A period of stagflation is part of the normal aftermath of a period of excessive aggregate demand.

Question

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Stagflation typically occurs when there is a combination of high inflation and stagnant economic growth, which can be a result of excessive aggregate demand. During a period of excessive demand, businesses may increase prices and wages, leading to inflationary pressures. However, if the demand is not sustainable or if there are supply-side constraints (such as high oil prices or a labor shortage), economic growth may slow down while inflation persists, resulting in stagflation.

A Period of Stagflation Is Part of the Normal Aftermath