Florida Teacher Certification Examinations (FTCE) Social Science Practice Test

What economic condition is characterized by an increase in the price level, a decrease in real domestic output, and increased unemployment?

1. Increased productivity

2. Increased input prices

3. Reduced government regulations

4. Increased exports

The correct answer is: Increased input prices

The condition described in the question is commonly known as "stagflation." Stagflation is characterized by stagnant economic growth, high unemployment, and rising prices. This situation occurs when the economy experiences a supply shock that leads to increased input prices, which can drive up inflation while simultaneously slowing down economic growth and increasing unemployment. When input prices rise, production costs for businesses increase, which can lead firms to cut back on output, resulting in a decrease in real domestic output. This situation can also force companies to lay off workers in response to reduced production levels, contributing to rising unemployment rates. Consequently, this combination of dynamic factors aligns perfectly with the characteristics described in the question. The other options do not depict the scenario of rising prices and decreasing output combined with unemployment, as increased productivity typically leads to higher output and potentially lower prices, reduced government regulations generally stimulate economic activity, and increased exports are likely to boost output rather than decrease it. Thus, the choice relating to increased input prices is the most accurate reflection of the described economic condition.