Stagflation is an economic cycle characterized by high inflation, high unemployment, and low economic growth. The document discusses stagflation, providing causes such as oil crises and monetary policy, effects such as high unemployment and inflation, and solutions such as increasing money supply and reducing taxes. It analyzes stagflation in the 1970s U.S. and India in the 2011-2013 period, where India showed signs of overheating and weakness simultaneously.

1. ATHULYA NAIR - D-08
BHAWANA - D-10
PRIYANKA MAHARANA - D- 42
SHINDUJA R – D - 61
SWATI BAJPAI - D-64
MACRO
ECONOMICS

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STAGNATION + INFLATION = STAGFLATION
 Stagflation is an economic cycle in which there
is a high rate of both inflation and stagnation.
 Period of rising inflation, falling output and
rising unemployment.
(aka Inflationary Recession)
 First used by Lain Macleod during economic
stress in the U.K. in 1960s.
 Main Cause- Restriction in aggregate supply.

3. STAGFLATION DIAGRAM
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If demand is increased or decreased:-
Demand
Increased
Demand
Decreased

4.  Until the 1970s, many Keynesian economists
believed that there was a stable inverse
relationship between inflation and
unemployment.
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 According to the Keynesian school of
economic thought :
 If the economy slowed, unemployment
would rise, but inflation would fall.
 To promote economic growth a country's
central bank could increase the money
supply to drive up demand and prices.
 The growth in money supply would increase
• employment
• economic growth
Stagflation in the 1970s

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• In the 1970s,U.S entered a phase of stagflation.
• The U.S. economy in the 1970s is characterized by 4 things:
High oil prices Unemployment
Recession Inflation
• Inflation – reached an annual average of 12.4% in 1980.
• Oil supply shock and the resulting increase in the price of gasoline, caused prices to get
higher (cost push inflation).
• Milton Friedman had the solution to this stagflation problem.
Inflation is always and everywhere a monetary phenomenon.
Suggested a constrictive monetary policy to control inflation.

6. CAUSES
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 The Oil Crisis
 Nixon Wage-Price
Control
 Stop-Go
Monetary Policy
 Recession
 Inflation

7. EFFECTS
 Increased demand in the market pushed up
prices, leading to demands for higher wages,
this led to high Unemployment rates
 The government's ever-rising need for funds
swelled the budget deficit and led to greater
government borrowing
 With energy costs and interest rates high,
business investment languished and
unemployment rose to uncomfortable levels
 Cost-push inflation (occurs when
overall prices increase due to increases in the
cost of wages and raw materials)

8. SOLUTIONS FOR STAGFLATION
Government- Circulation of money
RBI- supply of money
Encourage counsumption
Reduce the tax rates which lead to rise in investments
Different policy
credit creation by RBI

9. ACTIONSTAKEN
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 Recession
 Falling productivity
 Powerful trade unions
 Raising the prices of fuel
 Coal production increased from 75mn tons to 100mn tons
 Loan from International Monetary Fund twice in a year
 Price control for different goods

10. INDIA IS NOW IN CLASSIC STAGFLATIONTERRITORY
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 Recession
 Falling productivity
 Powerful trade unions
• The slowdown is three years in the making and will require higher
liquidity and increased employment to pull us out of the quagmire.
• National Statistical Office (NSO), the Consumer Food Price Index
increased from 5.11% in September 2019 to 7.89% in October 2019.
• The retail price inflation rate reached an annual high at 4.62%.
• The recent NSO estimates of gross domestic product (GDP) for the
second quarter of 2019-20 reported a further reduction in the
growth rate of GDP to 4.5%, the lowest since 2012-13.
• It is now irrefutable that India is in a growth recession.

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India economy puzzled 2011-2013
• The current account deficit in 2011-12 was 4.2%, and the fiscal deficit was 5.9% of
GDP (against the budgeted 4.8%). Both were signs of overheating.
• consumer price inflation was almost in double digits, and every sector from
agriculture and construction to industry and services complained of labor scarcity.
• Wholesale price inflation has at last dipped to 6.6% in January, but consumer price
inflation remains sky-high at 10.8%.
• signs of an overheated economy for two years. Yet, in the same period, we have
also seen a dramatic fall in production, consumption and investment intentions,
and overall economic sentiment.
• India was showing signs of an overheated economy for two years.
• At the same time there was also a dramatic fall in production, consumption and
investment intentions, and overall economic sentiment.

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• GDP was 9.2% in 2010-11, crashed to 6.5% in
2011-12
• Private consumption this year to rise by only
4.1%, after consistently exceeding 8% in
recent years.
• How do we reconcile the data showing
overheating with data showing terrible
weakness?
Some economists claim that high inflation
proves that India is supply-constrained. But
many corporates complain of slack demand and
low capacity utilization, above all in the capital
goods sector.

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