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EconActive Solutions (CNN News Questions)
Chapter 33: Business Cycles: Uslmo2v
- Why does a booming economy usually lead to higher inflation?
- Why do gains in productivity tend to lower inflation?
- Are business cycles dead?
Answers:
- As the economy produces more and more output, more workers are needed. Eventually the only way to attract enough workers is to offer them higher wages. This raises company costs, which usually leads to a price increase to maintain the desired profit margin.
- As your workers become more productive they produce more output per hour, so even if you pay them more, the increased output more than compensates for the pay increase.
- No, at least Alan Greenspan does not think so as he is trying to head off higher inflation by raising interest rates. Business cycles have been around since the Roman Empire. Still, it's nice to have such a long economic expansion.
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