Macroeconomics in a nutshell

Or Iceland, anyway…

The following graphic from The Economist this week gives an excellent opportunity to link the concepts of growth, inflation, unemployment and the current account.

Starter questions for classes to revise some basic theory before the Easter break:

(a) Explain why strong growth in 2004-5 feeds into higher inflation (note the time lag) and a growing current account deficit?

(b) Or are there other causal factors at play?

(c) Why does unemployment appear relatively unresponsive to changes in growth?

Extension questions for the more ambitious:

(d) What factors allowed OECD countries to enjoy low-inflation growth and falling unemployment over the data range shown?

(e) Why would the current account position of all OECD countries be unhelpful? (Note it is the only graph where this comparison is not shown).