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Inflation, Unemployment, Interest/Exchange Rates

The topics of macroeconomics - inflation, unemployment, interest rates, and exchange rates - are the subject of newspaper headlines and television stories every day. In your own words, discuss how these concepts relate to each other.

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Please see the attachment for a fully formatted explanation (including graphs).

UNDERSTANDING: INFLATION, UNEMPLOYMENT, INTEREST RATES, AND EXCHANGE RATES.

All these topics are particularly important to macroeconomics. These concepts are especially important in the context of Aggregate demand and aggregate supply model (i.e. the AD-AS model of macro economics).

(see attachment for graph)

It is probably best to begin with inflation and unemployment as they are often presented as two sides of the same coin. When the economy is growing (AD is shifting to the right) unemployment tends to fall, especially if the economy is far below full employment output. At the same time, the more the economy grows the more pressure there is on prices, which leads to inflation once the economy approaches full employment output. So inflation and unemployment tend to be inversely related. ...

Solution Summary

The following contains a detailed discussion of macroeconomic concepts including inflation, unemployment, interest rates, and exchange rates, as well as how they're related to each other.

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