What economic challenge did the U.S. face in the 1970s characterized by stagnant economic growth and inflation?

The correct answer, stagflation, refers to an economic condition that combines stagnation in economic growth with inflation. This phenomenon became prominent in the United States during the 1970s, a decade marked by significant economic difficulties.

Stagflation is particularly notable because it challenges the traditional economic correlations; typically, inflation and unemployment are thought to have an inverse relationship, as indicated by the Phillips Curve. However, during the 1970s, the U.S. experienced rising inflation alongside rising unemployment and stagnant demand, which was unprecedented. Factors contributing to stagflation included oil price shocks, increased production costs, and a lack of productivity growth.

This context helps to understand why stagflation is the correct answer—it encapsulates the unique combination of inflation and stagnant economic conditions that defined the U.S. economy during that period. In contrast, the other terms like recession (characterized by a decline in economic activity), deflation (a decrease in the general price level), and stagnation (simply limited growth) do not adequately describe this dual challenge of rising prices and stagnant growth experienced in the 1970s.