Stagflation is characterized by which two economic conditions?

Stagflation is specifically defined by the simultaneous occurrence of rising prices, known as inflation, and stagnant economic growth, which is often reflected in high unemployment rates. This situation creates a challenging economic environment because inflation typically occurs in a growing economy, while stagnation suggests that economic output is either slow or declining.

In the case of stagflation, the economy is not expanding or producing more goods and services, yet prices continue to rise, causing a decrease in purchasing power for consumers. This combination leads to significant challenges for policymakers since traditional measures to combat inflation, such as raising interest rates, can further inhibit economic growth and worsen unemployment.

Other scenarios presented in the choices do not align with the core definition of stagflation. For example, rising prices typically relate to economic growth rather than stagnation, and decreasing prices with increasing demand is more indicative of a deflation scenario.