Inflation and Interest Rates

The subject of macro economics is intended to help us understand the movements of five variables:

• 1. GDP growth

• 2. Unemployment/employment

• 3. Inflation

• 4. Interest rates (short and long-term)

• 5. Exchange rate

GDP and employment have been discussed in the immediately preceding chapters. We now turn to the inflation and the interest rates. We will do the exchange rates and the external deficit later when we turn to long-run issues like the adequacy of savings to fund our retirements. If our focus were any other country than the United States, the exchange rates and the external deficit would be front and center, but, looking backward, there is very little volatility of the US economy that has come from our economic interrelations with other countries. In that regard, the future is quite likely to be different from the past. As I write these words at the end of 2006, a huge US external deficit that has persisted for almost a decade and an apparently over-valued dollar constitute the greatest threat to the stability of the US economy.