What does the term "stagflation" refer to?

The term "stagflation" refers to an economic situation characterized by rising inflation and unemployment combined with stagnant economic growth. This phenomenon is particularly problematic because it contradicts the traditional economic theory which suggests that inflation and unemployment have an inverse relationship; typically, when unemployment is low, inflation tends to rise, and vice versa.

During stagflation, an economy experiences both persistent inflation and high unemployment rates, alongside a lack of growth, making it difficult for policymakers to address these issues through standard economic techniques. Central banks might raise interest rates to combat inflation, but this could further increase unemployment, while stimulating the economy to reduce unemployment might exacerbate inflationary pressures.

Thus, option B accurately captures the essence of stagflation, highlighting its unique and challenging combination of economic conditions.