Check out these other AP Macro resources!
- Attend weekly AP Macro live streams with Fiveable+!👉🏻Join here.
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:
- 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.
- 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.