Rise in prices and growth in production, both moves at different paces. This was clearly visible in 3 years – 20014, 2008, 2009. The growth in real GDP saw a hike of 3.6% in the year 2004. However, in the year 2008, there was no growth in 2008. And finally, in case of 2009, a drop of 2% in real GDP was seen in 2009.
Similarly, in the last decade, there had been a sudden spike in the rates in 2005. In that year, the hike was of 3%. In comparison to that, in the year 2009, there was another drop of 1% over the previous one.
On taking such conditions into perception,we will read 2 aspects of this business cycle in this chapter.
In this chapter, we will go through real GDP model and price levels associated with it. This model is known as AS-AD model or aggregate supply–aggregate demand model. With this model, we will come to understand about macroeconomist and their consensus view on real GDP. We will also take a careful look and determine how this real GDP affects the price level. We do get a proper framework from this model, which helps us to get a better understanding related to the necessary forces helping in economic expansion.
This expansion is the reason which helps in fluctuation of business cycle leading to inflation. This AS – AD model does also have a specialized framework with whose help we can get a better idea about the views of macro economists belonging from various schools of thoughts.