<p>For a long time many people thought that stagnation was an impossible economic experience to occur as Keynes economic theory of the Philipps curve which portrayed macroeconomic policy as a trade-off between unemployment and inflation.   However during the 1960s in UK and in 1970s in the US stagnation occurred but was due to external situations which caused prices to increase. U.S. and other industrialized countries entered a period of slow economic growth occurring simultaneously with high rates of inflation.</p>

<p><a href="https://www.investopedia.com/articles/economics/08/1970-stagflation.asp" rel="nofollow noreferrer">https://www.investopedia.com/articles/economics/08/1970-stagflation.asp</a></p>

<p>It appears, which Neo-Keynesians are believing, that stagflation is caused by cost-push inflation (when some force or condition increases the cost of production). So external factors such as a shortage of natural resources or an act of war are the main contributors to this situation. </p>

CC BY-SA 4.0
2020-01-29T18:28:00.293Z
2020-01-29T18:28:00.293Z
Mike J
<p>In Keynesian theory, inflation and recession are regarded as mutually exclusive. A high aggregate demand would drive prices up because, naturally, people are spending more in goods and services (high inflation) - business and enterprises demands for factor of productions (specially labour, therefore low unemployment). </p>

<p>When the aggregate demand diminish, people stop consuming. The imediate consequence is the rise of the unemployment rates, since there's no production of new goods and services. But, mostly as a side effect of a malformed expansionary monetary policy in the past, inflation keep high.</p>

<p>Between 2014 and 2016, Brazil went trough a similar scenario. Given the past monetary policies (huge subsidies for private companies close to the government, corruption in infrastructure companies, easy credit access, huge government spending), the inflation rate surpassed the 10% in the same time when the bubble of consumption was over. It means that in the previous years people had made big debts to buy real estate, cars and electronics - and the industry followed the trend hiring more people and improving production. </p>

<p>When the consumption stopped aggressively, the result was factories with a lot of cars in stock. In attempt to cut costs, they fired a lot of people and closed several industrial plants, but even trying to sell with discount the inflation was there mostly because of the excess of credit in the past.</p>

CC BY-SA 4.0
2020-01-29T16:46:05.407Z
2020-01-29T16:46:05.407Z
Croves
<p>High demand for goods drives up prices, and also encourages firms to hire more; and likewise high employment raises demand. 
Then why stagflation?
According to above explanation,  it should not exist.</p>

CC BY-SA 4.0
2020-01-29T06:31:09.700Z
https://en.wikipedia.org/wiki/Stagflation#Causes
Art
<macroeconomics>
Explaining Stagflation
George carlin
# Explaining Stagflation

(Asked by: username_0 on 2020-01-29)

High demand for goods drives up prices, and also encourages firms to hire more; and likewise high employment raises demand.
Then why stagflation?
According to above explanation, it should not exist.

**Tags:** macroeconomics
> **Comments:**
> **username_1**: https://en.wikipedia.org/wiki/Stagflation#Causes  

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## 2 answers

### Answer by username_2 on 2020-01-29. Score: 1

For a long time many people thought that stagnation was an impossible economic experience to occur as Keynes economic theory of the Philipps curve which portrayed macroeconomic policy as a trade-off between unemployment and inflation. However during the 1960s in UK and in 1970s in the US stagnation occurred but was due to external situations which caused prices to increase. U.S. and other industrialized countries entered a period of slow economic growth occurring simultaneously with high rates of inflation.

<https://www.investopedia.com/articles/economics/08/1970-stagflation.asp>

It appears, which Neo-Keynesians are believing, that stagflation is caused by cost-push inflation (when some force or condition increases the cost of production). So external factors such as a shortage of natural resources or an act of war are the main contributors to this situation.


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### Answer by username_3 on 2020-01-29. Score: 0

In Keynesian theory, inflation and recession are regarded as mutually exclusive. A high aggregate demand would drive prices up because, naturally, people are spending more in goods and services (high inflation) - business and enterprises demands for factor of productions (specially labour, therefore low unemployment).

When the aggregate demand diminish, people stop consuming. The imediate consequence is the rise of the unemployment rates, since there's no production of new goods and services. But, mostly as a side effect of a malformed expansionary monetary policy in the past, inflation keep high.

Between 2014 and 2016, Brazil went trough a similar scenario. Given the past monetary policies (huge subsidies for private companies close to the government, corruption in infrastructure companies, easy credit access, huge government spending), the inflation rate surpassed the 10% in the same time when the bubble of consumption was over. It means that in the previous years people had made big debts to buy real estate, cars and electronics - and the industry followed the trend hiring more people and improving production.

When the consumption stopped aggressively, the result was factories with a lot of cars in stock. In attempt to cut costs, they fired a lot of people and closed several industrial plants, but even trying to sell with discount the inflation was there mostly because of the excess of credit in the past.


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