Which of the following best describes how stagflation happens in an economy?
A) Aggregate demand increases.
B) Aggregate demand decreases.
C) Aggregate supply increases.
D) Aggregate supply decreases.

Question

Which of the following best describes how stagflation happens in an economy?  
A) Aggregate demand increases. 
B) Aggregate demand decreases. 
C) Aggregate supply increases. 
D) Aggregate supply decreases.

Quizplus · Accepted Answer

Stagflation is the combination of stagnant economic growth and high inflation. This can occur when the aggregate supply of goods and services decreases, causing prices to rise, while at the same time aggregate demand fails to increase due to weak economic growth. This creates a situation where the economy is experiencing both inflation and unemployment, known as stagflation.

Which of the Following Best Describes How Stagflation Happens in an Economy