| Consider the following statements. |
| 1. Stagflation is a condition of slow economic growth and relatively high unemployment - a time of stagnation -accompanied by a rise in prices, or inflation. |
| 2. Reflation is a fiscal or monetary policy, designed to expand a country's output and curb the effects of deflation. Which of the statements given above is/are correct? |
A) Only 1
B) Only 2
C) Both 1 and 2
D) neither 1 nor 2
Correct Answer: A
Solution :
[a] [c] Stagflation occurs when the economy isn't growing but prices are, which is not a good situation for a country to be in. This happened to a great extent during the 1970s, when world oil prices rose dramatically, fueling sharp inflation in developed countries. For these countries, including the U.S., stagnation increased the inflationary effects. Reflation policies can include reducing taxes, changing the money supply and lowering interest rates. The term "reflation" is also used to describe the first-phase of economic recovery after a period of contraction. Although almost every government tries in some form or another to avoid the collapse of an economy after a recent boom, none have ever succeeded in being able to avoid the contraction phase of the business cycle. Many academics actually believe government agitation only delays the recovery and worsens the effects.
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