Stagflation is generally caused by:
A)an increase in aggregate demand.
B)a decrease in aggregate demand.
C)an increase in aggregate supply.
D)a decrease in aggregate supply.

Question

Stagflation is generally caused by:
A)​an increase in aggregate demand.
B)​a decrease in aggregate demand.
C)​an increase in aggregate supply.
D)​a decrease in aggregate supply.

Quizplus · Accepted Answer

Stagflation is a situation where there is a concurrent increase in inflation and decrease in real GDP or total output, and is primarily caused by a decrease in aggregate supply. This may be due to supply shocks such as sudden increase in the prices of raw materials, disruption in production processes or natural disasters that affect production capacity. When the supply of goods and services falls, prices increase due to higher demand, while output and employment decline, leading to a stagnant economy. This is different from regular inflation which can be caused by excessive aggregate demand.

Stagflation Is Generally Caused By