During which phase of the business cycle is inflation a significant concern?

During which phase of the business cycle is inflation a significant concern?

• A. Recession
• B. Expansion
• C. Trough
• D. Recovery

Answer: (B)

Inflation becomes a significant concern during the expansion phase of the business cycle. This phase is characterized by increasing economic activity, rising Gross Domestic Product (GDP), and generally heightened consumer and business confidence. As demand for goods and services grows, businesses may increase their prices in response to the heightened demand, leading to inflation. During expansion, employment levels typically rise, and as more people are working, disposable income increases, fueling further demand. If demand outpaces supply, it can create upward pressure on prices. Central banks often monitor inflation during this phase as they may have to adjust interest rates to keep inflation in check while trying to sustain economic growth. In contrast, during a recession, economic activity is declining, leading typically to lower inflation or even deflation. The trough represents the lowest point of economic activity and is usually followed by recovery, during which inflation concerns are more subdued until the economy begins to expand again. Therefore, the expansion phase is critical for monitoring inflation as the economic activity is strong, and prices can accelerate considerably.

Inflation becomes a significant concern during the expansion phase of the business cycle. This phase is characterized by increasing economic activity, rising Gross Domestic Product (GDP), and generally heightened consumer and business confidence. As demand for goods and services grows, businesses may increase their prices in response to the heightened demand, leading to inflation.

During expansion, employment levels typically rise, and as more people are working, disposable income increases, fueling further demand. If demand outpaces supply, it can create upward pressure on prices. Central banks often monitor inflation during this phase as they may have to adjust interest rates to keep inflation in check while trying to sustain economic growth.

In contrast, during a recession, economic activity is declining, leading typically to lower inflation or even deflation. The trough represents the lowest point of economic activity and is usually followed by recovery, during which inflation concerns are more subdued until the economy begins to expand again. Therefore, the expansion phase is critical for monitoring inflation as the economic activity is strong, and prices can accelerate considerably.