SIE practice questionhardStagflation
Stagflation refers to an economic condition characterized by:
- ALow interest rates combined with high GDP growth
- BHigh inflation combined with stagnant economic growth and high unemployment✓ Correct answer
- CDeflation combined with rapid economic expansion
- DRapid economic growth combined with low unemployment
Explanation
Why B — High inflation combined with stagnant economic growth and high unemployment
Stagflation is a particularly challenging economic condition where high inflation occurs simultaneously with stagnant (slow or negative) economic growth and high unemployment. This is problematic because the typical tools to fight inflation (raising rates, tightening policy) can worsen unemployment, while tools to fight unemployment (lowering rates, stimulus) can worsen inflation. The U.S. experienced stagflation in the 1970s, partly due to oil price shocks.
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