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IAI Actuarial Core Principles · Business Economics · Recent macroeconomic history

Which combination of macroeconomic features best defines 'stagflation' as experienced by many economies in the mid-1970s?

Stagflation is the combination of stagnant or falling output and high unemployment with high inflation at the same time. It was notable in the 1970s because it contradicted the simple Phillips curve view that inflation and unemployment move in opposite directions.

  1. ARapid output growth together with falling prices
  2. BHigh unemployment or stagnant output together with high inflationCorrect
  3. CLow unemployment together with falling prices
  4. DFalling output together with falling prices and a trade surplus
  5. Rapid output growth together with a falling exchange rate and low inflation

Explanation

Stagflation is the simultaneous presence of stagnant or falling output with high unemployment and high inflation. Option A and C describe a boom or disinflation, while D describes deflationary recession. The 1970s experience was notable because it contradicted the simple Phillips curve trade-off.

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