1a. What is the difference between a nominal and a real variable?

1b. Suppose inflation is 1%. Would you rather your economy had nominal GDP growth of 2% or real GDP growth of 2%? Explain.

2. Which of the following transactions will be included in GDP for the US? Explain.

1. Coca-Cola builds a new bottling plant in the US.
2. Delta sells one of its existing planes to Korean Air.
3. An American buys a bottle of French Wine.
4. An American buys a share of Disney stock.
5. A book publisher produces too many copies of a new book. The books don't sell this year so the publisher adds the surplus to inventories.

3a. Does inflation always benefit borrowers at the expense of lenders? Explain.

3b. Will a firm be able to agree on a wage rate for their employees next year if the employer expects that inflation next year will be 4% while the employees expect that it will be 2%? Explain.

4. When the Federal Reserve fears that inflation is imminent, the Fed tends to push up interest rates which leads to higher unemployment rates. Does the Fed not care that jobs are lost? Explain.

5a. What is the multiplier?

5b. Why is the multiplier likely to be greater than 1? Explain. (Do not just rely on formula).

6. How is it possible that the aggregate supply curve can be upward sloping in the short run and be vertical in the long run? Explain.

7. Commentators on the US economy feel the US economy fell into a recession in 2001 and then proceeded into a slow-growth recovery due to a decline in investment.

1. Explain how a change in investment can have a big impact on GDP causing a nationwide slump. Recall that investment is "small" relative to the whole economy.
2. Illustrate your reasoning using our AD/AD model.
3. How did low interest rates combined with increased government spending on defense and homeland security alter the US economic outlook? Explain using our AD/AS model.

8a. What is the process by which an inflationary gap closes itself? Explain.

8b. How does the speed of this adjustment process inform the decisions made at the Federal Reserve? Explain.

9. The public tends to view trade deficits with alarm while macroeconomists claim that trade deficits can actually be helpful for an economy. Explain the macroeconomists' position on trade deficits.

10. Some economists claim that budget deficits often spawn an evil twin, a trade deficit.

a. Explain how a budget deficit might lead to an appreciating currently and a trade deficit. (Use our foreign exchange market diagram in this answer)

b. Explain how the introduction of the foreign sector makes the fiscal policy tool of the budget deficit less effective in stimulating the open, as compared to the closed, economy. (Use our AD/AS model diagram in this answer).

c. According to economists, what is (are) the true cost(s) of a budget deficit? Does the "opening up" of an economy change the type of costs a deficit produces? (Use our investment/savings model to answer this question).

11a. Draw a typical Phillips Curve.

11b. Explain why some economists claimed that the Phillips Curve represented a menu of social choice.

11c. Do economists still believe in the menu view of the Phillips Curve? What view has replaced the original view?

11d. Given the new view of the Phillips Curve, why do economists believe that a "credible" inflation reducing policy will be less costly than an "incredible" inflation reducing policy. (Using a Phillips Curve diagram in your answer.)

12. Suppose an economy has overbuilt and suffers from excess capacity. A recession ensues due to firms cutting back on expenditures. Is deficient demand more easily remedied by monetary or fiscal policy for this economy? Explain