AP Macroeconomics Question 15: Answer and Explanation
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3. Stagflation occurs when
- A. the price level rises for two consecutive quarters
- B. the price level rises and output falls
- C. the price level stays the same and output increases
- D. the price level stays the same and output decreases
- E. the price level and output both fall
Correct Answer: B
B Stagflation (also known as supply-side inflation) occurs when the cost of resources increases. This increase in cost of resources causes the aggregate supply curve to shift to the left (AS1 in the figure) causing prices to increase and GDP to fall. Therefore the answer is (B).