Question

1. How is inflation measured & what causes inflation?

2. What is the business cycle and why the debate over macro stability is important?

3. Contrast the European Central Bank and the IMF's response to the Greek economic crisis to FDR's economic response to the Great Depression.

Answer 1

Answer:- 1)- Inflation means there is a sustained increase in the price level.To measure the inflation we have taken a example, a number of goods that are representative of the economy are put together into what is referred to as a "market basket." The cost of this basket is then compared over time. This results in a price index, which is the cost of the market basket today as a percentage of the cost of that identical basket in the starting year.

CAUSE OF INFLATION:-

1.Demand-pull inflation– aggregate demand growing faster than aggregate supply ,

2.Cost-push inflation– higher oil prices feeding through into higher costs,

3.Devaluation– increasing cost of imported goods, also boost to domestic demand,

4.Rising wages – higher wages increase firms costs and increase consumers’ disposable income to spend more.

5.Expectations of inflation – causes workers to demand wage increases and firms to push up prices.

Answer:-2)- Definition of busines cycle: The business cycle is the natural rise and fall of economic growth that occurs over time. The cycle is a useful tool for analyzing the economy. It can also help youmake better financial decisions.

Macro stability:- Macroeconomic stability acts as a buffer against currency and interest fluctuations in the global market. It is a necessary, but insufficient requirement for growth.

1Exposure to currency fluctuations, large debt burdens, and unmanaged inflation can cause economic crises and collapse in GDP.Both the IMF

2and the EU place an emphasis on macroeconomic stability. According to the Maastricht criteria

3, stability is measured by five variables.*.Low and stable inflationindicates healthy demand in the marketplace; however, highor unstable inflation threaten growth.

4High inflation alters the value of long termcontracts. Volatile inflation creates uncertainty in the market place, increasingrisk premiums. Since many tax rates are adjusted by average inflation, volatile inflation can severely alter government revenues and individual liabilities.