What economic condition is indicated when the price level rises while real GDP decreases?

When the price level rises while real GDP decreases, it indicates a situation often referred to as "stagflation." This is typically associated with a decrease in short-run aggregate supply. When the short-run aggregate supply decreases, it means that producers are unable to supply as many goods and services at previous price levels, often due to increased production costs or other supply-side constraints. As a result, the reduced supply of products leads to higher prices, which drives the price level up, while the real GDP falls because fewer goods and services are being produced in the economy.

This scenario is essential in understanding the dynamics between supply and demand in the economy, where inflation occurs alongside a contraction in economic output, which is not a typical outcome and presents challenges for policymakers.