Question

What are the costs associated with large volatility in GDP?

	bouts of high inflation and high unemployment rate
	bouts of high GDP growth and low inflation rate
	bouts of high interest rates and high national debt
	bouts of low taxes and high government expenditures

Answer 1

Costs associated with large volatility in GDP are bouts of high GDP for a few quarters and low inflation rate as when the economy slows down, because of low demand inflation also declines in short term, it picks up ultimately when shortages arise. Thus B is the answer.

High unemployment rate stays for a longer duration and is not short term, as companies won't immediately lay off staff if GDP declines for one quarter. Same with high inflation, instead there will be low inflation rate as there will be less demand for goods when there is a slowdown.

High interest rates are short term if they are controlled by the monetary policy but high national debt is not on short term basis, it goes on increasing.

High government expenditures are for a longer duration as it takes time to circulate in the economy. Also lower taxes continue for a longer duration as short term fluctuations don't impact company and individual earnings to a certain extent.