Questions

1: Suppose all wages, salaries, welfare benefits, and other sources of income were indexed to inflation. Would inflation still be considered a problem? Why or why not?

2: Policy makers talk about the "capacity" of the economy to grow. What specifically is meant by the "capacity" of the economy? How might capacity be measured? In what ways is capacity limited by labor constraints and by capital constraints? What are the consequences if demand in the economy exceeds capacity? What signs would you look for?

3: A large multinational shipping company, MGC, Inc. has just decided to spend 10 million on new storage space in Munich, 45 million on new aircraft, and 5 million on additional acquisition of kerosene. In addition to these expenses, the company is producing 5 million parcels at a price of 5 per parcel. Now suppose that MGC plans to have a tenth of that production in inventory. Over time, the company's parcels have met with increasing demand, but the inventory has only increased by 1 million.

a. What is this firm's total planned investment?

b. How much did the firm actually invest? c. What is the difference between actual and planned investment? Should MGC produce more or fewer parcels? Why?