In macroeconomics, the term stagflation refers to which combination of economic growth and inflation?

Introduction / Context:
This question checks understanding of the macroeconomic term stagflation. The word combines stagnation and inflation and describes an undesirable situation that challenges standard policy tools. Recognising the correct combination of growth and inflation is essential for analysing such scenarios.

Given Data / Assumptions:

• The term in question is stagflation.
• The options relate growth rates and price increases in different ways.
• We assume that inflation means a sustained increase in the general price level.
• Stagnation indicates very low or negative growth.

Concept / Approach:
Stagflation is a situation where the economy experiences stagnant or very slow growth along with high inflation. In other words, the rate of price increase is high while output and employment do not grow adequately. Therefore the option that states that the rate of growth is slower than the rate of price increase best captures the concept in the list provided.

Step-by-Step Solution:
Step 1: Break the word stagflation into stagnation plus inflation.Step 2: Interpret stagnation as very low or zero growth in output and employment.Step 3: Interpret inflation as a continuous rise in prices.Step 4: Combine these ideas to conclude that growth is weak while prices rise quickly.Step 5: Choose the option that says the rate of growth is slower than the rate of price increase.

Verification / Alternative check:
Macroeconomics textbooks describe stagflation as simultaneous stagnation and inflation, often citing the experience of many economies in the nineteen seventies. They point out that output growth is sluggish or negative while inflation remains high. This confirms that the correct option is the one where price rises outpace growth rather than one where both are falling or unrelated.

Why Other Options Are Wrong:
Option A, which says growth has no relation with change in prices, does not capture the simultaneous presence of slow growth and high inflation.
Option B, where growth is faster than price increase, describes a healthy situation with real growth, not stagflation.
Option D, where both growth and prices decrease, would correspond to deflationary recession, not stagflation.
Option E, with both growth and inflation at zero, describes a stable but stagnant situation without the inflation component.

Common Pitfalls:
Candidates may confuse stagflation with simple inflation or with recession alone. Some think any economic difficulty with inflation must be stagflation, ignoring the growth component. Others mix it up with deflationary periods, where prices fall rather than rise. Remembering that stagflation requires both stagnation and inflation occurring together helps avoid these errors.

Final Answer:
Stagflation refers to a situation where the rate of growth is slower than the rate of price increase, combining weak growth with high inflation.