When the short-term aggregate-supply of a state drops, the short-term aggregate-supply curve displacements to the left, which leads to a terrible economic job — -stagflation.

Stagflation is a status of slow economic growing and comparatively high unemployment ( a clip of stagnancy ) accompanied by a rise in monetary values, or rising prices. This happened to a great extent during the seventiess, when universe oil monetary values rose dramatically, fueling crisp rising prices in developed states. For these states, including the U.S. , stagnancy increased the inflationary effects.

Graph 1 shows that when the short-term aggregate-supply curve displacements from SRAS1 to SRAS2, the monetary value degree rises and causes rising prices ; the end product beads and causes recession. Happening of recession and rising prices can reason as stagflation job.

What might do the short-term aggregate-supply to switch?

Basically, alterations in the factors of production ( labour, natural resources, capital, engineering betterment ) and expected monetary value degree will do the short-term aggregate-supply to switch.

Changes in the factors of production

Labor:

When the measure of labour available increased, the measure of goods and services supplied would increase. As a consequence, the short-term aggregate-supply curve would switch to the right. Conversely, diminishing of labour available leads to diminishing of goods and services supplied. It brings a consequence of the short-term aggregate-supply curve would switch to the left.

Furthermore, when the natural rate of unemployment rises, it means less labour force is lending to the economic system, the measure of goods and services supplied would diminish. As a consequence, the short-term aggregate-supply curve would switch to the left.

Natural resources:

When the handiness of natural resources additions, an economic system can bring forth more, so the short-term aggregate-supply curve would switch to the right. However, when an economic system is lack of of import natural resources, its end product will drop. Therefore, the short-term aggregate-supply curve would switch to the left.

Capital:

An addition in the economic system ‘s capital increases the productiveness of a state and, thereby, the measure of goods and services supplied would increase. As a consequence, the short-term aggregate-supply curve would switch to the right. Conversely, a lessening in the economic system ‘s capital decreases the productiveness and the measure of goods and services supplied. Therefore, the short-term aggregate-supply curve would switch to the left.

Technology betterment:

When the technological cognition of a state has advanced, the economic system can bring forth more goods and services from any given sums of labour, natural resources, and capital. Sometimes, certain engineering is prohibited by authorities ordinance, the economic system produces lesser. As a consequence, the short-term aggregate-supply curve would switch to the left.

Expected monetary value degree:

When the expected monetary value degree rises, rewards are higher, costs increase, therefore houses supply a smaller measure of goods and services. As a consequence, the short-term aggregate-supply curve would switch to the left. On the contrary, a lessening in the expected monetary value degree raises the measure of goods and services supplied. Therefore, the short-term aggregate-supply curve would switch to the right.

The state our group chosen that holding such economic job is Italy.

We can cognize that Italy is confronting stagflation economic job from below cogent evidence:

Graph 2

From the graph 2, it shows that Italy is in recession because there are more than 2 quarters of negative GDP growing rate ( twelvemonth 2012 1st one-fourth, 2nd one-fourth, 3rd one-fourth ) .

Graph 3

Besides, from the graph 3 we know that Italy besides holding rising prices job. The rising prices rate of Italy rises above 3 % since the Europe ‘s autonomous debt crisis.

Therefore, we can reason that Italy holding stagflation because it ‘s economic system is sing both stagnancy ( falling end product ) and rising prices ( lifting monetary values ) .

We know that an economic system will see stagflation when its short-term aggregative supply is dropping ( swerve displacements to the left ) . Therefore, why aggregate supply of Italy is considered as dropping?

We can cognize the aggregative supply of Italy is dropping from the below points of position:

Labor:

From graph 4, we know that the unemployment rate of Italy is maintain lifting since the Europe ‘s autonomous debt crisis. When more labours are unemployed, it means lesser labours are working and bring forthing, so the economic system produces a smaller measure of goods and services. As a consequence, the short-term aggregate-supply curve displacements to the left.Historical Data Chart

Graph 4

Capital:

From graph 5, we know that the concern assurance of Italy is dropping since the Europe ‘s autonomous debt crisis. The Business Confidence Index is an index designed to mensurate the grade of optimism on the province of the economic system that concern proprietors are showing through their activities of puting and disbursement. Decreasing concern assurance frequently implies decelerating economic growing because concern proprietors are likely to diminish their investing. Basically, a lessening in the concern assurance causes a lessening in the economic system ‘s capital stock, this phenomenon leads to a lessening in productiveness and the measure of goods and services supplied, switching the short-term aggregate-supply curve to the left.

Historical Data Chart

Graph 5

Furthermore, graph 6 shows that the public debt of Italy authorities is raising and maintains at a high, hazardous degree. For illustration, Italian public debt stood as 116.4 % of GDP IN 2010, ranking as the 2nd largest debt ratio after Greece ( with 129.7 % ) . A high public debt causes fewer capital flows in the economic system, which decreases productiveness and the measure of goods and services supplied, switching the short-term aggregate-supply curve to the left.

Historical Data Chart

Graph 6

Besides the alterations in the factor of production, stagnancy worsened the stagflation job. We can explicate it in 4 ways:

Consumption beads, Output beads

From graph 7 & A ; 8, we observed that the falling of consumer assurance leads to dropping of ingestion, doing the end product drops.Historical Data Chart

Graph 7

Historical Data Chart

Graph 8

Investing beads, Output beads

From graph 9, it shows that the stock lists in Italy are dropping since the Europe autonomous debt crisis. Decreasing of stock lists is because of the decreasing of investing, and it causes the outputs drops.Historical Data Chart

Graph 9

Government disbursement beads, Output beads

From graph 10, we can detect a obvious tendency that the Italy authorities is cut downing their disbursement under force per unit area of the Europe autonomous debt crisis. Reducing of authorities disbursement causes the end product beads.

Historical Data Chart

Graph 10

Net export beads, Output beads

Obviously, the balance of trade in Italy recorded negative values for a long period, its means the import is more than the export, doing net export beads. Droping of net export causes the end product beads.

Historical Data Chart

Graph 11

These four points show that Italy is holding a serious recession job.