Stagflation

Macroeconomics

Inflation - measuring the cost of living

Inflationary and deflationary scenarios

Moderate Inflation in a Good Economy
Stagflation
Deflationary Spiral
Hyperinflation

Stagflation How a supply shock can cause prices to rise and the economy to stagnate

Back

Stagflation

⇐ Use this menu to view and help create subtitles for this video in many different languages. You'll probably want to hide YouTube's captions if using these subtitles.

We have learned that a moderate level of inflation is normally associated with a good economy
but what we saw in particular in the early 70's in 1973 when the oil embargo hit
is that we started to experience something called stagflation something that was labelled stagflation
it is a bizarre circumstance where you have inflation at the same time as stagnation in the economy.
That's where they get this combination of words of stagflation.
Lets think about how that would happen.
In particular, lets think about how that would happpen due to a supply shock.
There's other ways that you can get stagflation.
If you have strange regulation, over regulation, if the government does weird things
But the classic example is a supply shock. When we say supply shock is something like an oil embargo
where all of the sudden the supply of oil or something goes down dramatically
it could be because of some kind of emergency or it could be because of an embargo
Just think about how that would affect the rest of this chain
so if the supply of something dramatically goes down
we know that supply has an inverse relationship with price
so supply goes down then price immediately goes up
and we think about something like oil you might say oil is only part of my pocket book when I drive around
but it's not
because even when you buy a fruit you are really paying for the transportation cost
so the price of oil affects fruit, affects food, affects any goods and services
it's one of those things that is pervasive through the economy
so prices of a bunch of things could generally go up
well, if the price of a bunch of things generally go up what's going to happen to demand
demand is going to plummet
if demand plummets, utilization plummets
if utilization plummets, investment plummets and profits are going to plummet
profits are going to plummet now because
utilization is going down and prices have gone up, but it's not the price that they can sell things at
Now price is fundamentally a big cost
specially if you think about it from a US centered point of view
if oil is an import in the case in the early 70's
then price going up is going to have an inverse relationship
so the price goes up is really going to be on the cost side
so once again hitting profits hard
and if all of these things go down that's just going to kill employment, kill wages and then further make demand even worse
so stagflation is that situation where you have some type of shock to the system
where, in the classic scenario, it hits supply so hard it causes a massive inflation in one part of the economy
and in the case of oil, it affects other parts of the economy

Questions
Tips & Feedback

Be specific, and indicate a time in the video:

At 5:31, how is the moon large enough to block the sun? Isn't the sun way larger?

Have something that's not a question about this content?

Post a tip or feedback
General discussion about the site
Report a technical problem with the site
Request a video or feature

This discussion area is not meant for answering homework questions.

Formatting tips

Cancel or

( total)

Share a tip

When naming a variable, it is okay to use most letters, but some are reserved, like 'e', which represents the value 2.7831...

Suggest a fix

At 2:33, Sal says "double bonds" but should say "single bonds."

Have something that's not a tip or feedback about this content?

Ask a question
General discussion about the site
Report a technical problem with the site
Request a video or feature

This discussion area is not meant for answering homework questions.

Formatting tips

Cancel or

Discuss the site

For general discussions about Khan Academy, visit our Reddit discussion page.

Flag inappropriate posts

Here are posts to avoid making. If you do encounter them, flag them for attention from our Guardians.

abuse

disrespectful or offensive
an advertisement

not helpful

low quality
not about the video topic
soliciting votes or seeking badges
a homework question
a duplicate answer
repeatedly making the same post

wrong category

a tip or feedback in Questions
a question in Tips & Feedback
an answer that should be its own question

about the site

a question about Khan Academy
(Visit our FAQ)
a post about badges
a technical problem with the site
(Report a problem)
a request for videos or features