Economics

TITLE: THE IMPACT OF STAGFLATION ON THE MINING SECTOR

QUESTION 1

A. Describe and explain stagflation.  (15 marks) 

Stagflation is the occurrence of prices rising when the economy is not experiencing that same increase. This situation is not beneficial to a country. Stagflation is a combination of two terms – inflation and stagnation. Inflation can be defined as “A process in which the price level is rising and money is losing value” [Parking: 10] and Stagnation is defined as “A time period in which there is either little or no economic growth” [http://wps.pearsoned.co.uk/wps/media/objects/1881/1926829/glossary/glossary.html-- October 10th, 2008.]. Stagflation is the increase in price and the unemployment rate while the growth of the general economy is slow.

This issue can be very difficult to fix because while trying to deal with fixing one issue, many other issues can arise and cause even more difficulty. Stagflation is something the government tries to avoid through fiscal policy and by promoting even and healthy growth. Eventually if stagflation does continue there will be an economic recession and the economy will self correct [http://www.investopedia.com/articles/economics/08/stagflation.asp?Page=2-- October 10th, 2008]. “One of the most well-known examples of stagflation in the United States occurred in the 1970s, during the oil crisis.” http://www.investopedia.com/articles/economics/08/stagflation.asp?Page=2-- October 10th, 2008] During this time oil prices were high and this contributed to inflation while employment remained slow. “In most of the years of the 1970s and early 1980s the economy experienced both higher inflation rates and higher unemployment rates” [McConnell: 8]

“Until the 1970s, many economists believed that there was a stable inverse relationship between inflation and unemployment. They believed that inflation was tolerable because it meant the economy was growing and unemployment would be low. Their general belief was that an...