In a stagflation phase, a decrease in short-run aggregate supply will generate
A) an increase in the inflation rate and in the unemployment rate.
B) an increase in the inflation rate and a decrease in the unemployment rate.
C) an increase in the inflation rate with no change in the unemployment rate.
D) a decrease in the inflation rate and an increase in the unemployment rate.

Question

Quizplus · Accepted Answer

In a stagflation phase, the economy experiences both high inflation and high unemployment. A decrease in short-run aggregate supply will further worsen the situation by pushing up prices and reducing output, leading to an increase in both the inflation rate and the unemployment rate. Thus, option A is the correct choice.

In a Stagflation Phase, a Decrease in Short-Run Aggregate Supply