In the stagflation phase, a decrease in short-run aggregate supply will generate

Question

Quizplus · Accepted Answer

In the stagflation phase, there is a combination of inflation and high unemployment rate. If there is a decrease in short-run aggregate supply, it will lead to higher prices for goods and services, causing an increase in the inflation rate. This decrease in supply can also lead to decrease in production and increase in unemployment rate, resulting in an increase in the unemployment rate as well. Therefore, the correct choice is A, which states that there will be an increase in both inflation rate and unemployment rate.

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