1. 1. What is the difference between a nominal and a real variable?
   2. Suppose inflation is 1%. Would you prefer that your economy have a nominal GDP growth of 2% or a real GDP growth of 2%?Explain.

1. Which of the following transactions will be included in GDP for the US? Explain.
   1. Coca Cola builds a new bottling plant in the US.
   2. Delta sells one of its existing planes to Korean Air.
   3. An American buys a bottle of French Wine.
   4. An American buys a share of Disney stock.
   5. A book publisher produces too many copies of a new book. Since the books don't sell this year, the publisher adds the surplus to inventories.

1. 1. Does inflation always benefit borrowers at the expense of lenders? Explain.
   2. Will a firm be able to agree on a wage rate for their employees next year if the employer expects that inflation next year will be 4% while the employees expect that it will be 2%? Explain.

1. When the Federal Reserve fears that inflation is imminent, the Fed tends to push up interest rates which leads to higher unemployment rates. Does the Fed not care that jobs are lost? Explain.

1. 1. What is the multiplier?
   2. Why is the multiplier likely to be greater than 1? Explain. (Do not just rely on formula).

1. How is it possible that the aggregate supply curve can be upward sloping in the short run and be vertical in the long run? Explain.

1. Commentators on the US economy feel the US economy fell into a recession in 2001 and then proceeded into a slow-growth recovery due to a decline in investment.
   1. Explain how a change in investment greatly impacts GDP, causing a nationwide slump.Recall that investment is "small" relative to the whole economy.
   2. Illustrate your reasoning using our AD/AD model.
   3. How did low interest rates combined with increased government defense and homeland security spending alter the US economic outlook? Explain using our AD/AS model.

1. 1. What is the process by which an inflationary gap closes itself? Explain.