Teacher resources and professional development across the curriculum

Teacher professional development and classroom resources across the curriculum

Monthly Update sign up
Mailing List signup
Search

Unit 22 — Stagflation

Play Program

Purpose:

To discuss how rising inflation and rising unemployment can occur simultaneously when there is a supply shock; and how demand-management policies can fight cost-push inflation only by causing extremely high unemployment.

Objectives:

  1. Inflation can come about because of increases in aggregate demand pressures. This demand-pull inflation can result from expansionary fiscal and monetary policies pushing the economy up to its capacity limits.
  2. There is general agreement that, in the short run, there is a trade-off between the rate of inflation and the amount of slack in the economy (the unemployment rate). However, the trade-off is much worse when there are supply shocks and when wages are indexed to inflation.
  3. In the early stages of demand-pull inflation, demand-management policies may be able to reduce inflation without causing unemployment to rise to high levels. But in order to fight inflation that is entrenched (e.g., because of high inflation expectations) or inflation that is due to supply shocks, the government would have to reduce aggregate demand significantly, causing a high level of unemployment.

Audio and Transcripts

Meet the Series Experts

GO >>
Alan Blinder

Alan Blinder

Member of President Bill Clinton’s Council of Economic Advisors, 1993–1994, and Vice Chairman of the Board of Governors of the Federal Reserve System, 1994–1996.

See full bio
Stanley Fischer

Stanley Fischer

Governor of the Bank of Israel and former U.S. adviser to Israel’s economic stabilization program.

See full bio
Alice Rivlin

Alice Rivlin

Senior Fellow at the Brookings Institution and Member of President Barack Obama’s 2010 Federal Debt Commission, known for her expertise on fiscal and monetary policy.

See full bio
Paul Volcker

Paul Volcker

Chairman of the Board of Governors of the Federal Reserve System, 1979–1987, credited with leadership in ending a period of high and rising inflation and restoring a base for sustained growth.

See full bio

Study Tools

Calculator

Calculator

Use this web-based calculator to aid in your studies.

WHAT’S YOUR
ECONOMICS IQ?

  1. Which of the following statements is MOST accurate? Stagflation is:

    a condition common to numerous industrialized nations since the early 1970s.

    NEXT QUESTION
  2. The term “income policy” is another name for:

    wage and price guidelines.

    NEXT QUESTION
  3. As a result of the 1962 confrontation between President Kennedy and the steel industry, U.S. Steel ultimately:

    had to rescind price increases when other steel producers failed to follow its lead.

    NEXT QUESTION
  4. Significant increases in price will:

    chart chart

    shift the aggregate supply curve to AS1.

    NEXT QUESTION
  5. The Fed could minimize the impact of price increases on unemployment by increasing the money supply to shift aggregate demand to AD1. In that case the price level would:

    chart chart

    rise to OP3.

    NEXT QUESTION
  6. During the early 1970s, UAW workers insisted upon COLAs: cost of living adjustment contracts. Which of the following probably BEST describes the results of that decision?

    Initially, many workers benefited from higher salaries, but as the industry laid off workers to cut costs, many suffered.

    RESTART QUIZ

Glossary

GO >>

Key Terms

© Annenberg Foundation 2014. All rights reserved. Legal Policy