What characterizes stagflation?

Stagflation is characterized by a combination of stagnant economic growth, high unemployment, and high inflation. This situation is particularly challenging for policymakers because the typical tools used to combat inflation—like increasing interest rates—can further exacerbate unemployment and slow economic growth. Conversely, measures aimed at reducing unemployment, such as stimulating demand through government spending or lowering interest rates, can lead to an increase in inflation.

In the context of the other options presented, high economic growth and low unemployment would depict a thriving economy, not a stagnated one. The scenario of high inflation with increasing trade surpluses does not typically correlate with stagflation, as trade surpluses usually reflect a healthy economic state. Lastly, low inflation with high foreign investment suggests stability and attraction for investment, which contrasts sharply with the stagnation and inflation present in stagflation. Thus, the combination of stagnant growth, high unemployment, and high inflation defines the essence of stagflation, making the correct response clear.