Macropoland, an importer of natural gas and oil, has a natural unemployment rate of around 4.5% and a long-term average inflation rate of around 2%. However, there are two specific periods where these rates have fallen below their potential. During the period 1973-1974, the country experienced an inflation rate of around 15% and an unemployment rate of almost 13%. And now they have an unemployment rate of 9% and an inflation rate of 0.4%. As a new economic advisor, it is my duty to explain these two periods. First, I will discuss the period between 1973 and 1974. Since unemployment and inflation rates are higher than normal, we can assume that the aggregate demand curve is downward sloping. When the aggregate demand curve is downward sloping, we know that demand in the economy has slowed. When economic demand slows, companies have no choice but to raise prices and lay off workers to preserve profits. When employers across the country respond in the same way to reduced demand, unemployment increases. There are several reasons why the aggregate demand curve slopes downward. The first is the wealth effect. If prices are higher, the money you have is worth less. It is possible to put it into perspective by considering it at the microeconomic level. For example, if you have a $20 bill and the price of a ham sandwich goes from $5 to $10, you can only buy two sandwiches instead of four. This shows that a decline in wealth leads to a decline in consumption, and a decline in consumption leads to a decline in production, meaning fewer workers will be needed, leading to layoffs. The second reason is the interest rate effect. As prices rise, so do interest rates. Higher interest rates put the brakes on thing... middle of paper ... its profit. This causes an increase in unemployment. Deflation also affects loans. In deflation, borrowers repay their loans in dollars that are worth less than expected. So, a person's income may decrease, but their loan amount remains the same, making it more difficult to repay. In conclusion, regardless of the current economic situation in Macropoland, it is fair to say that it is all part of the economic cycle. The business cycle has three parts: the peak, the trough, and the peak. The peak is the date the recession begins. In the case of the Macropolis, the peak would be in early 1973, the trough would be somewhere between 1973 and 1974, and then its peak again in 1974. In the second scenario, the Macropolis would either be at its trough, where it is about to rise again. due to its low inflation rate, or it is expanding, heading towards its next peak.