Question

40. Assuming there is expected to be inflation over the coming year, will a 1-year TIPS (Treasury inflation protected security) offer a higher or lower interest rate than a comparable non-TIPS Treasury security?   
     
          Higher
          Lower
          Rates will be the same



41. What problems are caused by even a moderate level of inflation? (check all that apply)
     
          Unexpected redistribution of income, and the appearance of unfairness
          Errors in investment and savings decisions
          Expenditures of real resources to predict and adjust to inflation
          Money loses its value, and people turn to barter instead



42. How does the CPI compare to a true cost-of-living index?   
     
          The CPI has a downward bias
          The CPI has an upward bias
          The CPI is a true cost-of-living index
          The CPI varies from a true cost-of-living index in unpredictable ways



43. Which of the following statements about potential GDP are NOT true? (check all that apply)
     
          It is achieved only at the peak of the business cycle
          It is impossible to precisely measure
          It is somewhat inside the production possibilities curve
          It will increase when the prices of resources go down
          There is no cyclical unemployment
          Uemployment equals the natural rate



44. When aggregate demand and aggregate supply intersect to the left of potential GDP, we say that the economy is experiencing ____ .   
     
          A recessionary GDP gap
          An inflationary GDP gap
          A stable long-run equilibrium position
          Rapid inflation
          Falling potential GDP



45. If the economy is operating well below potential GDP, what will be the effect of an increase in aggregate demand?   
     
          Real GDP will fall, and the price level will fall
          Real GDP will rise, and the price level will change very little
          Real GDP will rise, and the price level will rise significantly
          It is impossible to predict what will happen to real GDP, but the price level will fall
          It is impossible to predict what will happen to the price level, but real GDP will fall

Answer 1

40 ans) lower

Explanation : TIPS pay lower interest rates than other non TIPS security to protect inflation.As inflation increases interest payments increases . They do not have adjustment of inflation.If taxes of investors are increased coupon payments are increased.TIPS utility holding decreases.

41 ans ) a,b and d

Explanation: Inflation leads to redistribion of income .which may lead to recession also in the society.Interest rates are low if inflation is high.It causes a fall in value of money which may lead to fall in real wages.Inflation reduce the value of savings which may lead to investment errors.

42) d ) the CPI varies from true cost of living index in unpredictable ways

CPI measures change in prices of goods.,For measuring quality improvements CPI has which leads to unmeasurable quality change.The average change in prices is measure of CPI.

43) a,b,d,e,f

potential GDP occurs in expansion business cycle.It is difficult to measur potential GDP. GDP increases if price level is decreased.cyclical unemployment is zero with potential GDP.The actual unemployment rate is equal to natural rate in potential GDP

44) d) and a)

economy is experiencing inflation whendemand and supply intersect to the left of potential GDP.A recessionary gap in GDP occurs due to this shift

45) b)  

Real GDP rises and there is change in price level if economy is operating below potential GDP.Change in potential of economy is affected by GDP which causes rise in GDP and price of goods to drop.