Tuesday, November 1, 2011

What is the relationship between inflation and stagflation?

Basically, inflation is one part of stagflation.  But
inflation, all by itself, is not the same thing as
stagflation.


Inflation is when the general level of prices
goes up in a country's economy.  This is not the price of one specific thing -- it is
the average price of all things.


Stagflation is when high
levels of inflation happen while the economy is "stagnant."  This means that the
economy's real gross domestic product is not going up (in other words, the economy is in
a contraction with stagnant or decreasing business activity).  Inflation with
contraction is not usually supposed to happen, but sometimes it
does.


So the relationship is that inflation is one of two
things that make up stagflation, contraction being the second
thing.

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