Which of the following will most likely result in stagflation?
A. Increase in aggregate demand
B. Increase in aggregate supply
C. Decrease in aggregate demand
D. Decrease in aggregate supply
E. Increase in the marginal propensity to save
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Correct Answer: D, Decrease in aggregate supply. When aggregate supply shifts to the left, the price level increases, output falls, and unemployment rises. High prices (inflation) + high unemployment = stagflation. When you add inflation and unemployment together, you get the Misery Index.