Association of Chartered Certified Accountants (ACCA) Certification Practice Test

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What does stagflation refer to?

Simultaneous high inflation and economic growth
A combination of high inflation and high unemployment
A scenario of low inflation and high growth
Periods of economic stability

The correct answer is: A combination of high inflation and high unemployment

Stagflation is a term used in economics to describe a situation where an economy experiences stagnant growth, high inflation, and high unemployment simultaneously. This phenomenon can be particularly challenging for policymakers because the typical tools used to combat inflation, such as raising interest rates, can further hinder economic growth and increase unemployment. In this context, high inflation suggests that prices are rising rapidly, while stagnant growth indicates that the economy is not expanding, and high unemployment reveals that there are not enough jobs for those seeking them. Thus, the correct answer captures this complex interplay of economic conditions, highlighting how stagflation is distinctly characterized by the combination of these adverse factors.