Inflation & Business Cycles

What is the long-run cause of inflation?

Inflation occurs if the quantity of money grows faster than the real GDP.

What initiates demand pull inflation?

Demand pull inflation starts because aggregate demand increases before production can respond.

List three factors that can increase aggregate demand leading to demand pull inflation.

1. An interest rate cut 2. An increase in the quantity of money 3. An increase in government expenditure.

What is cost push inflation?

Cost push inflation occurs when inflation starts with an increase in costs.

What is the main source of cost push inflation?

A rise in the price of a factor of production.

How do people's expectations about future inflation influence economic activity?

They influence plans about consumption, savings, investment, production, employment, and entrepreneurship.

What does it mean when expectations about inflation are described as rational expectations?

It means forecasts include the best information available.

What are business cycles?

Business cycles are fluctuations in economic activity that an economy experiences over time.

What characterizes a business cycle?

Expansion (growth) and contraction (decline) of the economy.

What does the Mainstream Business Cycle Theory state?

Potential GDP grows at a steady pace while aggregate demand grows at a fluctuating rate.

What is the Real Business Cycle Theory primarily focused on?

Fluctuations in productivity are the main source of economic fluctuations.

What triggers rapid productivity growth according to the Real Business Cycle Theory?

Fluctuations in the pace of technological change.

According to the Austrian Business Cycle Theory, what results from interventions to stabilize the economy?

Business cycles result from such interventions.

What are the two types of products mentioned in the structure of production?

Lower order and intermediate products.

What does greater capital investment allow for in the production process?

Higher output.

What is the relationship between technological change and productivity growth?

When technological change is steady, productivity grows at a moderate pace; rapid changes lead to productivity growth ramps up.

What can cause a recession according to the Real Business Cycle Theory?

A decrease in productivity growth.