Short paragraphs

1.Why does inflation make nominal GDP a poor measure of the increase in total production?

2.Which component of GDP will be affected by each of the following transactions involving FlyCheap Airlines? Briefly explain.

Hint on the components of the GDP: GDP = C + I + G + Nx

a. You purchase a ticket on a FlyCheap Airlines to visit your niece.

b. FlyCheap Airlines purchases a new jetliner from Boeing.

c. FlyCheap Airlines purchases new seats to be installed on a jetliner it already owns.

d. FlyCheap Airlines purchases 200 million gallons of fuel.

e. The city of Nashville agrees to spend funds to extend one of the runways so that FlyCheap will be able to land larger jets.

Use Table for Folowing

Year Real GDP (Billions of 2000 Dollars)

1993 $7,113

1994 7,101

1995 7,337

1996 7,533

1997 7,836

1. Calculate the growth rate of real GDP for each year from 1993-1994, 1994-1995, 1995-1996, and 1996-1997. Show your work.
2. Calculate the average annual growth rate of real GDP for the period from 1993 to 1997. Hint: Compute the average for the growth you calculated under (i) above.
3. How does the average annual growth rate you calculated in (ii) above compare to the average GDP growth rate the U.S. normally expects?