American Institute of Certified Planners (AICP) Practice Exam

The simultaneous occurrence of high unemployment and inflation is called?

1. Stagnation

2. Recession

3. Depression

4. Inflation

The correct answer is: Stagnation

The term that describes the simultaneous occurrence of high unemployment and inflation is stagflation. Stagflation combines stagnation—characterized by slow economic growth—with inflation, where prices rise. This economic condition is particularly challenging for policymakers because the measures that are typically used to combat inflation (like raising interest rates) can exacerbate unemployment, while measures to reduce unemployment (like lowering interest rates) can increase inflation. In contrast, the other terms represent different economic conditions. A recession typically involves a decline in economic activity that leads to falling GDP and rising unemployment but not necessarily high inflation. A depression is a more severe and prolonged downturn than a recession, which often involves significant declines in economic activity across the economy. Inflation, on the other hand, refers to the general increase in prices, which does not inherently include high unemployment. Understanding stagflation is crucial as it reflects complex dynamics in the economy, making it more difficult to devise effective policy responses.