Fundamentals of Macro

Assignment 2

Multiple Choice

1. What does the GDP Deflator measure?

a. Inflation
b. Unemployment
c. Economic Growth
d. Interest Rates
Answer:A
2. Which of the following best describes Nominal GDP?
a. GDP adjusted for inflation
b. GDP measured in current prices
c. GDP measured in constant prices
d. GDP excluding exports
Answer:B
3. How is Real GDP calculated?
a. Using current prices
b. Excluding government spending
c. Adjusting Nominal GDP for inflation
d. Including imports only
Answer:C
4. In the circular flow diagram, what flows from households to firms?
a. Goods and services
b. Money and resources
c. Investments
d. Taxes
Answer:B
5. What is the relationship between income and expenditure GDP?
a. They are always equal
b. Income GDP is always higher
c. Expenditure GDP is always higher
d. They have no relationship
Answer:A
6. Which component of GDP includes government spending?
a. Consumption
b. Investment
c. Government purchases
d. Net exports
Answer:C
7. Which of the following is an example of an intermediate good?
a. A loaf of bread purchased by a consumer
b. Steel used to build a car
c. A new laptop for personal use
d. Gasoline purchased by a family for their car
Answer:B
8. In the circular flow diagram, what represents the total value of goods and services produced in an economy during
a specific period?
a. Investment
Fundamentals of Macro
Assignment 2
b. National debt
c. GDP
d. Savings
Answer:C

9. What is the primary purpose of calculating Real GDP?

a. To adjust for inflation and measure economic growth
b. To determine the value of exports in an economy
c. To assess the overall purchasing power of consumers
d. To compare production levels across different countries
Answer:A
10. How does an increase in the GDP Deflator affect Real GDP?
a. Real GDP increases
b. Real GDP decreases
c. Real GDP remains unchanged
d. Real GDP becomes negative
Answer:A
11. Which of the following equations represents the relationship between Nominal GDP and Real GDP?
a. Nominal GDP = Real GDP – Inflation
b. Nominal GDP = Real GDP + Inflation
c. Nominal GDP = Real GDP x Inflation
d. Nominal GDP = Real GDP / Inflation
Answer:B
12. In the circular flow diagram, what represents the total value of income earned by households in an economy?
a. Savings
b. Investment
c. Consumption
d. Wages
Answer:C
13. When calculating Real GDP, what is used to adjust Nominal GDP for changes in price levels?
a. Unemployment rate
b. Purchasing Power Parity (PPP)
c. Consumer Price Index (CPI)
d. GDP Deflator
Answer:D
14. What impact does an increase in government purchases have on GDP?
a. Increases GDP
b. Decreases GDP
c. Has no effect on GDP
d. Leads to hyperinflation
Answer:A
15. GDP does not value
a. Leisure time
b. Quality of the environment
c. Non-market activity
d. All of the above

Answer:D
Fundamentals of Macro
Assignment 2

Solve:

1- Compute the nominal GDP in each year:

Pizza Chocolate
year P Q P Q
2019 $10 300 $1.50 1,000
2020 $11 400 $2.00 1,200
2021 $12 500 $2.50 1,300

Answer:
2019: 10 x 300+1.50 x 1.000=4,500
2020: 11 x 4000+2.00 x 1.200=6,800
2021: 12 x 500+2.50 x 1300=9,250

2- Compute the Real GDP in each year (Base year 2019):

Pizza Chocolate
year P Q P Q
2019 $10 300 $1.50 1,000
2020 $11 400 $2.00 1,200
2021 $12 500 $2.50 1,300

Answer:

2019: 10 x 300+1.50 x 1000=4,500

2020: 10 x 400+1.50 x 1200=5,800

2021: 10 x 500+1.50 x 1300=6,950

Fundamentals of Macroeconomics
Assignment 2

3- Compute the GDP deflator in each year:

Year Nominal GDP Real GDP

2019 $4,500 $4,500
2020 $6,800 $5,800
2021 $9,250 $6,950

Answer:
2019: 4,500/4,500x100=100
2020: 6,800/5,800x100=117,2
2021: 9,250/6,950x100=133,0

4- Use the below data to solve these problems:

A. Compute nominal GDP in 2019.
B. Compute real GDP in 2020.
C. Compute the GDP deflator in 2021.

2019 (Base year) 2020 2021

P Q P Q P Q
Cookies $2 900 $3 1000 $4 1250
Smartphones $1000 185 $1200 200 $1400 210

1.nominal GDP:
2019: 2 x 900+1,000 x 185=186,800
2.Real GDP:
2020: 2 x 1,000+1,000 x 200=202,000
3.GDP deflator:
2021:Nom GDP: 4 x 1,250+1,400 x 210=299,000
Real GDP: 2 x 1,250+1,000 x 210=212,500
GDP deflator:299,000/212,500x100=140,7

5- Mohamed pays Ahmed $100 to cut her garden grass. What happens with total expenditure and total
income?

-Total expenditure: increases (100).

-Total income: increases (100).
Fundamentals of Macroeconomics
Assignment 2
6- Fill in the Circular Flow Diagram with the following:
- Markets for Goods and Services
- Markets for Factors of Production
- Firms
- Households
- Government
- Goods and Services bought
- Goods and Services sold
- Land, Labor, Capital
- Factors of Production
- Revenue
- Spending
- Income
- Wages, rent, Profit

Markets for
Spending
goods & services
Revenue

Goods and
Goods and services
services sold bought

Firms Households

Factors of Land, Labor,

production Capital

Wages, rent, Profit Markets for

factors of Income
production