It’s Possible the US Can Dodge a Recession But Stagflation is Unavoidable

EconEye Admin

4 years ago

Stagflation represents the worst nightmare for the Fed. It puts the two parts of its mandate—full employment and stable prices—into direct conflict. The Fed will have a tough decision to make to control stagflation.—markets.businessinsider.com

Answer the following questions to check your understanding of the story.

Can the Fed “dodge a recession” but still experience stagflation?

The Fed ______________ “dodge a recession” but still experience stagflation because _____________.

a) can; a recession is easier to avoid than stagflation

b) cannot; a recession always occurs with inflation

c) cannot; stagflation is a combination of recession and inflation

d) can; a recession never occurs with inflation

When the economy is experiencing a stagflation, what is happening to the inflation rate and the unemployment rate?

Stagflation is the combination of recession and inflation. If the economy is experiencing stagflation, then by definition it is also experiencing recession.

Why does the Fed have a “tough decision” when the economy is experiencing stagflation?

The Fed has a “tough decision” when the economy is experiencing stagflation because it must ______________ to avoid inflation, and ______________ to avoid recession.

a) raise the interest rate; lower the interest rate

b) lower the interest rate; raise the interest rate

c) raise the interest rate; raise the interest rate even more

d) lower the interest rate; lower the interest rate even more

How do changes in the interest rate influence aggregate demand, the price level, real GDP, and unemployment? How do changes in the interest rate influence the inflation rate and recession?

If the Fed raises the interest rate, the inflation rate falls and the unemployment rate increases. But if the Fed lowers the interest rate, the inflation rate rises and the unemployment rate decreases.

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