When the price level is rising and, simultaneously, real GDP is decreasing,
A)potential GDP is decreasing.
B)the natural unemployment rate is rising.
C)stagflation is occurring.
D)the economy is experiencing an expansionary gap.
E)the natural unemployment rate is falling.

Question

Quizplus · Accepted Answer

This situation is referred to as stagflation, which occurs when the economy is experiencing both inflation and recessionary conditions. This can happen when there is a supply shock, such as a decrease in oil supply, that causes prices to rise while real GDP decreases. This is different from an expansionary gap, which occurs when the economy is producing above its potential GDP and there is upward pressure on prices.

When the Price Level Is Rising And, Simultaneously, Real GDP