Final Exam 2015 - FINAL EXAM ECO201 Principles of...

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12/21/15 FINAL EXAM: ECO201 Principles of Macroeconomics N. Aman 1. The FOMC is concerned about current and future inflation rates because inflation rates play a role in the entire economy – especially when we are talking about the oil business. If the expected rate of inflation matches the actual rate of inflation, no one gains and no one loses. However, if expectations are wrong, inflation will still redistribute income. Therefore, if the FOMC predicts one thing and are proven wrong, businesses and incomes will be affected. Zero inflation will boost the living standards from wages rising faster than prices, it will also boost to consumers comes from the outlook for interest rates. There’s a potential dark side to the fall in inflation, the risk is that it becomes a permanent feature of the economic landscape. The reason the majority of economists view February’s zero inflation as nonthreatening is because they think lower unemployment will put upward pressure on wage settlements. Higher pay deals will start to push up inflation at a time when last year’s drop in oil prices starts to unwind. However there are problems that would arise if the inflation rate fell to zero – an inflation rate of zero means no interest. If there is no interest than the government isn’t making any extra money therefore the economy isn’t necessarily benefiting. A small amount of inflation is always good for the economy. Economists view creeping inflation, and walking inflation as good signs of business expansion and growth in the economy. The reason behind this is that when there is a rise in prices, businesses start expanding their output, which will reduce unemployment 2A.

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