Question 1

Which of the following best describes the value-added approach to calculating Gross Domestic Product (GDP)?

Accepted Answer

Summing the value of all final goods and services produced in the economy and subtracting the value of all intermediate goods used in production.

Question 2

Suppose the government increases its spending by $$\Delta G. $$According to the Keynesian multiplier, what is the total change in equilibrium output $$\Delta Y if $$the marginal propensity to consume is $$c_1$$?

Accepted Answer

$$\Delta Y = \frac{\Delta G}{1-c_1$}$$

Question 3

If the Consumer Price Index (CPI) rises faster than the GDP deflator, which of the following is most likely true?

Accepted Answer

The price of imported goods has increased relative to domestically produced goods.

Question 4

Given the consumption function $$C = c_0$ + c_1$ (Y - T)$$, what does $$c_1$$ represent?

Accepted Answer

The marginal propensity to consume out of disposable income.

Question 5

In the money market, what is the effect of an open market purchase of bonds by the central bank?

Accepted Answer

The money supply increases, shifting the vertical $$M^s$$ line to the right.

Question 6

If the unemployment rate is calculated as $$u = \frac{U}{L}$$, where $$U is $$the number of unemployed and $$L is $$the labor force, what happens to the unemployment rate if discouraged workers stop looking for work?

Accepted Answer

The unemployment rate decreases because $$U$$ and $$L$$ both decrease, but $$U$$ decreases more.

Question 7

Which equation correctly represents equilibrium in the goods market for a closed economy with government?

Accepted Answer

$$Y = C + I + G$$

Question 8

If the central bank wants to maintain a target interest rate $$i^*$$ and income $$Y$$ increases, what must the central bank do?

Accepted Answer

Increase the money supply to match the higher money demand.

Question 9

Which of the following best explains why the price of a bond is inversely related to its yield (interest rate)?

Accepted Answer

As the price of a bond increases, the fixed future payment (face value) represents a lower return relative to the purchase price.

Question 10

Suppose the marginal propensity to consume $$c_1 = 0.8$. If the government increases spending by $$\$$100$$ billion, what is the predicted total increase in equilibrium output $$\Delta Y$?

Accepted Answer

$$\Delta Y = \frac{100}{1-0.8} = 500$$

Question 11

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

Accepted Answer

Spending on intermediate goods.

Question 12

If the goods market is in disequilibrium such that $$Y \u003c Z$$, what is the likely short-run response by firms?

Accepted Answer

Firms will increase production to replenish depleted inventories.

Question 13

Which of the following best describes the participation rate?

Accepted Answer

The ratio of the labor force to the total working age population.

Question 14

In the context of the money market, what is the opportunity cost of holding money?

Accepted Answer

The interest forgone from not holding bonds.

Question 15

If $$Y = C + I + G$$ and $$C = c_0$ + c_1$ (Y - T)$$, which of the following is the formula for equilibrium output $$Y$$?

Accepted Answer

$$Y = \frac{1}{1-c_1$}(c_0$ - c_1$ T + I + G)$$

Question 16

Which of the following statements about the GDP deflator and CPI is correct?

Accepted Answer

The GDP deflator measures the price of goods produced within a country, while the CPI measures the price of goods consumed within a country.

Question 17

If the central bank sells bonds in the open market, what is the expected effect on the money supply and interest rates?

Accepted Answer

The money supply decreases and interest rates rise.

Question 18

Which of the following is true about private and public saving in the goods market equilibrium?

Accepted Answer

Private saving plus public saving equals investment: $$I = S_{private} + S_{public}$$

Question 19

If the base year for real GDP calculation is changed, what is the likely effect?

Accepted Answer

The measured real GDP may change because relative prices of goods change over time.

Core Macroeconomic Concepts: GDP, Unemployment, Inflation, Goods and Money Markets

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