The present day inflation is the best explanation for stagflation in the whole world. It is inflation accompanied by stagnation on the development front in an economy. Instead of leading to full employment, inflation has resulted in un-employment in most of the countries of the world. It is a global phenomenon today. Both developed and developing countries are not free from its clutches. Stagflation is a portmanteau term in macro economics used to describe a period with a high rate of inflation combined with unemployment and economic recession. Inflationary gap occurs when aggregate demand exceeds the available supply and deflationary gap occurs when aggregate demand is less than the aggregate supply. These are two opposite situations. For instance, when inflation goes unchecked for some time, and prices reach very high level, aggregate demand contracts and a slump follows. Private investment is discouraged. Inflationary and deflationary pressures exist simultaneously. The existence of an economic recession at the height of inflation is called ’stagflation’.
The effects of rising inflation and unemployment are especially hard to counteract for the government and the central bank. If monetary and fiscal measures are adopted to redress one problem, the other gets aggravated. Say, if a cheap money policy and public works program are adopted to remedy unemployment inflation gets aggravated. On the other hand, if a dear money policy and stringent fiscal measures are followed unemployment will get aggravated. It is the most difficult type of inflation that the world is facing today.… Read the rest