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inflation, unemployment, and the business cycle

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Explanation of the following two bullet points:

~Analyze the relationship among inflation, unemployment, and the business cycle
~Assess the impact of inflation, unemployment, and the business cycle

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Solution Summary

Economic Indicator Forecast of the Oil Industry is assessed.

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1. Inflation, unemployment, and the business cycle are very closely related. In a very simplistic way we can say that over the short-run there is an inverse relation between inflation and unemployment, that is, when inflation rises unemployment falls, and when unemployment rises inflation falls. We can also say that periods of low inflation - high unemployment are accompanied by a recession, and periods of high inflation - low unemployment are usually accompanied by economic booms. This can be shown using a simple aggregate demand - aggregate supply framework. In the attached graph the recessionary gap is a period of low inflation, high unemployment and falling output, while the inflationary gap is a period ...

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