Part 1: The Current State of the Economy and Unemployment
Imagine a scenario where there is a decline in aggregate demand. Identify which part of the business cycle is part of a decline in aggregate demand. Gross Domestic Product (GDP) measures the amount of new production. A change in the amount of new production affects employment. Describe what would happen to GDP, the unemployment rate and the inflation rate if there is a decline in aggregate demand.
Part 2: Who Benefits and Who Loses from Inflation?
Inflation is an important policy issue because it causes a redistribution of income and wealth, and discourages saving and investment. Discuss how inflation affects borrowers and lenders, asset prices, and households on fixed incomes.