Association of Chartered Certified Accountants (ACCA) Certification Practice Test

What does the term stagflation describe?

1. Rapid economic growth with low inflation

2. High unemployment with high inflation and low growth

3. Deflation accompanied by increasing prices

4. Consistent economic expansion without fluctuations

The correct answer is: High unemployment with high inflation and low growth

The term stagflation refers to an economic condition characterized by a combination of high unemployment, high inflation, and stagnant economic growth. This phenomenon challenges the traditional economic theory that inflation and unemployment have an inverse relationship, as it presents scenarios where these two undesirable outcomes occur simultaneously. In stagflation, rising prices create serious challenges for consumers as their purchasing power diminishes, while high unemployment suggests that a significant portion of the workforce is unable to find jobs. This combination creates a difficult environment for policymakers, as efforts to control inflation can exacerbate unemployment, and vice versa. The other options describe different economic conditions that do not encapsulate the essence of stagflation. Rapid economic growth with low inflation illustrates a healthy economy, while deflation accompanied by rising prices is a contradiction. Lastly, consistent economic expansion without fluctuations depicts a stable economic environment, which is the opposite of the stagnation implied in stagflation. Understanding stagflation is critical for economists as it informs their strategies in economic planning and intervention.