On an aggregate demand and aggregate supply graph, how can the stagflation of the 1970s be represented?
A) as a leftward shift of the aggregate supply curve
B) as a rightward shift of the aggregate supply curve
C) as a rise in the price level that caused an excess demand for output
D) as a rightward shift of the aggregate demand curve

Question

On an aggregate demand and aggregate supply graph, how can the stagflation of the 1970s be represented?  
A) as a leftward shift of the aggregate supply curve 
B) as a rightward shift of the aggregate supply curve 
C) as a rise in the price level that caused an excess demand for output 
D) as a rightward shift of the aggregate demand curve

Quizplus · Accepted Answer

Stagflation of the 1970s was characterized by both inflation and stagnation in the economy. This combination is unusual because inflation normally occurs when there is excess demand for goods or services, while stagnation happens when there is insufficient demand. In the case of the 1970s, the oil crisis caused a rise in the price of oil, which led to a leftward shift of the aggregate supply curve. This caused a rise in the price level and a fall in real output, or stagnation, which is consistent with the phenomenon of stagflation. Therefore, the correct representation of stagflation of the 1970s is a leftward shift of the aggregate supply curve.

On an Aggregate Demand and Aggregate Supply Graph, How Can