unemployment increases along with rising inflation causing demand to remain stagnant in a given period. In fact, it is an indication of an inefficient market, as traditionally, there is an inverse relationship between unemployment rates and inflationary pressures.

Explanation: 

   Usually, inflationary pressures are observed in economies with high growth rates, which increase the demand for products, and consequently, supply. The high economic growth creates more jobs, thus compressing unemployment down.During stagflation, unemployment and inflation rise together either as a result of a poor economic policy and regulations or due to an abrupt increase in the price of oil, which lowers the entire output of an economy.

In a nutshell: 

  • 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. 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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