Q: In the country of Bananaland, only bananas and sunscreen are produced. The base year is 2024. In 2023, 100 bananas are sold at $$2 each and 60 bottles of sunscreen at 5 $$each. In 2024, 125 bananas are sold at $$4 each and 75 bottles of sunscreen at 6 $$each. What is the nominal GDP in 2024?

$$(125 \times 4) + (75 \times 6) = 500 + 450 = 950$$

Q: Suppose the price of a tennis ball rises from $$2 to 4$$, the price of a golf ball rises from $$4 to 6$$, and the price of Gatorade rises from $$1 to 2. $$What is the percentage change in the price of a tennis ball?

$$\frac{4-2}{2} \times 100\% = 100\%$$

Q: If the Consumer Price Index (CPI) was 200 in 2023 and 220 in 2024, what was the inflation rate between 2023 and 2024?

$$\frac{220-200}{200} \times 100\% = 10\%$$

Q: If your nominal monthly wage is $3,000 in 2024 and the CPI in 2024 is 200, but the expected CPI in 2025 is 220, what must your nominal wage be in 2025 to keep your real wage constant?

$$3,000 \times \frac{220}{200} = 3$$,300$

Q: Suppose a small nation produces only karaoke machines and CDs. In 2023, 15 karaoke machines are sold at $$50 each and 60 CDs at 12 $$each. In 2024, 20 karaoke machines are sold at $$75 each and 80 CDs at 18 $$each. Using 2023 as the base year, what is the real GDP in 2024?

$$(20 \times 50) + (80 \times 12) = 1,000 + 960 = 1,960$$

Question 1

Which of the following best defines Gross Domestic Product (GDP)?

Accepted Answer

The total value of all final goods and services produced within a country's borders in a given period, measured at current market prices.

Question 2

In the country of Bananaland, only bananas and sunscreen are produced. The base year is 2024. In 2023, 100 bananas are sold at $$2 each and 60 bottles of sunscreen at 5 $$each. In 2024, 125 bananas are sold at $$4 each and 75 bottles of sunscreen at 6 $$each. What is the nominal GDP in 2024?

Accepted Answer

$$(125 	imes 4) + (75 	imes 6) = 500 + 450 = 950$$

Question 3

Which of the following transactions would be included in the 'Government Purchases' component of GDP?

Accepted Answer

Boeing sells an airplane to the Air Force.

Question 4

Suppose a farmer grows wheat, sells it to a miller for $$1.00, the miller sells flour to a baker for 3.00$$, and the baker sells bread to an engineer for $6.00. What is the value added by the baker?

Accepted Answer

$$6.00 - 3.00$$ = $$3.00$$

Question 5

If the GDP per capita in the United States is $$75,180 and in India is 2$$,466, which of the following is a valid reason why the standard of living difference may be overstated by this ratio?

Accepted Answer

Differences in cost of living and purchasing power parity are not accounted for.

Question 6

Suppose the price of a tennis ball rises from $$2 to 4$$, the price of a golf ball rises from $$4 to 6$$, and the price of Gatorade rises from $$1 to 2. $$What is the percentage change in the price of a tennis ball?

Accepted Answer

$$\frac{4-2}{2} 	imes 100\% = 100\%$$

Question 7

If the Consumer Price Index (CPI) was 200 in 2023 and 220 in 2024, what was the inflation rate between 2023 and 2024?

Accepted Answer

$$\frac{220-200}{200} 	imes 100\% = 10\%$$

Question 8

Which of the following best explains why the chain-weighted measure of real GDP is often preferred over the traditional measure?

Accepted Answer

It better accounts for changes in relative prices and the composition of output over time.

Question 9

If your nominal monthly wage is $3,000 in 2024 and the CPI in 2024 is 200, but the expected CPI in 2025 is 220, what must your nominal wage be in 2025 to keep your real wage constant?

Accepted Answer

$$3,000 	imes \frac{220}{200} = 3$$,300$

Question 10

Which of the following is NOT a difference between the Consumer Price Index (CPI) and the GDP deflator?

Accepted Answer

The GDP deflator includes prices of used goods, while the CPI does not.

Question 11

Suppose a small nation produces only karaoke machines and CDs. In 2023, 15 karaoke machines are sold at $$50 each and 60 CDs at 12 $$each. In 2024, 20 karaoke machines are sold at $$75 each and 80 CDs at 18 $$each. Using 2023 as the base year, what is the real GDP in 2024?

Accepted Answer

$$(20 	imes 50) + (80 	imes 12) = 1,000 + 960 = 1,960$$

Question 12

Why does the Consumer Expenditure Survey matter for the calculation of the CPI?

Accepted Answer

It determines the weights of different goods and services in the CPI basket based on actual consumer spending patterns.

Question 13

If the price of Gatorade increased because new flavors were introduced in 2014, should this affect the calculation of the inflation rate for 2014?

Accepted Answer

No, because the introduction of new flavors reflects a change in quality or product variety, not pure inflation.

Question 14

Which of the following best describes the 'value added' approach to calculating GDP?

Accepted Answer

It sums the value added at each stage of production for all goods and services.

Question 15

If the GDP deflator in 2023 is 100 and in 2024 is 120, what is the inflation rate between 2023 and 2024?

Accepted Answer

$$\frac{120-100}{100} 	imes 100\% = 20\%$$

Question 16

Which of the following is a reason why the core CPI might be more informative for the Federal Reserve than the overall CPI?

Accepted Answer

Core CPI excludes volatile food and energy prices, providing a clearer view of underlying inflation trends.

Question 17

If the CPI is 250 in 2024 and your nominal wage is $50,000, what is your real wage in base year dollars (base year CPI = 100)?

Accepted Answer

$$\frac{50,000}{2.5} = 20,000$$

Question 18

Which of the following best describes the difference between nominal GDP and real GDP?

Accepted Answer

Nominal GDP is measured at current prices, while real GDP is measured at constant base-year prices.

Question 19

Which price index does the Federal Reserve use as its primary indicator of overall price level for monetary policy decisions?

Accepted Answer

The Personal Consumption Expenditures (PCE) price index.

Macroeconomics Study Guide: GDP, Price Indices, and Economic Analysis

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