4

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4

2
a) False
b) True
c) False – CPI is an INDEX – its level means nothing but its rate of change matters.
d) Uncertain – which is better depends on what we are trying to measure – inflation
faced by consumers or by the economy as a whole.
e) False. The Phillips curve is a relation between the change in inflation and the
level of unemployment.

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3

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a) C increases by 5000, so does GDP
b) I (or G) increases by 20k, NE decreases by 20k, GDP unchanged.
c) GDP increases by 500 mi, 450 C/I/G depending on usage, and 50 inventory
d) It’s in the GDP 5-year ago as inventory investment. For last year, C increases by
8000, inventory investment decreases by 8000, GDP unchanged.

NOTE: IM is NOT in the calculation of GDP! So why people say increasing IM

reduces GDP? Reduces demand for domestic goods!
X is in the calculation of GDP!

Note 2: last question, what about price change over time? Answer: this is why we
should only care about REAL GDP, not nominal GDP!

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6
e

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2

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1)

Note: if we start from a balanced budget, good thing is: we can increase G and T by
the same amount to remain a balanced budget and at the same time boost up output
(but not by too much though).

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a) True
b) False < 1
c) True
d) False: demand = output
e) False: multiplier effect
f) False: increase in output

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