Hi to everybody,
I really don’t understand this part of the curriculum relating to capital market expectations : “ With regard to what drives the cycle, if aggregate supply shocks predominate, then inflation will tend to be counter cyclical, reflecting alternating periods of “stagflation” and disinflationary boom.”
Why counter cyclical?
Thank you
I’m not quite sure but this is my best guess, confusing caveat at the end of the LOS so clarification from anyone else would be greatly appreciated.
If AS dominates, then a negative supply shock (rising input prices such as wages?) would create a negative output gap whilst seeing rising prices and inflation across the board, positive inflation and negative output being counter cyclical.
My thoughts is simple:
supply >demand, ->depress prices - >low inflation/stagflation, therefore counter cyclical.
Not sure if it right?
Yes. I think this is a sound and logical explanation. Thanks.