Unemployment and Inflation: Their role in economy and their relationship

Macro-economics

Most of the nations of the world today have a free economy. A free economy is one which operates automatically. However, this automatic regulation of the economy is actually achieved by the price level. Price level can be defined as the weighted average of all the final goods and services produced in an economy. A healthy economy is characterized by a stable price level. Fluctuations in price level affect the economy’s real domestic output (RDO), unemployment and its growth. A high increase in price level can bring down a nation's output by affecting the aggregate demand. It will lower total spending and increase the unemployment level. Similarly a decrease in price level will increase the real income of the masses, investment will increase and unemployment will fall. This decrease and increase in price level along with the fluctuations in unemployment, interest rates and output forms the business cycle that characterizes all market economies.

The BUSINESS CYCL...