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    Question

    Stagflation describes a situation

    of
    A rising prices and rising output Correct Answer Incorrect Answer
    B rising prices and falling or stagnant output Correct Answer Incorrect Answer
    C falling or stagnant prices and rising output Correct Answer Incorrect Answer
    D falling or stagnant prices and falling or stagnant output Correct Answer Incorrect Answer

    Solution

    In stagflation, we see rising prices (inflation) without rising output — instead, output stagnates or falls, and unemployment remains high. Stagflation is a term used to describe a specific economic situation characterized by three key features: high inflation, stagnant economic growth, and high unemployment. Essentially, it refers to an economy experiencing both inflation (rising prices) and stagnation (falling or stagnant output), which is a particularly challenging scenario for policymakers because the usual tools to combat inflation (e.g., raising interest rates) can exacerbate the stagnation, and the usual tools to stimulate growth (e.g., lowering interest rates) can worsen inflation.

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