Chapter 19, Problem 3MCQ

To determine

The correct option for Stagflation.

Answer to Problem 3MCQ

From the available options, the correct option is aggregate price level increases and real GDP decreases

Explanation of Solution

Stagflation is a dilemma for the economy which decreases the unemployment rate and economic growth and increase the inflation rate which means there would be an increase in price of goods in the economy and decrease in domestic product of the economy.

Therefore, the correct option is aggregate price level would increase and real GDP would decrease during stagflation because if there is decrease in aggregate price level then the low quantity of real GDP would produce in the economy. Moreover, if price level would stay constant then real GDP would not stay same during stagflation.

It means all other options are incorrect and the correct option is d.

Economics Concept Introduction

Introduction: Stagflation refers to a phase or situation in the economy when inflation is increasing and the rate of economic growth is slow and unemployment in the economy is high.