AP Macro Test 3

Suppose Miguel wants to know the value of real gross domestic product (GDP) for 2011 in terms of the base year 1984 dollars. In 1984 nominal GDP was $10 billion. In 2011 nominal GDP was $15 billion and the price deflator was 200. Real GDP in 1984 dollars would be equal to which of the following?

$7.5 billion

What was the inflation rate for 2016 if the real GDP of 2016 is $400 and the nominal GDP is is $600?

(600-400)/400*100=50, 50%

How should the quantity of goods and price of goods change to cause an increase in nominal GDP but not a change in real GDP in Justinia?

The quantity of goods produced stays the same; prices increase; real GDP measures how much is actually produced, which has not changed according to this statement. Nominal GDP is a measure of how much is spent on output, which according to this statement would have increased

If actual real output is greater than potential real output ....

Then actual unemployment is lower than natural unemployment (or there is negative cyclical unemployment)

Which of the following will happen when the actual inflation rate exceeds the expected inflation rate?

This will harm lenders with fixed-interest rate loans.

Labor unions negotiated a 3-year contract with employers in the automobile industry. They agreed to a 3 percent per year increase in pay over the 3 years. How would each group be affected by an actual inflation rate of 4% next year?

Workers would be worse off, and the employers would be better off.

Was there real economic growth in Pirateland between 2015 and 2017? Why?

Yes. Quantity of both Milk (100 to 300) and Honey (50 to 100) produced increased between 2015 and 2017.

Do commissions earned in 2006 by a stockbroker count in GDP?

Yes; the commissions represent income for providing service in 2006

Does rent paid in 2006 by residents in an apartment building built in 2000 count in GDP?

Yes; the payment is for service provided in 2006

If nominal gross domestic product increased by 4 percent in 1996, identify two additional pieces of information you need before you can conclude that the living standard of the typical person increased by 4 percent during that year.

inflation rate population growth change in the income distribution change in externalities change in leisure time change in product quality

Jan works a 30-hour week for a minimum wage of $10 per hour. Suppose that last year is the base year for the Consumer Price Index (CPI). Which of the following is true about Jan's real wage if at the end of this year the CPI is 125?

real wage = (nominal wage / CPI) * 100 real wage = (10 / 125) * 100 Jan's real wage is $8 per hour at the end of the year.

Construction of new homes is what spending in GDP?

Investment; when a household purchases a new home, the value of all of the construction costs that were incurred to produce it is counted in investment

Explain difference between GDP deflator and CPI

CPI observes a fixed market basket to measure changes in the prices of only consumer goods and services. GDP deflator does NOT look at a fixed market basket and instead measures changes in the prices of all goods and services produced in an economy.

The chart below displays the total spending for a typical consumer on a fixed (unchanging) basket of goods during a four-year period. If 1995 is the base year, what is the price index and inflation rate in 1998? Year CPI 1995 $15,052 1996 $15,500 1997 $16,500 1998 $19,000

1.26, 15.2% The price index can be calculated by dividing total spending in 1998 by total spending in 1995 and then multiply by 100. Inflation in 1998 is total spending in 1998 minus total spending in 1997, then divide by 1997 spending and multiply by 100.

If the nominal interest rate you earned on an investment was 7% and the rate of inflation was 2.7%, the real rate of return on your investment is ...

4.3%

Why does the expenditure and income approach both work?

For all goods, profit = total revenue - total factor costs, therefore, total factor costs + profit (found by income approach) = total revenue (found by expenditures approach) https://secure-media.collegeboard.org/apc/sg_macroeco_99_7103.pdf

A price index in the years after the base year ...

Can be less than, greater than or equal to 100

The countries of Montrose and Bellaire have the same GDP. Each country only consumes two goods: fish tacos and air purifiers. It turns out that due to the way fish tacos are produced in Bellaire, there is a lot more air pollution in Bellaire than there is in Montrose. People in both countries like fish tacos, but really only put up with the air purifiers to clean up after making tacos. Assume that people value fish tacos for the enjoyment of eating them. On the other hand, air purifiers don't bring anyone any enjoyment beyond cleaning up pollution. Montrose spends $50 on air purifiers and $100 on tacos, while vice versa for Bellaire. Based on this information, what can we infer about the quality of life in these two countries?

Montrose has a better quality of life than Bellaire because they spend more on tacos; because Bellaire has more air pollution, they spend more of their income on cleaning up after the polluting fish taco industry. This leaves Montrose with a higher quality of life because more of their income is spent on the good that people really like, fish tacos.

Last year, Myron purchased a $10,000 certificate of deposit with a fixed 3% interest rate from his bank. The government reported that prices, on average, have fallen by 5% during the current year. Which of the following can be concluded as a result of this transaction?

Myron gains, while the bank loses.

If prices rose by 3% and nominal GDP rose by 5%, real GDP ...

Rose by 2%

Assume that Sara gets a fixed-rate loan from a bank when the expected inflation rate is 3 percent. If the actual inflation rate turns out to be 4 percent, who benefits from the unexpected inflation: Sara, the bank, neither, or both? Explain.

Sara will benefit from the unexpected inflation because her fixed loan payments have less value

You borrow $200 from the First Bank of Westeros to purchase Kraken repellant. The bank charges a fixed nominal interest rate of 18% per year and you will repay them in one year. You and the bank both anticipate that there will be 7% inflation. However, after the loan agreement is signed, the rate of inflation turns out to be 9%. Who is hurt by this unanticipated inflation, and why are they hurt by it?

The bank is hurt

The Consumer Price Index (CPI) is computed by comparing the cost of the typical market basket of goods purchased during a base year (evaluated at base year prices) with

The cost of the same market basket evaluated at current prices

The output gap is measured by which of the following?

The difference between actual and potential GDP.

If nominal GDP increased between years 2 and 3 while real GDP decreased...

The economy experienced inflation between years 2 and 3; this is only possible if prices increased while actual output decreased.

Suppose the consumer price index (CPI) was 100 on January 1st, 2017 and 110 on January 1st, 2018 with no changes in nominal wages. What was the inflation rate?

The inflation rate was 10 percent.