Reading 17

What is the GDP Deflator?

The GDP deflator is the percentage difference between nominal GDP and real GDP, reflecting inflation since the base period.

Which of the following factors is most likely to increase aggregate demand?

While an increase in real wealth will shift the AD curve to the right, an increase in the real rate of interest will shift the AD curve to the left as consumers and businesses reduce their borrowing and spending. An expected decrease in prices will shift the AD curve to the left as households and businesses postpone their consumption in anticipation of lower prices in the future.

If both aggregate demand and short-run aggregate supply decrease, the price level:

may increase or decrease.The effect on the price level of decreases in both AD and SRAS depends on the relative size of the decreases in AD and SRAS. An increase in AD increases the price level, but an increase in SRAS tends to decrease the price level, so their combined effect could be an increase or a decrease in the price level.

Nominal GDP for the year 20X7 is $784 billion and real GDP is $617 billion. If the base period for the GDP deflator is 20X1, the annual rate of increase in the GDP deflator since the base year is closest to:

GDP deflator = $784 billion / $617 billion × 100 = 127.07. Annual rate of increase = (127.07 / 100)^1/6 - 1 = 0.0407 = 4.07%.

Components of national income include:

National income is the sum of employee wages and benefits, corporate and government enterprise profits before tax, interest income, unincorporated business owners' income, rental income, and indirect business taxes less subsidies. Capital consumption allowance is an estimate of depreciation during the measurement period. Statistical discrepancy is an adjustment to GDP when measured using the income approach, which accounts for differences from the data used to calculate GDP using the expenditure approach.

The long-run aggregate supply curve is:

The long-run aggregate supply curve is perfectly inelastic because in the long run all input prices change in proportion to the price level. Therefore the price level has no effect on long-run aggregate supply, which represents the level of potential GDP.

Which method of calculating gross domestic product requires data from each stage of production of goods?

The sum-of-value-added method of calculating GDP requires data on the value added to goods at each stage of production and distribution. The value-of-final-output method only requires data on the final values of goods and services. The income approach to calculating GDP measures the total income of households and companies, rather than the value of goods and services.

A country's labor force is projected to decrease by 2% while its labor productivity is projected to increase by 3% per year. Based on these projections, the country's sustainable annual economic growth rate:

is positive. Growth in potential GDP = growth in labor force + growth in labor productivity. In this example, -2% + 3% = 1% growth in potential GDP.