Stagflation is a situation when
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1 mark, −0.333MacroeconomicsInflation, unemployment and the Phillips curveSupply shocks and stagflationEasyabout 1 min
GATE 2023 Question 30: Inflation, unemployment and the Phillips curve
Answer and worked solution
Answer: (B)
Stagflation combines 'stagnation' (weak economic growth, high unemployment) with 'inflation' (rising prices) occurring simultaneously — a phenomenon that classical Phillips Curve theory did not predict, since it assumed an inverse tradeoff between unemployment and inflation. The 1970s oil-shock episodes are the classic historical example.
Therefore the answer is (B): both unemployment and inflation are high.
The trap: (C) unemployment is high but inflation is low
Students sometimes recall 'stagnation' as relating only to unemployment/low growth and forget the '-flation' half of the term also needs to be high, leading them to pick (C) which only credits the unemployment side correctly.
Inflation, unemployment and the Phillips curve has come up 106 times in 7 exams since 2006.
What this question tests
This question is on Supply shocks and stagflation, part of Inflation, unemployment and the Phillips curve in Macroeconomics.
How adverse supply shocks raise inflation and unemployment together.
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Question from the GATE 2023 paper. Solutions are TestStop's own. Not affiliated with or endorsed by any examination authority.