GDP & CPI Review

1. Gross Domestic Product measures:

• a.the total income in the economy, but not the total expenditure on the economy's output.

• b.the total expenditure on the economy's output, but not the total income in the economy.

• c.both the total income in the economy and the total expenditure on the economy's output.

• d.neither the total income in the economy nor the total expenditure on the economy's output.

2. Assume households purchase all greeting cards. In calculating GDP, the government will include the value:

• a.of all the paper as well as all the greeting cards produced in the economy.

• b.of all the greeting cards but of none of the paper.

• c.of all of the greeting cards and any paper that is added to inventory.

• d.of some of the greeting cards and all of the paper.

3. For the purposes of national accounting, 'Investment' can be defined as:

• a.depositing money in Certificates of Deposits (CDs) or Money Market accounts.

• b.purchases of stocks and bonds.• c.spending on capital equipment, inventories,

and structures.• d.putting money away in a 401K pensions fund

system.

4. For the purpose of national accounting, 'Consumption' refers to the:

• a.spending done by households on everything except house purchases.

• b.wear and tear through the normal use of machinery and equipment.

• c.way Tuberculosis used to be called in the 19th century, at the time when economists were figuring out national accounting standards.

• d.wear and tear of highways and infrastructure through normal use.

5.'Net Exports' are the nation's:

• a.exports minus imports of goods only.• b.exports minus imports of goods and

services.• c.imports minus exports of goods only.• d.imports minus exports of goods and

services.

6.The 'Government Purchases' category of GDP includes all government spending on goods and services:

• a.including transfer payments.• b.except transfer payments.• c.excluding local government spending.• d.excluding state government spending

7.If Nominal GDP increased from $1.0 trillion in 2000 to $1.2 in 2005, we:

• a.can say that output increased by 20% in the economy through that period.

• b.can say that prices increased by 20% in the economy through that period.

• c.don't have enough information from this to determine how much output actually increased in the economy.

• d.can say that output increased by 20% in the economy compared to the base year.

8.If the Nominal GDP is $1.6 trillion, and the Real GDP is $1.0 trillion, the GDP deflator is:

• a.160• b.162.5• c.164• d.137.5

9. An economy produces cheese and fish. In 2005, 20 units of cheese are sold at $5 each, and 8 units of fish at $50 each. In

2004, the base year, the price of cheese was $10/unit and fish $75/unit. For 2005,

• a. nominal GDP is $800, real GDP is $500 and GDP deflator is 160

• b. nominal GDP is $500, real GDP is $800 and GDP deflator is 160

• c. nominal GDP is $500, real GDP is $800 and the GDP deflator is 62.5

• d. nominal GDP is $800, real GDP is $500 and the GDP deflator is 62.5

10.To fix the basket for the CPI, the Bureau of Labor Statistics:

• a.sets up a committee that decides, based on its own experience, what items will be in the basket.

• b.reviews the things produced in our economy and selects some of these to include in the basket.

• c.reviews national expenditure patterns in the economy, and selects a basket that reflects these patterns.

• d.surveys a large number of consumers to find what they buy, then fixes a basket based on its findings.

11.Suppose the cost of the basket in 2005 was $3,300, and the cost of the basket in the base

year was $3,000. Find the CPI for 2005.

• a.100• b.909• c.110• d.115

12.Suppose the CPI at the end of 2004 was 150 and the CPI at the end of 2005 was 165. Calculate the inflation rate for 2005.

• a.15%• b.10%• c.65%• d.20%

13.Suppose the cost of the basket in 2005 was $4,200 and the cost of the basket in the base year was $4,000.

• a.The CPI for 2005 is 105.• b.The inflation rate for 2005 was 5%.• c.The inflation rate for 2004 was 5%.• d.We cannot discern anything from the data

provided.

14.Suppose the cost of the basket at the end of 2002 was $5,500, and at the end of 2003 it was $5,775. If the cost of the basket in the base year

was $1,000, find the inflation rate for 2003.

• a.27.5%• b.25.0%• c.10.0%• d.5.0%

15.According to the surveys of the Bureau of Labor Statistics, the biggest spending item of households is:

• a.food and beverages.• b.housing.• c.transportation.• d.medical care.

16.All of the following cause the CPI to measure more inflation than there really is, EXCEPT:

• a.substitution bias.• b.introduction of new goods.• c.unmeasured quality change.• d.the steady increase in the number of

consumers.

17.Suppose the price of fish increases, so households now buy less fish and more chicken. This will cause the:

• a.CPI to measure more inflation than there really is.

• b.CPI to measure less inflation than there really is.

• c.PPI to measure less inflation than there really is.

• d.GDP deflator to measure less inflation than there really is.

18.Which of the following statements is true?

• a.The GDP deflator considers only a basket of goods, while the CPI considers everything produced.

• b.The GDP deflator includes imports, while the CPI does not.

• c.The GDP deflator uses a fixed bundle of goods, while the CPI uses a changing bundle of goods.

• d.The GDP deflator measures the inflation of everything produced in the nation, while the CPI measures the inflation of the goods typically bought by households.

19.If John earned $30,000 in 1990, how much would that be worth in today's dollars?

Suppose the CPI was 160 in 1990 and is 220 today.

• a.$21,818• b.$50,000• c.$41,250• d.$11,250

Tie Breakers

Answer the following questions concisely

Short Response #1

• Explain whether this statement is true, false or uncertain: “To ignore the production of intermediate goods when measuring the total product of a country means ignoring the work, the efforts and the incomes of millions of citizens. This is a mistake and can be rectified only by including intermediate goods production in GDP figures.”– Idea behind your response: intermediate goods are worked

into the final price– To count intermediate goods would be to double count

them

Short Response #2

• Explain the statement “A man diminishes GDP by marrying his cook.”– The cook is paid for a service provided– This goes into GDP as consumption– By getting married, the “cook” is now doing work

around her own house, excluded from GDP