Final answer:
Inflation and interest rates fall under economic forces in the external business environment. Upward and downward changes in GDP are known as business cycles, influenced by shifts in aggregate supply and demand, potentially leading to inflation, which governments address through fiscal policy.
Step-by-step explanation:
Inflation and interest rates are closely associated with economic forces within the external business environment. Inflation is particularly problematic as it can have substantial long-term costs for businesses by shifting their focus away from real productivity gains. Smaller economies might experience more volatile inflation due to their susceptibility to international movements of capital and goods, causing disruptions in their economic stability.
Upward and downward changes in aggregate economic activity, as measured by GDP, are called business cycles. These cycles are the result of shifts in aggregate supply and demand. For instance, a period of substantial investment, as observed in the U.S. economy during the late 1990s, can lead to economic growth. However, if aggregate demand accelerates beyond the rate of increase in aggregate supply, it can lead to inflation. These cycles of economic expansion and recession can prompt governments to utilize fiscal policy to attempt to stabilize the economy.