Question

1. Which of the following statements is true?

a.Macroeconomic policies are always effective in the short-run because output is at its potential level.

b. Macroeconomic policies are always effective in the short-run because they affect output through AD, but not prices.

c. Macroeconomics policies are always effective in the long-run because output is at its potential level.

d. Macroeconomic policies are effective in the short-run as well as in the long-run because both output and price are at their potential levels.

2. Output gap is given by:

a. Actual Price – Real Price.

b. Nominal GDP – Real GDP.

c. Actual Output – Potential Output.

d. Nominal Price – Real Price.

3. To avoid multiple counting while calculating GDP,

a. Primary, intermediate and final goods should be counted.

b. Only intermediate goods should be counted.

c. Only final goods should be counted.

d. Both final and intermediate goods should be counted.

4. Which of the following would be considered as an investment expenditure?

a. The government hires new workers to build a freeway.

b. Kim’s Boat Storage buys a new boat lift.

c. Frank purchases a few shares of Microsoft.

d. The Jones buy a house which was built in 1980

5. GDP will NOT include:

a. Barnes & Nobles adds $5000 worth of books to its inventory.

b. Bonson hires a babysitter for $10 an hour to take care of his kids.

c. Carolyn offers pedicure services and makes $5 tips daily, which are reported on her income tax.

d. Raj has a job of washing dishes at his parents’ diner who provide him with room and board instead of a salary.

6. Which of the following components will not be included while measuring GDP using expenditures approach:

a. The army buying new tanks.

b. Ben’s purchase of a burger at the “In n’ Out” in Reno.

c. Tesla buying new Dell Computers for use in its marketing department in Sparks, Nevada.

d. A senator from Nevada being paid the monthly salary.

Answer 1

Solution:

1. In the short run, the output is not at its potential level (potential level is reached in the long run). So, the effect of policy is through changes/shifts in the aggregate demand curve. In the long run, stabilization process occurs to reach the potential output level. Thus, the correct option is (B).

2. Output gap is the difference of actual output with the potential level of output, that is, output gap = actual output - potential output. Thus, the correct option is (C).

3. In order to avoid multiple counting, we avoid including value of primary and intermediary goods, and only keep the value of final goods as used in gross domestic product (GDP) calculation. Thus, the correct option is (C).

4. Investment expenditure mainly includes the investment of money in something that adds on to the business. Among the given options, freeway building required government expenditure, Frank's purchase of shares is simply a financial investment for growth of personal wealth, and buying of a house by Jones is consumption expenditure as it's purpose is of living in. Only Kim's Boat Storage buying a new boat lift is a purchase for business expansion, and thus, an investment expenditure. Thus, the correct option is (B).

5. GDP does not account for any service that is unpaid, be it care of parents or helping a relative out by babysitting for them. Raj provides service of washing dishes, but in return gets a room and a board, so this service is unpaid, and must not be included in GDP calculation. Thus, the correct option is (D).

6. Under expenditure approach, GDP includes consumption expenditure such as purchase of a burger, government expenditure such as army buying tanks, investment expenditure such as buying of new Dell computers, and net exports (which is excess of export value over import value for an economy). Monthly salary and wages are included based of income approach and not expenditure approach. Thus, the correct option is (D).