Railway
A situation marked by rising prices along with stagnant economic growth and high unemployment is called:
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Answer: Option D — Stagflation
Detailed Solution
Stagflation is a combination of the words "stagnation" and "inflation". It describes an economic situation in which three problems occur together:
High inflation (prices rising rapidly).
Slow or stagnant economic growth.
High unemployment.
Stagflation is a difficult problem for policymakers. Normally, inflation tends to be high when the economy is growing strongly and demand is high, and unemployment tends to be high when the economy is slowing down. Policies used to fight inflation, such as raising interest rates and reducing government spending, can slow growth further and increase unemployment. On the other hand, policies to boost growth, such as cutting interest rates or increasing spending, can push inflation even higher.
Stagflation is usually caused by a supply shock, a sudden fall in supply or rise in production costs. The best-known example was in the 1970s, when oil-exporting countries (OPEC) sharply raised oil prices in 1973 and again in 1979. Higher oil prices increased the costs of production and transport across the world, causing prices to rise while economies slowed down and unemployment increased in many Western countries. The term "stagflation" is often credited to the British politician Iain Macleod, who used it in 1965.
India also faced high inflation and slow growth in the 1970s; inflation reached about 25% in 1974-75.
Related terms:
- Deflation: a sustained fall in the general price level.
- Disinflation: a fall in the rate of inflation; prices are still rising, but more slowly.
- Reflation: deliberate government or central bank action to increase output and prices after a period of deflation or recession.
- Skewflation: inflation in only a few items, such as food, while overall inflation is low.
- Shrinkflation: a reduction in the size or quantity of a product while its price stays the same.
Why not the other options?
- ✗Deflation is a fall in the general price level.
- ✗Disinflation is a slowing down of the rate of inflation.
- ✗Reflation is the deliberate stimulation of the economy after a slowdown.
Quick tip
Remember: Stagflation = inflation + stagnation + unemployment (1970s oil shocks); deflation = falling prices; disinflation = slower inflation; reflation = stimulus after recession.
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Inflation & Price Indices — Preparation
This question tests your understanding of Inflation & Price Indices, a key topic in the General Knowledge section. The detailed solution above uses a step-by-step approach to show the reasoning, and where available, a shortcut that helps you solve similar questions in under 90 seconds during the actual exam.
This topic covers inflation and deflation, the types and causes of inflation (demand-pull and cost-push), stagflation, the Consumer Price Index (CPI) and Wholesale Price Index (WPI), and the measures used to control inflation. Questions commonly ask which index the RBI uses for its inflation target (CPI combined), who publishes CPI and WPI, and what terms such as stagflation, deflation and disinflation mean. Remember that inflation reduces the purchasing power of money and generally benefits borrowers at the cost of lenders. Practise the inflation and price indices questions below, written in the style of the general awareness sections of exams such as SSC, banking, railways, CUET GAT, MAH CET and CLAT. Each question comes with a detailed explanation that adds related facts, so every question helps you revise more than one point.