Stagflation, a portmanteau of the words stagnation and inflation, is a term in general use within modern macroeconomics used to describe a period of out-of-control price inflation combined with slow-to-no output growth, rising unemployment, and eventually recession.
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.
Solving The Problem of Stagflation
Hayek said that stagflation was the greatest thing to fear in a economy, because of this fear he created the Monetary Policy. This policy would adjust the money supply and interest rates to stabilize the amount of money available for spending on goods and services.
Low interest rates---high money supply---more money borrowed---more production
High interest Rates---low money supply---less spending---less inflation
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.
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Tyler Bannerman__
Solving The Problem of Stagflation
Hayek said that stagflation was the greatest thing to fear in a economy, because of this fear he created the Monetary Policy. This policy would adjust the money supply and interest rates to stabilize the amount of money available for spending on goods and services.
Low interest rates---high money supply---more money borrowed---more production
High interest Rates---low money supply---less spending---less inflation