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Stagflation refers to an unusual circumstance in economics. 

Imagine the U.S Macroeconomy is in equilibrium as shown below:

Now try to imagine a scenario where the equilibrium price has increased while the equilibrium quantity has decreased. Have you ever thought about it before? 

Well, this is what you call a situation of Stagflation:

  • Stagflation refers to when the economy suffers from persistent high inflation and high unemployment. 
  • Still not sure how stagflation relates to the scenario mentioned above? Well, here is a graph of stagflation: 


Recession

  • When the Aggregate Supply of the economy decreases, the equilibrium quantity of goods and services purchased decreases and their equilibrium price increases. 
  • When the equilibrium quantity in a macroeconomy decreases, less workers are needed to produce those goods and services
  • This increases the rate of unemployment.

Inflation

  • The Aggregate Demand for goods and services has remained the same while the Aggregate Supply has decreased. 
  • This results in consumers bidding for a lower supply of goods and services, leading to an increase in the equilibrium price of the goods 
  • Thus an increase in the rate of inflation occurs 
  • This means that the value of currency has decreased.

At the end of the day, Stagflation benefits absolutely nobody, for high unemployment coupled with high inflation is a nightmare for both producers and consumers of goods and services. 

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