P-set #1

Indicate whether each of the following is a final​ good, an intermediate​ good, or neither. 1. Coffee beans purchased by a coffee shop 2. One share of Google stock 3. A new​ pick-up truck purchased by a consumer 4. A new home purchased by a family

1. Intermediate good 2. Neither 3. Final good 4. Final good

Indicate whether each of the following transactions represents the purchase of a final good: 1. The purchase of steel from a steel mill by an automobile manufacturer. 2. The purchase of an aircraft carrier by the federal government. 3. The purchase of domestic wine by a French consumer. 4. The purchase of a new plane by American Airlines.

1. Is not the purchase of a final good 2. Is the purchase of a final good 3. Is the purchase of a final good 4. Is the purchase of a final good

Suppose that the only good you purchase is premium bottled water and that at the beginning of the​ year, the price of a bottle is ​$2.00. Suppose you lend ​$1,000 for one year at an interest rate of 9.7 percent. At the end of the​ year, the price of premium bottled water has risen to ​$2.17. Calculate the real interest rate on the loan.

1.2%

Price indexes can be used to compare prices across different periods. Suppose that a year of tuition for college at public institutions averaged a cost of ​$1,945 in 1989 and that the CPI index was 121 in 1989. If the CPI index was 212 in​ 2009, then the cost of tuition in​ 2009, as the result of​ inflation, would equal ​$_______________. ​(Enter your response rounded to the nearest whole​ number.) Suppose that the actual average cost of tuition in 2009 was ​$7,549. Relative to the expected cost computed​ above, the cost of tuition increased by _______________ the amount of inflation.

3408 more than

Suppose an economy has an inflation rate of 3.9​% and a bank makes a loan with an interest rate of 7.9​%. In this​ case, the real interest rate is ______%.

4.0

Suppose the​ economy's consumer price index​ (CPI) in 2008 was 183 and the CPI in 2009 was 195. The inflation rate over the period from​ 2008-2009 was equal to _____​%. ​(Enter your response rounded to one decimal​ place.)

6.6

Indicate whether you agree or disagree with the following statement. "If a recession is so severe that the price level​ declines, then we know that both real GDP and nominal GDP must​ decline." A. Agree. If both output and prices are​ falling, then both real GDP and nominal GDP will fall. B. Disagree. Real GDP falls if output falls. Nominal GDP can increase if output falls and prices rise. C. Agree. If prices​ fall, real GDP and nominal GDP will both fall if output increases. D. Disagree. Real GDP falls if output falls. Nominal GDP can increase if output falls and prices fall.

A

Indicate whether you agree or disagree with the following statement. ​"If nominal GDP is less than real​ GDP, then the price level must have fallen during the​ year." A. Disagree. Nominal GDP is less than real GDP if the current price level is less than the base year price level. A fall in the price level during the year is neither necessary nor sufficient to cause nominal GDP to be less than real GDP. B. Agree. Real GDP will be less than nominal GDP if the price level falls and is lower than the base​ year's prices. C. Agree. Nominal GDP will be less than real GDP if the price level falls and is higher than the base​ year's prices. D. Disagree. Real GDP will be equal to nominal GDP if the price level increases and is equal to the base​ year's prices.

A

Indicate whether you agree or disagree with the following statement. ​"Whenever real GDP ​declines, nominal GDP must also​ decline." A. Disagree. Real GDP falls if output falls. Nominal GDP can increase if output falls and prices rise. B. Agree. Both real GDP and nominal GDP decline if price falls and output remains constant. C. Agree. Both real GDP and nominal GDP decline if output falls and prices remain constant. D. Disagree. Real GDP falls if output falls. Nominal GDP can increase if output falls and prices fall.

A

The following appeared in a newspaper​ article: ​"Inflation in the Lehigh Valley during the first quarter of​ [the year] was less than half the national​ rate... So, unlike much of the​ nation, the fear here is​ deflation-when prices sink so low that the CPI drops below​ zero." Do you agree with the​ reporter's definition of deflation? A. No. Deflation is defined as a negative inflation rate. B. No. Deflation occurs when the nominal interest rate is greater than the real interest rate. C. Yes. Deflation is caused by a negative CPI. D. Yes. When prices fall too​ low, the CPI is negative.

A

The real interest rate A. is equal to the nominal interest rate minus the inflation rate. B. is the interest rate that adjusts GDP for changes in prices. C. is the interest rate that is quoted on a financial debt and a​ firm's assets. D. is equal to the inflation rate minus the nominal interest rate.

A

If prices rise over​ time, then real GDP will be A. smaller than nominal GDP in the base year. B. larger than nominal GDP in years before the base year. C. larger than nominal GDP in years after the base year. D. smaller than nominal GDP in years before the base year.

B

If the economy is experiencing​ deflation, A. high nominal interest rates inflict serious losses on both household and business borrowers. B. the nominal interest rate will be lower than the real interest rate. C. the nominal interest rate will be higher than the real interest rate. D. the nominal interest rate will be equal to the real interest rate.

B

Indicate whether you agree or disagree with the following statement. "If real GDP stayed the same while nominal GDP declined between 2008 and​ 2009, then the GDP deflator must also have​ declined." A. Disagree. If nominal GDP declined between 2008 and​ 2009, then the GDP deflator could have gone up. B. Agree. If nominal GDP declined between 2008 and​ 2009, then the GDP deflator must also have declined. C. Disagree. If nominal GDP increased between 2008 and​ 2009, then the GDP deflator must have remained the same. D. Disagree. If real GDP declined between 2008 and​ 2009, then the GDP deflator must also have declined.

B

Suppose a house is built and sold in the year 2010. If the house is resold in the year​ 2021, is the value of the house included in Gross Domestic Product ​(GDP) for​ 2021? A. Yes. The value of the house is included in Gross Private Domestic Investment for 2021. B. No. GDP for 2021 includes only production that occurs during 2021. C. Yes. The value of the house is included in Personal Consumption Expenditures for 2021. D. No. GDP for 2021 includes only the market value of final goods. A house resold in 2021 is an intermediate good.

B

The difference between the nominal interest rate and the real interest rate is A. the real interest rate is the stated interest rate whereas the nominal interest rate is the real interest rate minus the inflation rate. B. the nominal interest rate is the stated interest rate whereas the real interest rate is the nominal interest rate minus the inflation rate. C. the nominal interest rate is the stated interest rate whereas the real interest rate is the nominal interest rate plus the inflation rate. D. the nominal interest rate is the stated interest rate whereas the real interest rate is the nominal interest rate divided by the inflation rate.

B

Why does inflation make nominal GDP a poor measure of the increase in total production from one year to the​ next? A. Nominal GDP separates increases in GDP as a result of price changes from increases in GDP as a result of quantity changes. B. When nominal GDP increases from year to​ year, the increase is due partly to changes in prices and partly to changes in quantities. C. Nominal GDP is a measure of production in quantity terms. D. All of the above E. A and B only

B

Would the services of a real estate agent who helped sell​ (or helped​ buy) the house be included in GDP for​ 2021? A. No. GDP for 2021 includes only the market value of final goods. Real estate services are not final goods. B. Yes. GDP for 2021 includes the market value of final goods and services. This includes real estate services. C. Yes. Real estate services are considered Gross Private Domestic Investment. D. No. The value of the house is not included in GDP for 2021.​ Therefore, real estate services are not included either.

B

If inflation is expected to​ increase, A. the nominal interest rate will decrease. B. the real interest rate will increase. C. the nominal interest rate will increase. D. the nominal interest rate will remain the same.

C

If the U.S. Bureau of Economic Analysis​ (BEA) added up the values of every good and service sold during the​ year, would the total be larger or smaller than measured gross domestic product​ (GDP)? A. ​Equal: Measured GDP is calculated by adding the values of every good and service sold during the year. B. ​Smaller: Measured GDP includes the values of every good and service sold AND the market value of all final goods. C. ​Larger: The value of all goods and services sold would include intermediate goods. D. ​Larger: Measured GDP includes quantities of goods and​ services, not the values of goods and services.

C

In​ 2013, the population of Great Britain was around 64 million. According to the World​ Bank, the​ country's GDP​ (expressed in US​ dollars) in 2013 was about​ $2.5 trillion. This implies that​ Britain's 2013 per capita GDP was about A. ​$20,000 B. ​$25,600 C. ​$39,000 D. ​$45,000

C

What index is used to measure the average prices paid by a typical​ family? An average of the prices of the goods and services purchased by a typical family is​ the: A. inflation rate index. B. aggregate price level index. C. consumer price index​ (CPI). D. producer price index​ (PPI).

C

Your father earned​ $34,000 per year in 1984. To the nearest​ dollar, what is that equivalent to in 2014 if the CPI in 2014 is 215 and the CPI in 1984 is​ 104? A. ​$73,100 B. ​$16,447 C. ​$70,288 D. ​$34,000

C

How does real GDP deal with the problem inflation causes with nominal​ GDP? A. Real GDP uses the prices of goods and services in the base year to calculate the value of goods in all other years. B. By keeping prices​ constant, we know that changes in real GDP represent changes in the quantity of output produced. C. Real GDP separates price changes from quantity changes. D. All of the above. E. A and C only.

D

Potential GDP is A. the level of GDP produced when all firms have excess capacity. B. the level of nominal GDP in the base year. C. the level of real GDP in the base year. D. the level of GDP produced when all factors of production are utilized at​ "normal" rates.

D

What are the four major components of expenditures in​ GDP? A. ​Consumption, Intermediate​ Goods, Government​ Purchases, and New Expenditures B. ​Consumption, Investment, Government​ Purchases, and​ Non-Durable Expenditures C. ​Consumption, Intermediate​ Goods, Goods and​ Services, and Net Exports D. ​Consumption, Investment, Government​ Purchases, and Net Exports

D

Indicate which component of GDP will be affected by each of the following transactions involving General Motors. a. You purchase a new Chevrolet Silverado pickup from a GM dealer. b. You purchase a 2017​ (preowned) Chevrolet Silverado from a friend. c. GM purchases door handles for the Silverado from an auto parts manufacturer in Indiana. d. GM produces​ 1,000 Silverados in a factory in​ Flint, Michigan, and ships them to a car dealer in​ Shanghai, China. e. GM purchases new machine tools to use in its Flint factory. f. The state of Michigan builds a new highway to help improve access to​ GM's Flint plant.

a. Consumption Expenditure b. Not included in GDP calculation c. Not included in GDP calculation d. Net Export Expenditure e. Investment Expenditure f. Government Expenditure

Suppose you were borrowing money to buy a car. Consider the following situations. Situation​ 1: Suppose the interest rate on your car loan is 19.00 percent and the inflation rate is 18.00 percent. Calculate the real interest rate. 1.001.00​%. ​(Enter your response as a percentage rounded to two decimal​ places.) Situation​ 2: Suppose the interest rate on your car loan is 9.00 percent and the inflation rate is 6.00 percent. Calculate the real interest rate. 3.003.00​%. ​(Enter your response as a percentage rounded to two decimal​ places.) Situation 1 will be ____________ than Situation 2 because the _____________ is lower. Now suppose you are JPMorgan​ Chase, and you are making car loans. Which situation above would you now​ prefer? JPMorgan Chase would prefer Situation ____.

better real interest rate 2