When a supply shock causes higher inflation but also causes output to fall, then the economy experiences:
A)a depression.
B)economic growth.
C)deflation.
D)stagflation.

Question

Quizplus · Accepted Answer

Stagflation is the situation where the economy experiences both inflation and stagnation (i.e. low output). In this situation, higher inflation is caused by the supply shock, while output falls. This is a combination that is not typically experienced together and can cause significant challenges for policymakers to address.

When a Supply Shock Causes Higher Inflation but Also Causes