Q: Which of the following best describes the fundamental identity of GDP in a closed economy?

$$GDP = \text{value of production} = \text{income to factors of production} = \text{spending on production}$$

Q: If the nominal interest rate on a bond is 8% and the expected inflation rate is 3%, what is the real interest rate?

$$\text{Real interest rate} = 8\% - 3\% = 5\%$$

Question 1

Which of the following best describes the fundamental identity of GDP in a closed economy?

Accepted Answer

$$GDP = 	ext{value of production} = 	ext{income to factors of production} = 	ext{spending on production}$$

Question 2

Suppose a country has the following data for a given year: Consumption ($$C$$) = $$400$$, Investment ($$I$$) = $$100$$, Government Spending ($$G$$) = $$200$$, and Net Exports ($$NX$$) = $$-50. $$What is the country's GDP for that year?

Accepted Answer

$$GDP = 400 + 100 + 200 - 50 = 650$$

Question 3

In the context of GDP measurement, which of the following transactions would NOT be included in the calculation of GDP using the expenditure approach?

Accepted Answer

A used car sold from one consumer to another

Question 4

Given the following information for a closed economy: $$Y = 1000$$, $$C = 600$$, $$G = 200$$, and $$T = 150 ($$where $$T is $$taxes minus transfers). What is national saving ($$S_N$$)?

Accepted Answer

$$S_N = Y - C - G = 1000 - 600 - 200 = 200$$

Question 5

If OrangeInc produces oranges and sells some to the public and some to JuiceInc, which then produces juice, how is the value-added approach used to avoid double counting in GDP?

Accepted Answer

By only counting the value added at each stage of production, not the total sales at each stage

Question 6

Suppose the nominal GDP in year $$t is$$ $$Y_t = 8,000$$ and the real GDP in year $$t (in $$base year prices) is $$y_t = 7,000. $$What is the GDP deflator $$P_t$$ for year $$t$$?

Accepted Answer

$$P_t = \frac{Y_t}{y_t} = \frac{8,000}{7,000} = 1.143$$

Question 7

Which of the following best explains the difference between the GDP deflator and the Consumer Price Index (CPI)?

Accepted Answer

The GDP deflator measures the price level of all domestically produced goods and services, while the CPI measures the price level of a fixed basket of consumer goods and services.

Question 8

If the nominal interest rate on a bond is 8% and the expected inflation rate is 3%, what is the real interest rate?

Accepted Answer

$$	ext{Real interest rate} = 8\% - 3\% = 5\%$$

Question 9

A discount bond pays $$10,000 in $$one year and is currently selling for $$9,500. $$What is the nominal interest rate on this bond?

Accepted Answer

$$R = \frac{10,000 - 9,500}{9,500} = 0.0526 = 5.26\%$$

Question 10

If the GDP deflator in 2020 is $$1.00$$ and in 2021 is $$1.0166$$, what is the inflation rate between 2020 and 2021?

Accepted Answer

$$\pi = \frac{1.0166 - 1.00}{1.00} = 0.0166 = 1.66\%$$

Question 11

Which of the following statements about chain-weighted GDP is correct?

Accepted Answer

Chain-weighted GDP uses the average growth rates calculated using consecutive years' prices as weights to better reflect changes in the composition of output.

Question 12

If a country’s GDP increases by 10% in nominal terms and the GDP deflator increases by 4%, what is the approximate growth rate of real GDP?

Accepted Answer

$$	ext{Real GDP growth} \approx 10\% - 4\% = 6\%$$

Question 13

In an open economy, which of the following is true regarding the relationship between net exports (NX), net factor income (NFI), and net US lending?

Accepted Answer

$$NX + NFI = 	ext{Net US lending}$$

Question 14

Suppose the market value of produced goods at current prices is $$12,000$$ and at base year prices is $$10,000. $$What is the GDP deflator?

Accepted Answer

$$	ext{GDP deflator} = \frac{12,000}{10,000} = 1.2$$

Question 15

Which of the following best describes the effect of inflation on the real value of money?

Accepted Answer

The rate of inflation is identical to the rate of depreciation of the value of money.

Question 16

If the price of a bond increases, what happens to its interest rate, all else equal?

Accepted Answer

The interest rate decreases.

Question 17

A country has the following data: $$Y = 2,000$$, $$C = 1,200$$, $$G = 400$$, $$T = 300. $$What is the value of investment ($$I) in a $$closed economy?

Accepted Answer

$$I = Y - C - G = 2,000 - 1,200 - 400 = 400$$

Question 18

Which of the following is a correct statement about the relationship between nominal and real GDP?

Accepted Answer

$$	ext{Nominal GDP} = 	ext{Real GDP} 	imes 	ext{GDP deflator}$$

Question 19

If a country’s GDP increases due to higher prices but the quantity of goods and services produced remains unchanged, what happens to real GDP?

Accepted Answer

Real GDP remains unchanged.

Measurement and Structure of the National Economy: Intermediate Macroeconomics Study Notes

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