In the first half of 2008, food and energy costs in the United States increased. At the same time, the financial crisis slowed production. As a result, economists warned that the economy would
A) suffer an inflationary gap.
B) see a decrease in aggregate demand and an increase in long-run aggregate supply.
C) see an increase in potential GDP.
D) experience stagflation.

Question

Quizplus · Accepted Answer

The increase in food and energy costs led to cost-push inflation, while the slowdown in production led to a decrease in aggregate supply. This resulted in stagflation, which is a combination of high inflation and low economic growth.

In the First Half of 2008, Food and Energy Costs