Association of Chartered Certified Accountants (ACCA) Certification Practice Test

Which economic condition is characterized by high inflation and high unemployment?

1. Recession

2. Stagnation

3. Stagflation

4. Hyperinflation

The correct answer is: Stagflation

The economic condition characterized by high inflation and high unemployment is known as stagflation. This term combines stagnation and inflation, indicating that the economy is not growing (stagnation) while simultaneously experiencing rising prices (inflation). Stagflation presents a complex challenge for policymakers because traditional monetary or fiscal policies aimed at controlling inflation can exacerbate unemployment, and vice versa. In stagflation, the economy suffers from the dual pressures of increased consumer prices and a labor market that is struggling, leading to less consumer spending and slower economic growth. This phenomenon became particularly well-known during the 1970s when many economies faced a combination of rising oil prices, inflation, and stagnant economic growth. In contrast, a recession typically refers to a period of negative economic growth and increasing unemployment, but it does not necessarily imply high inflation. Stagnation generally describes a prolonged period of slow economic growth with either low inflation or deflation. Hyperinflation indicates an extremely high and typically accelerating rate of inflation, often leading to a breakdown of the normal economic environment, but it does not directly correlate with high unemployment. Thus, stagflation is the most appropriate term encompassing the scenario of high inflation and high unemployment.