Which economic factor can reduce overall economic activity?

High inflation rates can significantly reduce overall economic activity. When inflation rises sharply, it erodes purchasing power, meaning consumers can buy less with the same amount of money. This can lead to decreased consumer spending, which is a major component of economic activity. As prices increase, interest rates may also rise as central banks attempt to combat inflation, further discouraging both consumer and business investment. This combination of diminished purchasing power and higher borrowing costs can create a cycle of reduced demand, slowing economic growth and potentially leading to a recession.

In contrast, low unemployment typically correlates with strong economic activity because it indicates more people are working and earning wages, thus having greater spending capacity. Stable interest rates promote investment by providing predictability for businesses and consumers, while consistent economic growth suggests that the economy is expanding, which usually fosters further economic activity.