Question

In your own words; define Inflation and Recession.

Answer 1

Inflation: An increase in the general price level of the goods and services is called as inflation.

1. Demand pull inflation: This arises due to rise in aggregate demand of goods and services.

2. Cost push inflation: This arises due to the rise in price of inputs which increases the cost of production.

Recession: It arises when economic activity slow downs. The aggregate demand decreases. We can declare recession when the economic output (GDP) is falling in 2 consequtive quarters. In recession, people start loosing jobs, unemployment rises in the economy, aggregate demand falls.