Exercise 1:

a) Use the equation for the circular flow of the real economy to give an overview of the demand side components and tie players in the macroeconomy to each of these components.

b) How can you use the equation for the circular flow to discuss the effect of fiscal policy and monetary policy?

c) As a follow up from part b), discuss the statement: "During the pandemic, expansionary monetary policy did not boost the economy as expected".

d) For the following two cases, use the equation for the real interest rate to give an example for each case using numbers for real interest rate, nominal interest rate and inflation. Explain each number you select.

Case 1: A situation where it is a real cost if you borrow money.

Case 2: A situation where it is a real gain if you borrow money.

3 e) Let GDP (Gross Domestic Product) as a simplification, only be one good, apples. Find the GDP deflator if nominal GDP = 100 and real GDP = 20 and explain these three numbers using apples as an example.

f) As a follow up from part e), suppose the nominal GDP growth rate = 7 % and the GDP deflator inflation = 3%. Find the real GDP growth rate and explain the three numbers using apples as an example.