Question

A) Explain what stagflation means.

B) What does opportunity costs mean? Explain using a paradigm.

Answer 1

a) Normally the economy suffers the inflation i.e. there is excess demand in the economy and that demand will lead to firms investing more and increasing the output So we can say the inflation will increase the employment and it is only excess demand that cannot be fulfilled with current capacity. Stagflation is a situation when the inflation is high due an increase in the input cost. it will increase the price but employment and output cannot be increased as it will lead to even higher inflation.

So, stagflation is a situation when there is high inflation and high unemployment in the market.

b) Opportunity cost is the next best option you have given up to do the present task .For example, the US economy has a choice between spending more on defence and investing in health sector. If they choose defence then the opportunity cost of defence expenditure will be health expenditure. and vice versa.