Which of the following statements best describes stagflation in the 1970s?

• A. It was a decade of deflation and increasing productivity.
• B. It was a period marked by low inflation and rapid economic growth.
• C. It was a period characterized by high inflation and high unemployment occurring simultaneously.
• D. It was a time when unemployment fell as prices remained stable.

Answer: (C)

Verified step by step guidance

1. Step 1: Understand the term 'stagflation' by breaking it down into its components: 'stag' refers to stagnation in economic growth, and 'flation' refers to inflation, which is a rise in the general price level.
2. Step 2: Recall that stagflation is a unique economic condition where high inflation and high unemployment occur at the same time, which is unusual because inflation and unemployment typically have an inverse relationship according to the Phillips curve.
3. Step 3: Review the economic context of the 1970s, noting that this period experienced both rising prices (high inflation) and rising unemployment, largely due to supply shocks such as oil price increases.
4. Step 4: Evaluate each statement in the problem by comparing it to the definition and historical context of stagflation: deflation and increasing productivity do not match stagflation; low inflation and rapid growth contradict stagflation; falling unemployment with stable prices also contradict stagflation.
5. Step 5: Conclude that the statement 'It was a period characterized by high inflation and high unemployment occurring simultaneously' best describes stagflation in the 1970s.