Economics assignment 3

Hamna Wahab
22443

MCQs answers

1. C
2. B
3. C
4. B
5. C
6. A
7. C
8. B
9. A
10. C
11. A
12. C
13. A
14. B
15. D
16. B
17. B
18. D
19. B
20. B
21. B
22. C
23. B
24. B
25. A
26. B
27. A
28. B
29. C
30. A
 Questions and answers

Q1.

GDP COMPONENTS 2000 ($) Billions 2010 ($) Billions 2019 ($) Billions

Personal consumption 61.89 141,229 230.514

Expenditure (75.46% of GDP) (79.72% `of GDP) (82.853% of GDP)
Gross private 13.105 25.166 38.981
domestic investment (15.98% of GDP) (14.21% of GDP) (14.011% of GDP)
Government 6.632 18.227 32.654
purchases (8.09% of GDP) (10.32% of GDP) (11.737% of GDP)
Net exports -2.03 -11,960 25.77
(-0.025% of GDP) (-0.067% of GDP) (-0.093% of GDP)
GDP $82.018 billions $177.166 billions $278.22 billions

Q2.
a. Consumption increases because a refrigerator is a goods
purchased by a household.

b. Investment increases because a house is an investment good.

c. Consumption increases because a car is a good purchased by a

household, but investment decreases because the car in Ford’s
inventory had been counted as an investment good until it was
sold.

d. Consumption increases because pizza is a good purchased by a

household.

e. Government purchases increase because the government spent

money to provide a good to the public.

f. Consumption increases because the bottle is a good purchased

by a household, but net exports decrease because the bottle was
imported.
g. Investment increases because new structures and equipment
were built.

Q3.
Year 1 nominal GDP = $100
Year 2 real GDP= $100
Year 3 GDP deflator+ 120

a. The base year is 1 since the GDP deflator is 100

b. Prices rose 20 percent and real output stayed the same.
c. Prices stayed the same and real output rose 25 percent.

Q4

a. $700
b. $700
c. $770
d. $720
e. $100
f. $107
g. 107-100/100 x100 = 7%
h. Nominal increase = 770-700/700 x100= 10%
Prices rose 7%, so it was mostly due to an increase in prices

Q5.
Year 1 consumption= 3127
Year 3 GDP= 5140

a. Consumption is the largest expenditure component of GDP

b. No, investment doesn’t include the purchase of stocks and bonds since this is a
transfer payment, no new good or service is created
c. No, government purchases do not include government spending on unemployment benefit
as again this is a transfer payment nothing new is created
d. If net exports are negative this means that our imports are greater than exports that is, our
country brought in a greater value of goods and services than it sent out

Q6.
If the gross domestic product included goods that are resold, it would be counting output
of that particular year, plus the sales of goods produced in a previous year. It would
double count goods that were sold more than once and would count goods in GDP for
several years if they were produced in one year and resold in another.

Q7.
a. Real interest rate is the interest rate adjusted to accommodate the effect of
inflation. It is ideally the difference between the nominal interest rate and the rate
of inflation. The real interest rate is computed as the difference between the
nominal interest rate and the inflation rate. i.e: Real interest rate = nominal
 interest rate – inflation rate. When the inflation turns out to be higher than
expected, the real interest rate on this loan decreases to a point lower than
expected. The real interest rate measures the purchasing power of the interest
for the money loaned out. If nominal interest rate was 9 percent for example and
people expect that the inflation will be 6 percent, then the market has an
expected real interest of 3 percent (9%-6%). However, if in case inflation turns
out to be 7 percent, the real interest rate will be equal to 9 percent minus 7
percent which is equal to 2 percent. This inflation rate is less than the expected 3
percent inflation rate.  Fischer effect provides that an increase in expected
inflation drives up the nominal interest rate which leaves the expected real
interest unchanged.
b. The unexpectedly high inflation rate affects both the gains of the borrower and
the lender at the same time. For a lender however, the unexpectedly high
inflation leads to a loss. The lender is on the receiving end since the real interest
rate is lower than expected and a declined on the interest rate translates to a
lower purchase power of the interest that the lender will receive. Hence, as a
result of the lower real interest rate is less than the expected, the lender loses
and the borrower gains. The borrower who happens to be the party repaying the
loan gains from the fact that the dollar value is worth less than was expected.