1. Does anticipated inflation or unanticipated inflation discourage economic growth? Why? 2. Answer the following questions about nominal and real interest rates. a. What would be the real interest rate if the nominal interest rate were 14 percent and the inflation rate were 10 percent? If the nominal interest rate were 8 percent and the inflation rate were 1 percent? b. What would happen to the real interest rate if the nominal interest rate went from 9 percent to 15 percent when the inflation rate went from 3 percent to 10 percent? If the nominal interest rate went from 11 percent to 7 percent when the inflation rate went from 8 percent to 4 percent? 3. You borrow money at a fixed rate of interest to finance your college education. If the rate of inflation unexpectedly slows down between the time you take out the loan and the time you begin paying it back, is there a redistribution of income? Do you gain or lose? What if you already expected the inflation rate to slow at the time you took out the loan? Explain. 4. How does an adjustable rate mortgage agreement protect lenders against inflation? Who bears the inflation risk? 5. In July 2017, the Santa Monica Hotel Working Living Wage Rate was set a $15.66 and will increase every year in accordance with the Consumer Price Index (CPI). Predict the effect of such legislation on unemployment in the hotel and shopping industries in Santa Monica. What would you expect to happen to the unemployment rate in neighboring areas? 6. Calculate a price index for 2018, 2019, and 2020 using the following information about prices. Let the market basket consist of one pizza, two sodas, and three caffe lattes. Let the year 2018 be the base year (with an index value of 100).

Year	Price of a pizza	Price of a soda	Price of a caffe latte
2018	$9.00	$0.50	$2.00
2019	9.50	0.53	2.24
2020	10.00	0.65	2.90

How much inflation occurred between 2018 and 2019? Between 2018 and 2020? 7. Say that the bundle of goods purchased by a typical consumer in the base year consisted of 20 gallons of milk at a price of $1 per gallon and 15 loaves of bread at a price of $2 per loaf. What would the price index be in a year in which: a. milk cost $2 per gallon and bread cost $1 per loaf? b. milk cost $3 per gallon and bread cost $2 per loaf? c. milk cost $2 per gallon and bread cost $4 per loaf? 8. Indicate which of the following are true of the CPI and the GDP deflator:

	CPI	GDP deflator
Tends to overstate inflation
More volatile
Will reflect the cost of building an aircraft carrier domestically
Reflects the cost of imported consumer goods
Reflects prices charged in the underground economy

9. Answer the following questions about GDP. a. What is the definition of GDP? b. Why does GDP measure only the final value of goods and services? c. Why does GDP measure only the value of goods and services produced within a country? d. How does GDP treat the sales of used goods? e. How does GDP treat sales of corporate stock from one stockholder to another?

10. Which of the following are included in GDP calculations? a. Cleaning services performed by Molly Maid Corporation b. Lawn-mowing services performed by a neighborhood child c. Drugs sold illegally on a local street corner d. Prescription drugs manufactured in the U.S. and sold at a local pharmacy e. A rug woven by hand in Turkey f. Air pollution that diminishes the quality of the air you breathe g. Toxic-waste cleanup performed by a local company h. Car parts manufactured in the U.S. for a car assembled in Mexico i. A purchase of 1,000 shares of IBM stock j. Monthly Social Security payments received by a retiree

11. To which category of U.S. GDP expenditure does each of the following correspond? a. Department of Motor Vehicles services b. Automobiles exported to Europe c. A refrigerator d. A newly constructed four-bedroom house e. A restaurant meal f. Additions to inventory at a furniture store g. F-16 fighter jets built by a U.S. aerospace corporation and contracted for by the government h. A new steel mill (factory). 12. The expenditures on tires by the Ford Motor Company are not included directly in GDP statistics while consumer expenditures on replacement tires are included. Why? 13. Using any relevant information below, calculate GDP using the expenditure approach.

Inventory investment	$50 billion
Fixed investment	120 billion
Consumer durables	420 billion
Consumer nondurables	275 billion
Interest	140 billion
Indirect business taxes	45 billion
Government wages and salaries	300 billion
Government purchases of goods and services	110 billion
Imports	80 billion
Exports	40 billion
Profits	320 billion
Services	600 billion

14. Fill in the missing data for the following table (in billions):

Consumption	______
Consumption of durable goods	$1,200
Consumption of nondurable goods	$1,800
Consumption of services	$2,400
Investment	______
Fixed investment	$800
Inventory investment	$600
Government expenditures on goods and services	$1,600
Government transfer payments	$500
Exports	$500
Imports	$650
Net exports	______
GDP	______

15. Answer these questions about durable goods and GDP: a. Do consumer nondurable or durable goods tend to change more over the course of a business cycle? b. How are consumer durables like investments? c. Can either fixed investment or inventory be negative in a given year? d. Why isn't all of government spending part of GDP? 16 . Nominal GDP in Nowhereland in 2018 and 2019 is as follows:

NGDP 2018	GDP 2019
$4 trillion	4.8 trillion

Can you say that the production of goods and services in Nowhereland has increased between 2018 and 2019? Why or why not?

17. Answer these questions about GDP. a. Could next year's real GDP exceed next year's nominal GDP? b. Could real GDP grow at the same time that real GDP per capita falls? c. Could people's real consumption possibilities expand at the same time that real GDP per capita falls? d. How does changing amounts of leisure complicate comparisons of real well-being over time? 18. Fill in the missing data for the following table:

Year	GDP deflator	Nominal GDP (in billions)	Real GDP (in billions)
2017	90.9	$7,000
2018	100		$8,000
2019		$10,000	$8,000
2020	140	$14,000
2021	150		$12,000