Macroeconomics What Is Inflation, Stagflation, Essay

The effects of such a downturn is felt across an entire generation of people and it transforms the mindset of the people as well as the country's economy drastically. An example of such a downturn was the Great Depression of 1929 that saw extremely high levels of unemployment, underemployment and economic suffering.

Economic expansion is a favorable period in which the economic activity increases across all sectors and industries. During this period, there is an increase in GDP, credit is readily available and there is an overall air of prosperity. Economic contraction, on the other hand, is a period during which there is a decline in GDP, the economic growth slows down and unemployment increases. The expansion and contraction are part of a business cycle and they follow each other.

Relationship between these terms

Each of the above-mentioned terms are intertwined with one another. They are an integral part of the business cycle and one of these events occur at any given point of time. When an economy is experiencing expansion, there is a boom across all sectors and credit is freely available.This in turn leads to inflation and the central bank is likely to take measures to curb inflation. Along with other domestic and international factors, this can have a negative impact on the businesses and can cause an economic contraction where the growth slows down. Certain factors can further deepen this contraction and this will lead to a recession or stagflation depending on the business environment, the fiscal policies of the Government and the domestic and international growth and demand. A rare occurrence is the depression that occurs due to extensive problems in the economy. As the economy recovers from contraction, recession and stagflation, the overall output of industries increase and this increases the country's GDP. Soon, there is a period of economic expansion again.

References

Krugman, Paul;….....