When the price level rises and simultaneously there is a decrease in real GDP,
A) there is an expansionary gap.
B) the natural unemployment rate increases.
C) stagflation occurs.
D) the Fed has increased the discount rate.

Question

Quizplus · Accepted Answer

This is the definition of stagflation, which is a rare phenomenon where inflation and unemployment occur simultaneously. It is usually caused by supply shocks, such as an increase in oil prices, that cause a decrease in real GDP and an increase in the price level. The other options are not applicable in this situation.

When the Price Level Rises and Simultaneously There Is a Decrease