1. Why does inflation make nominal GDP a poor measure of the increase in total production?

2. Which component of GDP will be affected by each of the following transactions involving Fly Cheap Airlines? If you do not believe any component will be affected, briefly explain why.

i. Calculate the growth rate of real GDP for each year from 1994 to 1997.

ii. Calculate the average annual growth rate of real GDP for the period from 1994 to 1997.

iii. How does the average annual growth rate you calculated in (ii) above compare to the average growth rate the U.S. normally expects?

3. In an open economy, trade is allowed between countries. Assume a consumer purchases $1,000 worth of furniture manufactured in China. Answer the following:

a. Which component(s) of GDP are impacted by this purchase?

b. Does GDP increase, decrease or stay the same? Briefly explain why.

c. Does your answer change if the company in China is a U.S.-owned company? Why or why not?

4. Determine whether each of the following would cause a shift of the aggregate demand curve, a shift of the aggregate supply curve, neither, or both. Which curve shifts, and in which direction? What happens to aggregate output and the price level in each case?