QUESTION: What is Stagflation? Also discuss the causes of stagflation. (8 marks/120 words)
Stagflation is an adverse economic situation in which inflation causes the prices of most goods and services to rise, while at the same time, economic growth slows down due to lower demand. This means that purchasing power decreases along with the economy’s growth rate. So, when an economy suffers from stagflation, it is usually characterised by slowing economic growth, higher levels of unemployment and rising prices of goods and services.
Stagflation is the combination of high inflation and recession at the same time.
Causes of stagflation
The rising inflation leads to a drop in the currency’s purchasing power as we would be able to buy only fewer items for the same money. The situation is far greater when rising inflation is accompanied by a stagnant output. As economic growth halts, unemployment rises but existing incomes do not rise fast enough, making people contend with inflation.
One of the causes of stagflation is when a central bank creates money flow by printing more currency but puts supply on hold. The situation also rises when the central bank’s monetary or fiscal policies create credit.
While this at play, other policies slow growth if the government increases taxes or the central bank raises interest rates. Both of these moves prevent companies from producing more. Simply put, when conflicting expansionary and contractionary policies occur, it can slow growth while creating inflation, leading to stagflation.
Stagflation in India
In the first quarter of FY21, the Indian economy contracted 23.9 per cent. The major components of GDP, that is consumer demand and investment demand – contracted 27 per cent and 47 per cent, while the food inflation rate registered a growth rate of around 9 per cent.
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