Question

Stagflation can be defined as increasing rates of unemployment with no decrease in the inflation rate...

Stagflation can be defined as increasing rates of unemployment with no decrease in the inflation rate OR increasing rates of inflation with no decrease in unemployment rates. Stagflation therefore

a.         suggests the Phillips’ Curve relationship is improving.

b.         suggests that the misery index is relatively high.

c.         suggests the misery index is relatively low.

d.         says nothing about the misery index but tells us whether fiscal or monetary policy is more important

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Answer #1

A misery index is computed as a sum of unemployment rate and inflation rate. Recession have sometimes a rising unemployment rate accompanied by a rising misery index, reflecting a rising inflation. The periods of high inflation and high unemployment (for example, the oil price shock that brought a recession in 1970s) had highest misery index at that time. Now that there are increasing rates of unemployment with no decrease in the inflation rate OR increasing rates of inflation with no decrease in unemployment rates. Stagflation is suggesting tha misery index is more or less same.

Hence b, c and d are incorrect. Due to the fact that the tradeoff is reduced, it seems Phillips curve is improving. So Option A is correct.

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