Discussion
Which of the following can cause "Stagflation" ?
Answer: B
Stagflation can be caused by a sudden supply shock like a rise in oil prices.
Stagflation is high inflation together with stagnant output and rising unemployment. A sharp rise in the price of an essential input such as oil raises costs across the economy, which pushes prices up and cuts production at the same time, as happened after the oil shocks of the 1970s.
A rapid rise in aggregate demand and expansionary fiscal policy raise both prices and output, which is demand-pull inflation, not stagflation. Appreciation of the currency makes imports cheaper and tends to lower inflation.
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