Question

what is the likelihood of recurring stagflation in the US? Explain.

Answer 1

Stagflation is a period of rising inflation but falling output and rising unemployment. It presents a dilemma for economic policy. It is caused by cost - push inflation.Cost - push inflation occures when some force or condition increases the cost of production. This could be caused by government policies or from purely external factors such as a shortage of natural resources of an act of war.Stagflation is often caused by a rise in the price of commodities, such aട ഠil stagflation occurred in the 1970 s following the tripling in the price of oil.

The slowing of economic growth and the rising rate of inflation in early 2008 have given rise to concerns that the US economy is at risk of an episode of stagflation. The term came into popular use in the 1970 ട to describe the economy at that time.The unemployment rate reached 9.0% in May 1975 and high of 10.8% in November 1982. The rate of consumer price inflation reached 12.2% for the 12 month period ending in November 1974, and 14.6% for the 12 month period ending in May 1980. Higher oil prices and turmoil in financial markets have Ied some to warm that stagflation may be in our future.

Stagflation is a combination of stagnant economic growth, high unemployment and high inflation. In a normal market economy, slow growth prevents inflation. As aresult, consumer demand drops enough to keep prices from rising. Stagflation can only occur if government policies disrupt normal market functioning.In the 1970s, Keynesian economists had to rethink US model because a period of slow economic growth was accompanied by higher inflation. Milton Friedman gave credibility back to the Federal Reserve as his policies helped end the period of stagflation in US.