Question

Economic Indicator like; Interest rate, Unemployment Rate, CPI and GDP

Required;

How these indicator used to stabilize the economy

Answer 1

When the economy is in recession (expansion), central bank lowers (raises) the interest rate to boost aggregate demand (lower inflation). Lower (higher) interest rate increases (decreases) investment, thus increasing (decreasing) aggregate demand, which boosts the economy (slows it down), stabilizing the economy. So interest rate is a pro-cyclical measure of economic condition.

During recession (recession), output is lower (higher), so firms hire less (more) labor which increase (decrease) unemployment rate. So this is a counter-cyclical measure of economic condition.

CPI is used to measure inflation rate. During recession (recession), aggregate demand is lower (higher), so price level/inflation rate (measured by % change in CPI) is lower (higher). So this is a pro-cyclical measure of economic condition.

Finally, during recession (recession), aggregate demand is lower (higher), so real GDP is lower (higher). So this is a pro-cyclical measure of economic condition. During recession (expansion), government implements expansionary (contractionary) fiscal policy, and central bank implements expansionary (contractionary) monetary policy to stabilize the economy.