Question

QUESTION 1

1. If both prices and production are rising throughout the economy, then:

   	A.	Real GDP rises faster than Nominal GDP.
   	B.	Real GDP rises slower than Nominal GDP.
   	C.	Real GDP rises at the same rate as Nominal GDP.
   	D.	Real GDP falls at a slower rate than Nominal GDP.

1 points   

QUESTION 2

1. The CPI underestimates the inflation rate because:

   	A.	it excludes imported goods.
   	B.	it is derived by dividing NDGP by RGDP.
   	C.	it is subject to a substitution bias.
   	D.	it fails to consider the consumption patterns of the typical metropolitan consumer.

1 points   

QUESTION 3

1. If inflation changed from 5% to 4%:

   	A.	the economy would be experiencing falling prices.
   	B.	the economy would be experiencing rising prices.
   	C.	the economy would be experiencing deflation.
   	D.	the economy would be experiencing stagflation.

1 points   

QUESTION 4

1. The AD curve is downwards sloping because of:

   	A.	the income and substitution effects.
   	B.	the increase in real income that arises when price falls.
   	C.	the real balance effect, the intertemporal substitution effect and the international substitution effect.
   	D.	the positive consequences of deflation for debt holders.

Answer 1

B. Real GDP rises at a slower rate than Nominal GDP.

Nominal GDP = Current Price*Current Output

Real GDP = Base Year Price*Current Output

In nominal GDP, both component are increasing while in real GDP only one component is increasing, so real GDP will rise at a slower rate.

C. It is subject to a substitution bias.

Substitution effect refers to the substitution of products with its close substitute when price of a product increases. This is the reason CPI underestimate the inflation rate.

B. the economy would be experiencing rising prices.

Decrease in inflation refers to decrease in the rate at which prices are increasing. Prices will increase but at a decreasing rate. If inflation is negative that is known as deflation and when inflation remains constant it is called stagflation.

B. the increase in real income that arises when price falls

AD curve slopes downward as prices of goods and income level are negatively related.