In the first half of 2008, food and energy costs in the United States increased. At the same time, the financial crisis slowed production. As a result, economists warned that the economy would
A) suffer an inflationary gap.
B) see a decrease in aggregate demand and an increase in long-run aggregate supply.
C) experience stagflation.
D) see an increase in potential GDP.

Question

Quizplus · Accepted Answer

Stagflation occurs when the economy experiences stagnant growth (or a slowdown in production) and rising inflation (increased food and energy costs) simultaneously, which matches the scenario described.

In the First Half of 2008, Food and Energy Costs