The reason that stagflation tends to follow an inflationary gap is that
A)output tends to fall even as prices continue to rise as part of the self-correcting mechanism.
B)government officials tend to overact in controlling inflation.
C)businesses try to increase profits by raising prices and increasing output.
D)workers accept pay cuts to maintain employment.

Question

Quizplus · Accepted Answer

Stagflation occurs when there is a combination of high inflation and stagnant economic growth. An inflationary gap occurs when actual output exceeds potential output, leading to an increase in prices. However, in the long run, output tends to fall as resources become scarce and prices continue to rise. This creates a situation of stagflation where there is both high inflation and low economic growth. Hence, choice A is the best answer.

The Reason That Stagflation Tends to Follow an Inflationary Gap