Stagflation implies that
A) policymakers can choose to have less unemployment if they are willing to accept a higher rate of inflation.
B) a tradeoff between inflation and unemployment may not always exist.
C) any relationship between the inflation and unemployment was purely random.
D) the relationship predicted by the Phillips curve is stable.

Question

Quizplus · Accepted Answer

Stagflation is a situation where both inflation and unemployment are high. This challenges the traditional Phillips curve model, which suggests a tradeoff between inflation and unemployment. Stagflation implies that this tradeoff may not always exist and can occur due to external factors such as supply shocks. Thus, option B is the correct answer. Option A is incorrect as stagflation is a situation of high inflation and unemployment together, so policymakers cannot choose to have less unemployment if they accept higher inflation. Option C is incorrect as stagflation is a well-recognized economic phenomenon and not a random relationship between inflation and unemployment. Option D is incorrect as the Phillips curve relationship is not stable in the presence of stagflation.

Stagflation Implies That