Inflation and unemployment condition in stagflation
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Stagflation is a situation in which both high inflation and high unemployment manifest within an economy at the same time. So, I think the question you ask is: what causes that high inflation and high unemployment can manifest at the same time? Or, more simply, what causes stagflation?
In general, stagflation is cause by a negative supply shock; that is, a negative event that disrupt the production process and reduce the availability of goods and services. The text book case is the oil embargo during the 1970s, in which OPEP countries decided to coordinate a significant increase in oil prices, therefore causing an increase in input cost and inflation. To reduce production cost firms had to incur in many layoffs, thus causing a high unemployment.
In general, stagflation is cause by a negative supply shock; that is, a negative event that disrupt the production process and reduce the availability of goods and services. The text book case is the oil embargo during the 1970s, in which OPEP countries decided to coordinate a significant increase in oil prices, therefore causing an increase in input cost and inflation. To reduce production cost firms had to incur in many layoffs, thus causing a high unemployment.
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