Comment on GDP as a Measure of Welfare • How do economists define output, the unemployment rate, and the inflation rate, and why do economists care about these variables? • What factors affect output in the short run, the medium run, and long run? Why does this matter? • A1) Briefly explain why the decline in housing prices led to a major financial crisis. A2) Explain how the financial crisis turned into a major economic crisis.

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Inflation and Purchasing Power Theory

In economic terms, Inflation refers to the increase in the costs of various commodities which are used in daily lifestyle like food, clothes, transport, etc. over a specific time. It may lead to a fall in the purchasing power of the people and also affects the exchange rate of the currency because of the price increase. As the purchasing power falls the unit of the currency in the economy falls. When the prices of the commodities are decreased, then the purchasing power of the consumers will rise, then it will lead to deflation and changes the currency of the base economy to that of the foreign economy which will lead to change in exchange rates.