1. What is the difference between nominal GDP and real GDP? How are they calculated?

- Nominal GDP is the value of all final goods and services produced in a country in a given year, measured

at current prices. Real GDP is the value of all final goods and services produced in a country in a given year,

measured at constant prices of a base year. Nominal GDP is calculated by multiplying the quantities of final

goods and services by their current prices and adding them up. Real GDP is calculated by multiplying the

quantities of final goods and services by their base year prices and adding them up.

2. What is the difference between cyclical unemployment and structural unemployment? Give an example

of each.

- Cyclical unemployment is the unemployment that results from fluctuations in aggregate demand and

output in the economy. It is caused by recessions or downturns in the business cycle. Structural

unemployment is the unemployment that results from changes in the structure of the economy, such as

technological progress, globalization, or shifts in consumer preferences. It is caused by a mismatch between

the skills or location of workers and the demand for labor. An example of cyclical unemployment is a

worker who loses his job due to a decline in consumer spending during a recession. An example of

structural unemployment is a worker who loses his job due to automation or outsourcing.

3. What is the difference between fiscal policy and monetary policy? How do they affect aggregate demand

and output?

- Fiscal policy is the use of government spending and taxation to influence aggregate demand and output.

Monetary policy is the use of money supply and interest rates to influence aggregate demand and output.

Fiscal policy affects aggregate demand and output by changing the level of government purchases, transfers,

or taxes, which affect disposable income, consumption, investment, and net exports. Monetary policy affects

aggregate demand and output by changing the money supply, which affects interest rates, exchange rates,

asset prices, and expectations, which affect consumption, investment, and net exports.

4. What is the difference between inflation and deflation? What are their causes and consequences?

- Inflation is a sustained increase in the general level of prices in the economy. Deflation is a sustained

decrease in the general level of prices in the economy. Inflation can be caused by excess aggregate demand,

cost-push factors, or expansionary monetary policy. Deflation can be caused by insufficient aggregate

demand, supply-shock factors, or contractionary monetary policy. Inflation can have positive effects such as

stimulating economic activity, reducing real debt burdens, and increasing nominal incomes. Inflation can

also have negative effects such as eroding purchasing power, distorting relative prices, creating uncertainty,

and redistributing income and wealth. Deflation can have positive effects such as increasing purchasing

power, lowering relative prices, creating certainty, and redistributing income and wealth. Deflation can also

have negative effects such as depressing economic activity, increasing real debt burdens, and decreasing

nominal incomes.