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? If you do not believe any component will be affected, briefly explain why. i. You purchase a ticket on a FlyCheap Airlines to visit your niece. ii. FlyCheap Airlines purchases a new jetliner from Boeing. iii. FlyCheap Airlines purchases new seats to be installed on a jetliner it already owns. iv. FlyCheap Airlines purchases 200 million gallons of fuel. v. A French citizen purchases a ticket to fly on a FlyCheap flight from Paris to New York. vi. The city of Nashville agrees to spend funds to extend one of the runways so that FlyCheap will be able to land larger jets.

3.Use the table to answer the following questions.

 Year Real GDP (Billions of 2000 Dollars) 1993 \$7,113 1994 7,101 1995 7,337 1996 7,533 1997 7,836

i. Calculate the growth rate of real GDP for each year from 1994 to 1997. ii. Calculate the average annual growth rate of real GDP for the period from 1994 to 1997. iii. How does the average annual growth rate you calculated in (ii) above compare to the average growth rate the U.S. normally expects?

1. Calculate the growth rate of real GDP for each year from 1994 to 1997.

ii)Calculate the average annual growth rate of real GDP for the period from 1994 to 1997.

iii. How does the average annual growth rate you calculated in (ii) above compare to the   average growth rate the U.S. normally expects?

4.In an open economy, trade is allowed between countries. Assume a consumer purchases \$1,000 worth of furniture manufactured in China. Answer the following: a.Which component(s) of GDP are impacted by this purchase? b.Does GDP increase, decrease or stay the same? Briefly explain why. c.Does your answer change if the company in China is a U.S.-owned company? Why or why not?

1. Which component(s) of GDP are impacted by this purchase?
2. Does GDP increase, decrease or stay the same?  Briefly explain why.

1. Determine whether each of the following would cause a shift of the aggregate demand curve, a shift of the aggregate supply curve, neither, or both. Which curve shifts, and in which direction? What happens to aggregate output and the price level in each case?
a. The price level changes
i. Which curve shifts?
ii. Which direction does it shift?
iii. What happens to aggregate output?
iv. What happens to the price level?
b. Consumer confidence declines

i. Which curve shifts?
ii. Which direction does it shift?
iii. What happens to aggregate output?
iv. What happens to the price level?
c. The supply of resources increases
i. Which curve shifts?
ii. Which direction does it shift?
iii. What happens to aggregate output?
iv. What happens to the price level?
d. The wage rate increases
i. Which curve shifts?
ii. Which direction does it shift?
iii. What happens to aggregate output?
iv. What happens to the price level?
2. Determine whether the following statements are true or false.
i. Some people who are officially unemployed are not in the labor force.
ii. Some people in the labor force are not working.
iii. Everyone who is not unemployed is in the labor force.
iv. Some people who are not working are not unemployed.

3. Refer to the following data on the U.S. consumer price index and answer the questions below.
Year CPI Year CPI Year CPI Year CPI
1988 118.3 1993 144.5 1998 163.0 2003 184.0
1989 124.0 1994 148.2 1999 166.6 2004 188.9
1990 130.7 1995 152.4 2000 172.2 2005 195.3
1991 136.2 1996 156.9 2001 177.1 2006 201.8
1992 140.3 1997 160.5 2002 179.9

a. Compute the inflation rate for each year 1989-2006.

b. Which years were years of inflation?

c. In which years did deflation occur?

d. In which years did disinflation occur?

e. Was there hyperinflation in any year?

# Electronics

MT 217 Electronics is a midsized electronics manufacturer located in Melbourne, Florida. The company president is Sherry Jones. When it was founded over 70 years ago, the company originally repaired radios and other household appliances. Over the years, the company expanded into manufacturing and is now a reputable manufacturer of various electronic items. Doug Brown has been hired by the company’s finance department.
One of the major revenue-producing items manufactured by MT 217 is a personal digital assistant (PDA). MT 217 currently has one PDA model on the market, and sales have been excellent. The PDA is a unique item in that it comes in a variety of tropical colors and is preprogrammed to play Jimmy Buffett music. However, as with any electronic item, technology changes rapidly, and the current PDA has limited features in comparison with newer models. MT 217 developed a prototype for a new PDA that has all the features of the existing PDA but adds new features such as cell phone capability. The company has performed a marketing study to determine the expected sales figures for the new PDA.
MT 217 can manufacture the new PDA for \$200 each in variable costs. Fixed costs for the operation are estimated to run \$4.5 million per year. The estimated sales volume is 70,000, 80,000, 100,000, 85,000, and 75,000 per each year for the next five years, respectively. The unit price of the new PDA will be \$340. The necessary equipment can be purchased for \$16.5 million and will be depreciated on a 5 year straight-line schedule.
Net working capital investment for the PDAs will be \$6,000,000 this year. Of course NWC will be recovered at the projects end. MT 217 has a 35 percent corporate tax rate.
MT 217 ’s capital structure is 40% debt with an after-tax cost of 8% and 60% equity costing 16%,
Sherry has asked Doug to prepare a report that answers the following questions:
1. What is MT 217 ’s WACC, which will be used as the required rate of return for this project?
2. What is the IRR of the project?
3. What is the NPV of the project, based on the WACC (required rate of return)?
If you were Doug, how would you answer the questions?