1. 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?

a. The price level changes

i. Which curve shifts?

ii. Which direction does it shift?

iii. What happens to aggregate output?

iv. What happens to the price level?

b. Consumer confidence declines

i. Which curve shifts?

ii. Which direction does it shift?

iii. What happens to aggregate output?

iv. What happens to the price level?

c. The supply of resources increases

i. Which curve shifts?

ii. Which direction does it shift?

iii. What happens to aggregate output?

iv. What happens to the price level?

d. The wage rate increases

i. Which curve shifts?

ii. Which direction does it shift?

iii. What happens to aggregate output?

iv. What happens to the price level?

2. Determine whether the following statements are true or false.

i. Some people who are officially unemployed are not in the labor force.

ii. Some people in the labor force are not working.

iii. Everyone who is not unemployed is in the labor force.

iv. Some people who are not working are not unemployed.

3. Refer to the following data on the U.S. consumer price index and answer the questions below.

Year   CPI                 Year   CPI                 Year   CPI                 Year   CPI

1988   118.3              1993   144.5              1998   163.0              2003   184.0

1989   124.0              1994   148.2              1999   166.6              2004   188.9

1990   130.7              1995   152.4              2000   172.2              2005   195.3

1991   136.2              1996   156.9              2001   177.1              2006   201.8

1992   140.3              1997   160.5              2002   179.9

a. Compute the inflation rate for each year 1989-2006.

b. Which years were years of inflation?  What do you expect to happen to real interest rates during this time period if nominal rates remain unchanged?

c. In which years did deflation occur?  What do you expect to happen to real interest rates during this time period if nominal rates remain unchanged?

d. In which years did disinflation occur?

4. What are some of the costs associated with anticipated inflation? Why do these differ from those associated with unanticipated inflation?