Q. Consider the following statements regarding stagflation:

1. Stagflation is the combination of recession with high inflation
2. Stagflation generally occurs because recession reduces demand for goods
3. Stagflation can be triggered by short supplies of essential commodities

Which of the above statements is / are correct?
Answer: Only 1 and 3
Notes: Statement 1 is correct as stagflation refers to the coexistence of high inflation and recession. Statement 2 is incorrect; while recession reduces demand, stagflation is unusual precisely because inflation persists despite low demand. Statement 3 is right: stagflation is often caused by supply shocks, for example, shortages of essential commodities leading to rising prices and contracting output.