Q: Suppose the nominal GDP in 2005 was $$1,200 billion and the real GDP in 2005 (base year 2002) was 1$$,000 billion. What is the GDP price index for 2005?

$$GDP\ Price\ Index = \frac{Nominal\ GDP}{Real\ GDP} \times 100 = \frac{1,200}{1,000} \times 100 = 120$$

Q: A country’s real GDP increased from $$500 billion to 550 $$billion between 2002 and 2005. What is the real GDP growth rate over this period?

$$\frac{550 - 500}{500} \times 100 = 10\%$$

Q: If the cost of a basket of goods in the base year is $$200 and the cost in the current year is 250$$, what is the Consumer Price Index (CPI) for the current year?

$$CPI = \frac{250}{200} \times 100 = 125$$

Q: Suppose personal disposable income increases by $1,000 and the marginal propensity to consume is 0.8. By how much will consumption increase?

$$\Delta C = mpc \times \Delta YD = 0.8 \times 1,000 = 800$$

Q: Which of the following is a correct formula for calculating the rate of inflation using the GDP price index?

$$\text{Rate of Inflation} = \frac{GDP\ Price\ Index_{t} - GDP\ Price\ Index_{t-1}}{GDP\ Price\ Index_{t-1}} \times 100$$

Question 1

Which of the following best describes the difference between GDP calculated using the expenditures approach and the income approach?

Accepted Answer

The expenditures approach sums all spending on final goods and services, while the income approach sums all incomes earned by factors of production in the economy.

Question 2

Suppose the nominal GDP in 2005 was $$1,200 billion and the real GDP in 2005 (base year 2002) was 1$$,000 billion. What is the GDP price index for 2005?

Accepted Answer

$$GDP\ Price\ Index = \frac{Nominal\ GDP}{Real\ GDP} 	imes 100 = \frac{1,200}{1,000} 	imes 100 = 120$$

Question 3

If the marginal propensity to consume (mpc) is 0.75, what is the value of the expenditures multiplier?

Accepted Answer

$$Multiplier = \frac{1}{1 - mpc} = \frac{1}{1 - 0.75} = 4$$

Question 4

Which of the following is NOT included in the calculation of GDP using the expenditures approach?

Accepted Answer

Purchases of used goods

Question 5

A country’s real GDP increased from $$500 billion to 550 $$billion between 2002 and 2005. What is the real GDP growth rate over this period?

Accepted Answer

$$\frac{550 - 500}{500} 	imes 100 = 10\%$$

Question 6

If the cost of a basket of goods in the base year is $$200 and the cost in the current year is 250$$, what is the Consumer Price Index (CPI) for the current year?

Accepted Answer

$$CPI = \frac{250}{200} 	imes 100 = 125$$

Question 7

Which of the following best describes Okun’s Law?

Accepted Answer

For every 1% increase in the unemployment rate above the natural rate, a country’s output falls by about 2% relative to potential output.

Question 8

If the consumption function is $$C = 668 + 0.62YD$$, what is the marginal propensity to consume (mpc)?

Accepted Answer

$$mpc = 0.62$$

Question 9

Suppose personal disposable income increases by $1,000 and the marginal propensity to consume is 0.8. By how much will consumption increase?

Accepted Answer

$$\Delta C = mpc 	imes \Delta YD = 0.8 	imes 1,000 = 800$$

Question 10

Which of the following would cause the aggregate expenditures (AE) curve to shift upward?

Accepted Answer

An increase in government spending

Question 11

If the net factor income from abroad is positive, how does Gross National Product (GNP) compare to Gross Domestic Product (GDP)?

Accepted Answer

GNP is greater than GDP

Question 12

Which of the following is a correct formula for calculating the rate of inflation using the GDP price index?

Accepted Answer

$$	ext{Rate of Inflation} = \frac{GDP\ Price\ Index_{t} - GDP\ Price\ Index_{t-1}}{GDP\ Price\ Index_{t-1}} 	imes 100$$

Question 13

A country’s GDP at market prices is $$2,000 billion. Net factor income from abroad is 100 $$billion. What is the country’s GNP?

Accepted Answer

$$GNP = GDP + Net\ Factor\ Income\ from\ Abroad = 2,000 + 100 = 2,100\ billion$$

Question 14

If the slope of the AE curve (z) is 0.8, what is the value of the expenditures multiplier?

Accepted Answer

$$Multiplier = \frac{1}{1 - z} = \frac{1}{1 - 0.8} = 5$$

Question 15

Which of the following best explains why imports are subtracted in the expenditures approach to GDP?

Accepted Answer

Imports are not produced domestically and thus should not be counted in domestic output.

Question 16

If the average propensity to consume (APC) is greater than 1, what does this imply about a household’s spending behavior?

Accepted Answer

The household is spending more than its disposable income, likely by borrowing or using savings.

Macroeconomics Midterm Study Guide: Principles and Key Models

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