I.

1. The Consumer Price Index is subject to the substitution bias and the quality/new goods bias. Are the Producer Price Index and the GDP Deflator also subject to these biases? Why or why not?

2. If inflation rises unexpectedly by 5%, would a state government that had recently borrowed money to pay for a new highway benefit or lose?

3. How should an increase in inflation affect the interest rate on an adjustable-rate mortgage?

4. How do economists use a basket of goods and services to measure the price level?

5. Why do economists use index numbers to measure the price level rather than the dollar value of goods?

6. If foreign investors buy more U.S. stocks and bonds, how would that show up in the current account balance?

7. If the trade deficit of the United States increases, how is the current account balance affected?

8. Explain the relationship between a current account deficit or surplus and the flow of funds.

9. If a country is running a government budget surplus, why is (T - G) on the left side of the saving-investment identity?

10. What determines the size of a country's trade deficit?

II.

1. Describe the mechanism by which supply creates its own demand.

2. Describe the mechanism by which demand creates its own supply.

3. The short run aggregate supply curve was constructed assuming that as the price of outputs increases, the price of inputs stays the same. How would an increase in the prices of important inputs, like energy, affect aggregate supply?

4. In the AD/AS model, what prevents the economy from achieving equilibrium at potential output?

5. How would a decrease in energy prices affect the Phillips curve?

6. Does Keynesian economics require government to set controls on prices, wages, or interest rates?

7. List three practical problems with the Keynesian perspective.

8. Name some economic events not related to government policy that could cause aggregate demand to shift.

9. Name some government policies that could cause aggregate demand to shift.

10. From a Keynesian point of view, which is more likely to cause a recession: aggregate demand or aggregate supply, and why?