Question

Explain the basic process by which an economy moves through a business cycle. What is meant by a demand-pull inflation? How does a demand-pull inflation differ from a cost-push inflation? Explain. ( essay question)

Answer 1

The basic process through which an Economy moves through a business cycle is described below by the various stages in the business cycle.

Expansion:-

Firsr stage in business cycle

Increase in positive indicators of econEco.

Such as Employment,income output,wag wa etc.

Process continues until Economy becomes favourable for expansions.

Peak,:-

Second stage economE attains maximum unit of growth.

Prices are at higher level.

Reversal in the trend of Economic growth.

Recession:-

Third phase demand goods and services declines.

All ecoEcono indicators fall.

Creates excess supply demands.

Depression:-

Fourth phase_ rise in Unemployment growth continues to decline.

Trough:-

Fifth phase_ further decline of indicators until it reaches the lowest point.

Negative saturation point for an Economy.

National income and Expenditure decline.

Recovery:-

Sixth phase

Economy starts recovering.

Supply starts increasing with demand.

Positive growth rate develop and

Employment reaches its peak.

Recovery continues until Economy stabilizes.

The demand pull inflation is an inflation caused when the aggregate demand for goods and services increases further than the aggregate supply.

The major difference between demand pull inflation and cost pull inflation is that when additional supply is unavailable, sellers rises their prices resulting in demand pull inflation.

But in cost push inflation the total supply decreases which leads to an increase in the cost of that supply.and the suppliers will raise their prices in cost push inflation as they know that consumers will pay for it.