Assessment one spring 2018 2019

Macroeconomic sample questions for students BECO202 ASS 1

Chapter 5:

1. is when there are extremely rapid increases in the overall price level.
(a) Inflation
(b) Stagflation
(c) Hyperinflation
(d) Superflation
ANSWER: (c) Refer to p. 92 [404] for the definition.

2. Aggregation refers to
(a) the behavior of all individuals in a group taken together.
(b) the calculation of average values by adding together and dividing.
(c) forecasting future values, based on past data.
(d) the development of the microeconomic foundations of macroeconomics.
ANSWER: (a) Refer to p. 96 [408] for more on this.

3. A recession occurs when aggregate output declines for consecutive .

(a) two; months
(b) two; quarters
(c) three; months
(d) three; quarters
ANSWER: (b) Refer to p. 90 [402] for the definition of recession.

4. At the beginning of 2009, the Lifeguards’ Union negotiates a wage contract of $8 per
hour for lifeguards. The summer of 2009 is especially bleak, with little beach activity.
Although the demand for lifeguards decreases, their hourly wage rate does not. This is
an example of a
(a) macroeconomic price.
(b) price control.
(c) sticky price.
(d) price ceiling.
ANSWER: (c) If the price of lifeguard services were influenced by changes in market
conditions, the price (wage) should have fallen. The contractual
agreement made the price “sticky.”

5. The economy is in a recession. Using fiscal policy tools, the government

might government spending and taxes.
(a) increase; increase
(b) increase; decrease
(c) decrease; increase
(d) decrease; decrease
ANSWER: (b) Raising government spending will increase overall spending
(aggregate demand). Cutting taxes will also increase overall spending.
This is an expansionary fiscal policy.
6. A contractionary fiscal policy is likely to be enacted during a(n) ; a
contractionary monetary policy is likely to be enacted during a(n) .
(a) expansion; expansion
(b) expansion; contraction
(c) contraction; expansion
(d) contraction; contraction
ANSWER: (d) Contractionary policies are intended to stimulate a faltering economy.

7. In 2007, working-class parents received a child tax credit rebate of $500 per child. This
is best classified as a
(a) fiscal policy because it used taxes to stabilize the economy.
(b) fiscal policy because taxes were used as incentives to work, save, and invest.
(c) monetary policy because it was designed to stabilize the economy.
(d) monetary policy because taxes were used as incentives to work, save, and
invest.
ANSWER: (a) This payment had little impact on the decision to work, save, and
invest. The check was meant to be spent while the economy was
faltering.
8. The notion that the government can stabilize the economy is known as
(a) classical macroeconomics.
(b) growth economics.
(c) proactive business cycle management.
(d) fine-tuning.
ANSWER: (d) “Fine-tuning” suggests that the government can adjust macroeconomic
variables (inflation and unemployment) very precisely through
carefully selected policy actions.

9. Before the Great Depression, the “classical” economists assumed that wages
were upward and downward.
(a) flexible; flexible
(b) flexible; not flexible
(c) not flexible; flexible
(d) not flexible; not flexible
ANSWER: (a) The classical economists believed that the wage would respond to
shifts in the demand for, and supply of, labor. Refer to p. 96 [408].

10. Before the Great Depression, the “classical” economists predicted that, if the demand
for labor fell, then
(a) the wage would increase, the supply of labor would increase, and
unemployment would occur.
(b) the wage would decrease, the supply of labor would decrease, and
unemployment would occur.
(c) the wage rate would fall to clear the market, resulting in higher unemployment.
(d) the wage rate would fall to clear the market, reducing the quantity of labor
supplied and eliminating unemployment.
ANSWER: (d) Try drawing the labor market using demand and supply curves. The
classical economists used microeconomic tools. Unfortunately, they
failed to take into account contracts, minimum wages, and the
possibility that the wage level could become stuck.

11. In general, over the past 25 years, the inflation rate has been and the
unemployment rate has been .
 (a) increasing; increasing
(b) increasing; decreasing
(c) decreasing; increasing
(d) decreasing; decreasing
ANSWER: (d) Refer to Figures 5.5 (20.5) and 5.6 (20.6). While there has been some
variability, there has been a general downward trend.

12. In 2008, there was some concern about “stagflation” in the economy. If stagflation was
present, we should expect
(a) high inflation and low stock market prices.
(b) high inflation and high unemployment.
(c) low interest rates and falling stock market prices.
(d) a declining overall price level and high unemployment.
ANSWER: (b) Stagflation means high inflation and high unemployment with
negative growth.

13. Keynes believed that the level of employment is determined by

(a) the wage level.
(b) the aggregate (overall) price level.
(c) aggregate demand.
(d) stock prices.
ANSWER: (c) Keynes’s macroeconomic model is driven by aggregate demand (refer
to p. 96 [408]). When there is an increase in the demand for goods and
services, there is an increase in employment.
Chapter6:

1. U.S. gross domestic product for 2009 is defined as the total market value of all
(a) final goods and services sold in 2009.
(b) goods and services produced in 2009 by productive resources owned by U.S.
citizens.
(c) final goods and services produced in 2009 within U.S. boundaries by
productive resources owned by U.S. citizens.
(d) final goods and services produced in 2009 within U.S. boundaries.
ANSWER: (d) Ownership of resources is irrelevant in GDP calculations; the location
of production is—it must be within U.S. boundaries. Refer to p. 105
[417].

2. goods are goods that are not resold to someone else.

(a) Intermediate
(b) Final
(c) Transfer
(d) Consumer durable
ANSWER: (b) Consumer durables may not be resold (except as second-hand
goods)—they are final goods. Goods that are resold are intermediate
goods or second-hand goods. Refer to p. 106 [418].

3. Jean, an avid gardener, buys a packet of carrot seeds. The packet of

seeds counted in GDP as a final product; the carrots Jean grows and
consumes counted in GDP as a final product.
(a) is; are
(b) is; are not
(c) is not; are
 (d) is not; are not
ANSWER: (b) The seeds are sold to the final user. Because Jean grows and eats the
carrots, they never reach a market and will not be counted (although
they do represent production). This is a limitation of the GDP concept.

4. Many Arbezani workers cross the border to work in Arboc although few Arbocalis
work in Arbez. We should expect that Arbezani GDP will be than its GNP and
that Arbocali GDP will be than its GNP.
(a) greater; greater
(b) greater; smaller
(c) smaller; greater
(d) smaller; smaller
ANSWER: (c) GDP measures production by location. More resources are producing
in Arboc. GNP measures production by ownership. Refer to p. 107
[419].

5. The expenditure approach equation is

(a) C + I + G + (EX + IM).
(b) C + I + G – (EX + IM).
(c) C + I + G + (EX – IM).
(d) C + I + G – (EX – IM).
ANSWER: (c) Net exports (EX – IM) are added to the total. Refer to p. 108 [420].

6. Peter Rachman builds some apartment buildings. This expenditure is

(a) residential consumption.
(b) residential investment.
(c) durable consumption.
(d) inventory investment.
ANSWER: (b) All new residential construction is classified as investment. Refer to
p. 109 [421].

7. Gross private domestic investment has three components:

(a) nonresidential investment, residential investment, and inventory investment.
(b) business investment in plant and equipment, residential construction, and net
exports of machinery.
(c) stocks, bonds, and real estate.
(d) purchases of new firms, purchases of existing firms, and purchases of
residential housing stock.
ANSWER: (a) Refer to p. 109 [421] for a breakdown of gross private domestic
investment.

8. GDP is 1,200, consumption (personal consumption expenditures) is 900, gross private

domestic investment is 150, exports are 50, and imports are 125. Depreciation is 40.
Government spending (government consumption and gross investment) is
(a) 15.
(b) 75.
(c) 225.
(d) 265.
ANSWER: (c) GDP = C + I + G + (EX – IM). 1,200 = 900 + 150 + G + (50 – 125).
Depreciation is not relevant in this calculation.
9. The capital stock at the end of the year is equal to the capital stock at the beginning of
the year
(a) plus depreciation.
(b) minus depreciation.
(c) plus net investment.
(d) plus gross investment.
ANSWER: (c) The change in the capital stock is net investment. It can be negative.
Refer to p. 110 [422].

10. The best measure of the total income received by households is

(a) GDP.
(b) GNP.
(c) national income.
(d) personal income.
ANSWER: (d) National income measures the income earned by a nation’s productive
resources. Some income though, doesn’t reach households—retained
earnings, social insurance payments. Some income received by
households is unearned—transfer payments such as welfare. Personal
income records the income received by all households after these
adjustments have been made.

11. In Arboc, personal income is $680 billion, personal income taxes are $170 billion, and
personal saving is $20 billion. The personal saving rate is
(a) 2.9%.
(b) 3.9%.
(c) 11.8%.
(d) 27.9%.
ANSWER: (b) The personal saving rate is the percentage of disposable personal
income that is saved. Disposable personal income is personal income
minus personal income taxes ($680 billion – $170 billion). The saving
rate is $20 billion/$510 billion = 0.039, or 3.9%.

12. Arboc is a simple economy in which all income is either compensation of employees
or profits. Also, there are no indirect taxes. Using the income approach, GDP is made
up of
(a) compensation of employees + profits + depreciation
(b) compensation of employees + profits – depreciation
(c) compensation of employees – profits + depreciation
(d) compensation of employees – profits – depreciation
ANSWER: (a) Given the assumptions about Arboc, all other differences between
national income and GDP disappear.

13. GDP minus the rest of the world and minus equals NNP.
(a) net factor payments to; depreciation
(b) net factor payments to; indirect taxes minus subsidies
(c) net factor receipts from; depreciation
(d) net factor receipts from; indirect taxes minus subsidies
ANSWER: (a) GDP includes net factor payments to the rest of the world. GNP
subtracts these payments. NNP subtracts depreciation from GNP.

14. If real GDP decreases from Year 1 to Year 2, we can conclude that
(a) production levels are lower in Year 2 than in Year 1.
(b) price levels are lower in Year 2 than in Year 1.
 (c) there is less unemployment in Year 2 than in Year 1.
(d) we need more information before commenting.
ANSWER: (a) Real GDP measures the level of real production.

Use the fixed-weights method and following information about prices of goods in Arboc to
calculate the economy’s production for the next three questions.
Production Prices
Good Year 1 Year 2 Year 3 Year 1 Year 2 Year 3
Goat milk 200 180 160 2.00 2.40 2.50
Bananas 80 90 100 3.00 3.20 3.10

15. Nominal GDP in Year 1 is and nominal GDP in Year 2 is .

(a) 640; 720
(b) 640; 736
(c) 630; 720
(d) 630; 736
ANSWER: (a) Nominal GDP for Year 1 = (200  2.00) + (80  3.00) = 640. Nominal
GDP for Year 2 = (180  2.40) + (90  3.20) = 720.

16. In Year 1 prices, real GDP in Year 2 is and real GDP in Year 3 is .
(a) 640; 620
(b) 640; 630
(c) 630; 640
(d) 630; 620
ANSWER: (d) Real GDP for Year 2 = (180  2.00) + (90  3.00) = 630. Real GDP
for Year 3 = (160  2.00) + (100  3.00) = 620.

17. Using Year 1’s prices to get real GDP, the GDP fixed-weight deflator for Year 3 is
about
(a) 82.9.
(b) 87.3.
(c) 114.5.
(d) 120.6.
ANSWER: (c) Nominal GDP for Year 3 = (160  2.50) + (100  3.10) = 710. Real
GDP for Year 3 = (160  2.00) + (100  3.00) = 620. GDP deflator =
(nominal GDP/real GDP)  100 = (710/620)  100 = 114.5.

18. In Arboc, nominal GDP is 4,000 opeks and real GDP is 3,000 opeks. The GDP
deflator is
(a) 25.
(b) 33.33.
(c) 75.
(d) 133.33.
ANSWER: (d) To find the GDP deflator, divide nominal GDP by real GDP and then
multiply by 100. In this case, (4,000/3,000)  100 = 133.33.
Use the new BEA annual weights method and the following information about prices of goods
in Arboc to calculate the economy’s production for the next two questions.
 Production Prices
Good Year 1 Year 2 Year 1 Year 2
Goat milk 200 180 2.00 2.40
Bananas 80 90 3.00 3.20

19. The real GDP in Year 1 is . The real GDP in Year 2 is . Use Year 1 as the
base year.
(a) 600; 720
(b) 600; 630
(c) 640; 720
(d) 640; 630
ANSWER: (d) Real GDP for Year 1 = (200  2.00) + (80  3.00) = 640. Real GDP
for Year 2 = (180  2.00) + (90  3.00) = 630.

20. The real GDP in Year 1 is . The real GDP in Year 2 is . Use Year 2 as the
base year.
(a) 736; 780
(b) 736; 720
(c) 640; 780
(d) 640; 720
ANSWER: (b) Real GDP for Year 1 = (200  2.40) + (80  3.20) = 736. Real GDP
for Year 2 = (180  2.40) + (90  3.20) = 720.

8. Use the following table to answer the following questions.

Nominal Nominal GDP GDP Real Real GDP

Year GDP (% change) Deflator GDP (% change)
1995 1,212.8 — 46.5 —
2000 1,990.5 67.3
2005 3,166.0 100.0
2010 4,486.2 117.3

(a) Calculate the percentage increase in nominal GDP from one year to the next.
(b) Use the GDP deflator to derive real GDP.
(c) Calculate the percentage increase in real GDP from one year to the next.

8. Refer to the following table.

Nominal Nominal GDP GDP Real Real GDP

Year GDP (% change) Deflator GDP (% change)
1995 1,212.8 — 46.5 2,608.2 —
2000 1,990.5 +64.1 67.3 2,957.7 +13.4
2005 3,166.0 +59.1 100.0 3,166.0 +7.0
2010 4,486.2 +41.7 117.3 3,824.6 +20.8

Note: Rearrange the formula GDP deflator  (Nominal GDP  real GDP)  100 to get:
Real GDP  (Nominal GDP  GDP deflator) 100
9. The nation of Arboc produces pencils and notepads. Using the following information,
calculate:

Pencils Notepads
Year 1 2,000 at 10¢ each 75 at $1.00 each
Year 2 2,400 at 15¢ each 60 at $1.10 each

(a) Nominal GDP for Year 1

(b) Nominal GDP for Year 2
(c) Real GDP for Year 1 (Year 1 as base)
(d) Real GDP for Year 2 (Year 1 as base)

(a) Nominal GDP for Year 1 $275

(b) Nominal GDP for Year 2 $426
(c) Real GDP for Year 1 (Year 1 as base) $275
(d) Real GDP for Year 2 (Year 1 as base) $300

4. You are given the following information by a colleague who is doing research on the
Freedonian economy. Because she has never taken an economics course, she has turned
to you for help using the information she has found. (Assume any unreported values
are zero.)

Compensation of employees 1175.2

Corporate profits minus dividends 90.8
Freedonian exports of goods and services 94.4
Depreciation 283.2
Personal income taxes 150.5
Personal consumption expenditures 878.2
Government consumption and gross investment 400.4
Indirect taxes minus subsidies 122.4
Gross private domestic investment 322.7
Freedonian imports of goods and services 70.5
Use the information above to calculate
(a) GDP
(b) National income
(c) Personal income
(d) Disposable personal income
(e) Net exports
(f) Personal saving rate
4. (a) GDP = C + I + G + (EX – IM) = 878.2 + 322.7 + 400.4 + (94.4 – 70.5) =
1,625.2.
(b) National income  GDP – depreciation  1342.0.
(c) Personal income  national income – retained earnings  1,251.2.
(d) Disposable personal income  personal income – personal income taxes 
1,100.7
(e) Net exports  exports – imports  94.4 – 70.5  23.9
(f) Personal saving rate = (Disposable personal income – personal consumption
expenditures)/ Disposable personal income = (1,100.7 – 878.2)/ 1,100.7 =
222.5/ 1,100.7 = 20.2%.
Chapter7:

The population of Arbez is 150,000, of which 100,000 are aged 16 or older. Of this 100,000,
60,000 have jobs and 40,000 do not. 20,000 are unemployed but actively seeking jobs, and there
are 20,000 who have given up the job search in frustration.

1. What is the unemployment rate?

ANSWER: The unemployment rate is 25%; the labor-force participation rate is
80%. Of the 150,000 Arbezanis, only 100,000 are of an age that
qualifies them to be in the labor force. Of the 100,000, 60,000 are
employed, and an additional 20,000 are unemployed (without jobs,
seeking work). The remaining 20,000 discouraged workers have
dropped out of the labor force. There are, then, 80,000 workers in the
labor force. Unemployment rate  unemployed/labor force 
20,000/80,000  25%.

2. What is the labor-force participation rate?

ANSWER: Labor-force participation rate  labor force/population (over 16) 
80,000/100,000  80%.

3. During a recession, we expect to see output and unemployment .

(a) increasing; increasing
(b) increasing; decreasing
(c) decreasing; increasing
(d) decreasing; decreasing
ANSWER: (c) By definition, a recession occurs when real GDP falls for two or more
quarters. As output falls, more workers are laid off. Refer to p. 125
[437].

4. Typically, workers in a fishing-gutting factory have a high rate of absenteeism. Phyllis

the Filleter has been “off sick” this week. She is correctly classified as
(a) employed.
(b) unemployed.
(c) a discouraged worker.
(d) not in the labor force.
ANSWER: (a) If Phyllis is temporarily absent, with or without pay, she is considered
employed. Refer to p. 124 [436].

5. The labor force is comprised of

(a) the employed plus the unemployed.
(b) the employed minus the unemployed.
(c) the employed, the unemployed, and discouraged workers who could work.
(d) the employed plus the unemployed minus discouraged workers who could
work.
ANSWER: (a) Discouraged workers are not counted as part of the labor force.

6. In Arbez, there are 80,000 persons in the labor force, and the unemployment rate is
25%. As the economy moves out of a long recession and job openings increase, 5,000
discouraged workers become “encouraged” and begin searching for a job. The
unemployment rate will become
(a) 18.75%.
(b) 23.5294%.
 (c) 29.4118%.
(d) 31.25%.
ANSWER: (c) Initial unemployment rate  25%  unemployed/80,000. The number
unemployed is 20,000. When 5,000 new (unemployed) workers enter
the labor force, the unemployment rate  25,000/85,000  29.4118%.

7. The nation of Regit has a population of 1 million citizens. The labor-force participation
rate is 80%. The number of Regitanis with jobs is 728,000. The unemployment rate is
(a) 7.20%.
(b) 8.00%.
(c) 9.00%.
(d) 9.89%.
ANSWER: (c) The unemployment rate  unemployed  labor force 
72,000/800,000  0.09.
Labor force  participation rate  population  0.8  1,000,000 
800,000. Unemployed  800,000 – 728,000  72,000.

8. The nation of Noil has a population of 1 million citizens. The labor-force participation
rate is 80%. 50,000 persons are unemployed in March. By June, 10,000 persons have given up
seeking employment. This is the only change over the quarter. We can conclude that the
unemployment rate was
(a) 6.25% in March and 7.50% in June.
(b) 6.25% in March and 6.25% in June.
(c) 6.25% in March and 5.06% in June.
(d) 5.00% in March and 6.25% in June.
ANSWER: (c) In March, the unemployment rate  unemployed  labor force 
50,000/800,000  0.0625. In June, the unemployment rate 
unemployed  labor force  40,000/790,000  0.05063, or 5.06%.
9. Unemployment caused by short-run job/skill matching problems is
(a) frictional unemployment.
(b) structural unemployment.
(c) cyclical unemployment.
(d) natural unemployment.
ANSWER: (a) Refer to p. 129 [441] for the definition of frictional unemployment.

10. Recessions have all of the following beneficial effects EXCEPT

(a) inflation is reduced.
(b) efficiency is improved.
(c) the crime rate is decreased.
(d) the balance of payments improves because imports decrease.
ANSWER: (c) Typically, the crime rate rises during a recession.

11. During the Great Depression of the 1930s, many laborers found great difficulty finding
a job. They were
(a) frictionally unemployed.
(b) structurally unemployed.
(c) cyclically unemployed.
(d) discouraged workers.
ANSWER: (c) In the 1930s, demand was low throughout the economy.

12. The unemployment rate that occurs as a normal consequence of the efficient
functioning of the economy is the
 (a) frictional rate of unemployment.
(b) structural rate of unemployment.
(c) cyclical rate of unemployment.
(d) natural rate of unemployment.
ANSWER: (d) Refer to p. 129 [441]. This rate includes both frictional and structural
unemployment.
13. For many years, Noil was a traditional agrarian economy, specializing in rice
production. In the past few years, however, due to loans from the World Bank, Noil
has developed a thriving industrial sector, and farming (although increasingly
mechanized) has declined. We would conclude that, over the past few years, frictional
unemployment has and structural unemployment has .
(a) increased; increased
(b) increased; decreased
(c) decreased; increased
(d) decreased; decreased
ANSWER: (a) As the economy’s structure is changing, new skills are being required
and old skills are becoming obsolete—structural unemployment is
increasing. As skills become more specific and more complex, the
search time to find a suitable job increases—frictional unemployment
increases.
14. If the CPI is 120 in Year 1 and 135 in Year 2, what is the percentage change in the price
level from Year 1 to Year 2?
(a) 12.5%
(b) 15%
(c) 20%
(d) 35%
ANSWER: (a) The price index changes by 15 relative to the initial price level of 120
so (15/120)  100 = 12.5%.

15. Inflation is expected to run at 10% this year. Instead, it slows to 3%. This change will
hurt
(a) creditors.
(b) debtors.
(c) creditors and debtors equally, because it’s the same for both parties.
(d) neither, because inflation is lower.
ANSWER: (b) If inflation is higher than expected, creditors lose because they will fail
to compensate themselves through a higher interest rate. When
inflation is lower than expected, debtors lose because they are paying
an interest rate that is “too high.”

16. Inflation is expected to run at 10% this year. Instead, it slows to 3%. This year, there
has been
(a) an anticipated deflation.
(b) an unanticipated deflation.
(c) an anticipated reduction in inflation.
(d) an unanticipated reduction in inflation.
ANSWER: (d) The change was not expected. This is not a deflation—the price level
is still rising at 3% a year. A deflation occurs when the price level (not
the rate of increase in the price level) falls.

17. Inflation is expected to run at 10% this year. The real interest rate is 4%. This year, the
market interest rate is . If, during the year, the actual inflation rate is
4%, lose.
 (a) 6%; lenders
(b) 6%; borrowers
(c) 14%; lenders
(d) 14%; borrowers
ANSWER: (d) The interest rate  inflation rate  real interest rate = 10% + 4% = 14%.
Unanticipated deflation hurts borrowers.

18. Which of the following statements is false?

(a) When interest rates are high, the opportunity cost of holding cash is high.
(b) The more difficult it becomes to predict the rate of inflation, the more
the level of investment decreases.
(c) Individuals on fixed incomes gain during periods of deflation.
(d) In the mid-1970s, prices were lower than in the 1990s, and, therefore, inflation
was lower too.
ANSWER: (d) Historically, Option (d) is false; inflation rates were higher in the mid-
1970s than in the 1990s. Refer to Table 7.5 (22.5) in the textbook.
Option (d) is false theoretically, too. The fact that the price level is low
doesn’t imply that the rate of increase will also be low.

19. The difference between the interest rate a bank charges on a loan and the inflation rate
is
(a) the profit margin.
(b) the real interest rate.
(c) the anticipation markup.
(d) the nominal interest rate.
ANSWER: (b) Refer to p. 133 [445] for this definition.
20. Output growth depends on each of the following EXCEPT
(a) positive net investment.
(b) an increasing consumer price index.
(c) the growth rate of human capital per worker.
(d) an increase in the labor-force participation rate.
ANSWER: (b) Refer to p. 134 [446]. Output depends on availability and usage of
resources.

21. Each of the following will increase labor productivity EXCEPT

(a) an increase in the amount of capital being used.
(b) an increase in the efficiency of the capital being used.
(c) an increase in human capital.
(d) an increase in the number of workers.
ANSWER: (d) Labor productivity is output per worker hour. If we increase the
number of workers, total output should increase, but there is no
guarantee that average output will increase.

Exercises:
1.
Use the fixed-weights method and following information about prices of goods in Arboc to
calculate the economy’s production for the next three questions.
Production Prices
Good Year 1 Year 2 Year 3 Year 1 Year 2 Year 3
Goat milk 200 180 160 2.00 2.40 2.50
Bananas 80 90 100 3.00 3.20 3.10

1. Nominal GDP in Year 1 is and nominal GDP in Year 2 is .

(a) 640; 720
(b) 640; 736
(c) 630; 720
(d) 630; 736
ANSWER: (a) Nominal GDP for Year 1 = (200  2.00) + (80  3.00) = 640. Nominal
GDP for Year 2 = (180  2.40) + (90  3.20) = 720.

2. In Year 1 prices, real GDP in Year 2 is and real GDP in Year 3 is .

(a) 640; 620
(b) 640; 630
(c) 630; 640
(d) 630; 620
ANSWER: (d) Real GDP for Year 2 = (180  2.00) + (90  3.00) = 630. Real GDP
for Year 3 = (160  2.00) + (100  3.00) = 620.

3. Using Year 1’s prices to get real GDP, the GDP fixed-weight deflator for Year 3 is
about
(a) 82.9.
(b) 87.3.
(c) 114.5.
(d) 120.6.
ANSWER: (c) Nominal GDP for Year 3 = (160  2.50) + (100  3.10) = 710. Real
GDP for Year 3 = (160  2.00) + (100  3.00) = 620. GDP deflator =
(nominal GDP/real GDP)  100 = (710/620)  100 = 114.5.

2.
Use the new BEA annual weights method and the following information about prices of goods
in Arboc to calculate the economy’s production for the next two questions.

Production Prices
Good Year 1 Year 2 Year 1 Year 2
Goat milk 200 180 2.00 2.40
Bananas 80 90 3.00 3.20

1. The real GDP in Year 1 is . The real GDP in Year 2 is . Use Year 1 as the
base year.
(a) 600; 720
(b) 600; 630
(c) 640; 720
(d) 640; 630
ANSWER: (d) Real GDP for Year 1 = (200  2.00) + (80  3.00) = 640. Real GDP
for Year 2 = (180  2.00) + (90  3.00) = 630.
2. The real GDP in Year 1 is . The real GDP in Year 2 is . Use Year 2 as the
base year.
(a) 736; 780
(b) 736; 720
(c) 640; 780
(d) 640; 720
ANSWER: (b) Real GDP for Year 1 = (200  2.40) + (80  3.20) = 736. Real GDP
for Year 2 = (180  2.40) + (90  3.20) = 720.

3.
Use the following table to answer the following questions.

Nominal Nominal GDP GDP Real Real GDP

Year GDP (% change) Deflator GDP (% change)
1995 1,212.8 — 46.5 —
2000 1,990.5 67.3
2005 3,166.0 100.0
2010 4,486.2 117.3

(a) Calculate the percentage increase in nominal GDP from one year to the next.
(b) Use the GDP deflator to derive real GDP.
(c) Calculate the percentage increase in real GDP from one year to the next.

3. Refer to the following table.

Nominal Nominal GDP GDP Real Real GDP

Year GDP (% change) Deflator GDP (% change)
1995 1,212.8 — 46.5 2,608.2 —
2000 1,990.5 +64.1 67.3 2,957.7 +13.4
2005 3,166.0 +59.1 100.0 3,166.0 +7.0
2010 4,486.2 +41.7 117.3 3,824.6 +20.8

Note: Rearrange the formula GDP deflator  (Nominal GDP  real GDP)  100 to get:
Real GDP  (Nominal GDP  GDP deflator) 100

4.
The nation of Arboc produces pencils and notepads. Using the following information,
calculate:

Pencils Notepads
Year 1 2,000 at 10¢ each 75 at $1.00 each
Year 2 2,400 at 15¢ each 60 at $1.10 each

(a) Nominal GDP for Year 1

(b) Nominal GDP for Year 2
(c) Real GDP for Year 1 (Year 1 as base)
(d) Real GDP for Year 2 (Year 1 as base)
4. (a) Nominal GDP for Year 1 $275
(b) Nominal GDP for Year 2 $426
(c) Real GDP for Year 1 (Year 1 as base) $275
(d) Real GDP for Year 2 (Year 1 as base) $300

5.
You are given the following information by a colleague who is doing research on the
Freedonian economy. Because she has never taken an economics course, she has turned
to you for help using the information she has found. (Assume any unreported values
are zero.)

Compensation of employees 1175.2

Corporate profits minus dividends 90.8
Freedonian exports of goods and services 94.4
Depreciation 283.2
Personal income taxes 150.5
Personal consumption expenditures 878.2
Government consumption and gross investment 400.4
Indirect taxes minus subsidies 122.4
Gross private domestic investment 322.7
Freedonian imports of goods and services 70.5
Use the information above to calculate
(a) GDP
(b) National income
(c) Personal income
(d) Disposable personal income
(g) Net exports
(h) Personal saving rate
5. (a) GDP = C + I + G + (EX – IM) = 878.2 + 322.7 + 400.4 + (94.4 – 70.5) =
1,625.2.
(b) National income  GDP – depreciation  1342.0.
(c) Personal income  national income – retained earnings  1,251.2.
(d) Disposable personal income  personal income – personal income taxes 
1,100.7
(g) Net exports  exports – imports  94.4 – 70.5  23.9
(h) Personal saving rate = (Disposable personal income – personal consumption
expenditures)/ Disposable personal income = (1,100.7 – 878.2)/ 1,100.7 =
222.5/ 1,100.7 = 20.2%.

6. The following table provides information on inflation rates and unemployment rates
for Arboc over a seven-year period.

Year Inflation Rate (%) Unemployment Rate (%)

Year 1 0.0 7.5
Year 2 –2.0 9.0
Year 3 4.0 5.0
 Year 4 6.0 4.0
Year 5 10.0 2.5
Year 6 2.0 6.0
Year 7 –4.0 10.5

Arboc has a population of 1,000,000 over the age of 16. The labor-force participation
rate is 90%.
(a) Calculate the number of workers unemployed in Year 1.
(b) Calculate the number of workers employed in Year 7.
6. (a) 900,000  0.075 = 67,500
(b) 900,000  0.895 = 805,500
(c) Inflation is increasing—borrowers gain and creditors lose.
(d) The market interest rate is based on the real interest rate plus the expected
inflation rate. In Year 5, the market interest rate was 12% and the expected
inflation rate was 10% (based on the current inflation rate). The real interest
rate was 2%.

Assume that the citizens of Arboc, when trying to determine the inflation rate for the
next 12 months, base their calculations solely on the current inflation rate.
(c) During the period from Year 2 to Year 5, will borrowers be gaining or losing?
(d) In Year 5, the market interest rate was 12%. Calculate the real interest rate.
7. Using the following figures, calculate the economic quantities for each year.

2005 2010
Total population (16+) 200 million 210 million
Labor force 130 million 144 million
Employed 120 million 125 million

2005 2010
(a) the labor-force participation rate
(b) the number unemployed
(c) the unemployment rate
(d) There is more likely to have been a recession in which year?
(e) The President, denying that unemployment is growing, claims that:
(i) “We’ve created more jobs” and
(ii) “Some of the unemployed in the statistics have stopped seeking work.”
How would you respond to these points?
7. (a) The labor-force participation rate is labor force/population. In 2005, 130/200
= 65%; in 2010, 144/210 = 68.57%.
(b) Labor force equals the number employed plus the number unemployed. In
2005, the number unemployed = 130 million – 120 million = 10 million; in
2010, the number unemployed = 144 million – 125 million = 19 million.
(c) The unemployment rate  number unemployed/labor force. In 2005, number
unemployed/labor force = 10/130 = 7.69%; in 2010, number unemployed/labor
force = 19/144 = 13.9%.
(d) 2010x, because the unemployment rate is higher in 2005.
(e) (i) It is possible for a growing economy to experience rising employment
and rising unemployment but, if the increase in the participation rate
outstrips the increase in job openings, the unemployment rate will rise.
(ii) If, indeed, some individuals have stopped seeking work, then they
would have dropped off the unemployment rolls. Admitting the
presence of discouraged workers, on top of the listed unemployed,
actually makes the President’s performance worse!
8. Answer the questions, based on the following information.

Nominal Price Real Nominal

Year GDP (bill.) Index GDP (bill.) Wage Real Wage
Year 1 $4,486.0 108 $40,000
Year 2 $4,710.3 112 $40,800

(a) Between Year 1 and Year 2, nominal GDP has by %.

(b) Between Year 1 and Year 2, the price level has by %.
(c) Frank loaned Freda $500 in Year 1 to be paid back in Year 2. He guessed
inflation would run at 5% and accordingly increased the interest rate on the
loan. In the circumstances, who won?
(d) Calculate the real GDP figures.
(e) Now calculate the real wage of the typical worker in each year.
(f) To have maintained her/his Year 1 standard of living, the typical worker would
need to have received a nominal wage of in Year 2.
8. (a) risen; 5%; percentage change  (change in nominal GDP/initial GDP)  100 =
(224.3/4,486)  100 = 5%
(b) risen; 3.7%; percentage change  (change in price index/initial price index) 
100 = (4/108)  100 = 3.7%
(c) Frank as creditor, because anticipated inflation was greater than the actual
inflation rate.
(d) Refer to the following table. Real GDP = (nominal GDP/price index)  100
Example: Real GDP for Year 1 = (4,486/108)  100 = 4,153.7.

Nominal Price Real Nominal Real

Year GDP (bill.) Index GDP (bill.) Wage Wage
Year 1 $4,486.0 108 $4,153.7 $40,000 $37,037.04
Year 2 $4,710.3 112 $4,205.6 $40,800 $36,428.57

(e) Refer to the preceding table. Real wage  (nominal wage/price index)  100.
Example: Real wage for Year 1 = ($40,000/108)  100 = $37,037.04
(f) Real wage in Year 1 was $37,037.04 ($40,000/1.08). To maintain the same
value in Year 2, (x/1.12) = $37,037.04. Therefore, x = $37,037.04(1.12) =
$41,481.48.
9. Calculate the annual rates of inflation and complete the following table.

Year Price Index Rate of Inflation

Year 1 100.00 —
Year 2 113.00
Year 3 121.50
Year 4 126.70
Year 5 125.10

9. Refer to the following table.

Example: rate of inflation for Year 3 = [(121.5 – 113)/113]  100 = 7.52%.

Year Price Index Rate of Inflation

Year 1 100.00 —
Year 2 113.00 13.00%
Year 3 121.50 7.52%
Year 4 126.70 4.28%
Year 5 125.10 –1.26%