Problem 1:

1. Explain why an economy's income must equal its expenditure.

2. Why is it desirable for a country to have a large GDP? Give an example of something that would raise GDP and yet be undesirable.

Problem 2:

1. What components of GDP (if any) would each of the following transactions affect? Explain.

a. A family buys a new refrigerator.

b. Aunt Jane buys a new house.

c. Ford sells a Mustang from its inventory.

d. You buy a pizza.

e. California repaves Highway 101.

f. Your parents buy a bottle of French wine.

g. Honda expands its factory in Marysville, Ohio.

Problem 3:

1. Which do you think has a greater effect on the consumer price index: a 10 percent increase in the price of chicken or a 10 percent increase in the priceof caviar? Why?

2.  Explain the meaning of nominal interest rate and real interest rate. How are they related?

Problem 4:

Suppose that a borrower and a lender agree on the nominal interest rate to be paid on a loan. Then inflation turns out to be higher than they both expected.

a. Is the real interest rate on this loan higher or lower than expected?

b. Does the lender gain or lose from this unexpectedly high inflation? Does the borrower gain or lose?

c. Inflation during the 1970s was much higher than most people had expected when the decade began.

How did this affect homeowners who obtained fixed-rate mortgages during the 1960s? How did it affect the banks that lent the money?

Problem 5:

1. What does the level of a nation's GDP measure? What does the growth rate of GDP measure? Would you rather live in a nation with a high level of GDP and a low growth rate or in a nation with a low level of GDP and a high growth rate?

Problem 6:

1. Most countries, including the United States, import substantial amounts of goods and services from other countries. Yet the chapter says that a nation can enjoy a high standard of living only if it can produce a large quantity of goods and services itself. Can you reconcile these two facts?