סטגפלציה

Stagflation is a situation in which high inflation and high unemployment happen at the same time in an economy.

Imagine this: an adverse supply shock shifts the short-run aggregate supply curve to the left, causing stagflation.

At the new equilibrium, there is lower production in the economy.

This means many workers lose their jobs. At the same time, prices of many goods and services rise.

Many people who become unemployed find it hard to afford even necessities.

Even those who have jobs find that their purchasing power goes down.

And it’s not just households that struggle.

Stagflation is also challenging for policymakers.

If they focus only on the demand side of the economy, the challenge may be insurmountable. For example, imagine that they try to boost the economy through fiscal stimulus, such as higher government spending, which shifts the aggregate demand to the right.

This shift in aggregate demand increases production and, as a result, reduces unemployment, but the price level rises.

If they try to reduce the price level, they typically must slow down aggregate demand, which can make unemployment worse.

Stagflation is challenging for both people and policymakers.