What is Stagflation, Define of Stagflation
The word stagflation is the combination of two words Stag from stagnation and flation from inflation. In stagflation both the higher level of employment and inflation are attached. It is therefore, also called “Inflationary recession.” Keynesian define stagflation as it occurs due to rise in cost of production or fall of supply. If the supply goes downward it will certainly affect the price level which will go higher, it will also reduce the employment. This may result the stagflation.
Explanation of Stagflation Diagram
E1 is the equilibrium for the economy where AS1 = AD. OP stands for level of prices and OY line is for the income and employment level. As the cost of production rises it will affect the curve AS, which will shift to the lift AS0. E0 is will be the new equilibrium point, where AD = AS0. OY0 represents output level whereas OP represents price level. The gap between P1 and P2 represents inflation and Y1 and Y0 represents unemployment.