SAT Subject US History Practice Question 768: Answer and Explanation
29. The economic condition of "stagflation" of the early 1970s can best be described as
A. deflation and low productivity.
B. high productivity and high prices.
C. high inflation and high unemployment.
D. high prices and low productivity.
E. low prices and high productivity.
Correct Answer: C
"Stagflation" was an economic condition characterized by low productivity, caused by unemployment, along with inflation. Economic theory failed to explain how, in the early 1970s, the unemployment level could be high while, at the same time, prices increased at a rapid rate. Standard economic theory held that inflation (a rise in prices) was pushed by high wages: When workers have more money, they spend more, raising prices. If unemployment is high, according to this theory, the total amount of wages should be low, bringing prices down. The other answer choices do not describe the economic conditions of the early 1970s.