Question

1) The big problem with using prices as a ruler to measure the size of our economy and how fast it grows is:

	A.	Monopolies can distort prices.
	B.	Prices include sales taxes.
	C.	There are no prices to measure government output.
	D.	Prices cannot estimate the true value of goods and services.
	E.	Prices change from year to year.

2) A French couple purchases gasoline:

	A.	An intermediary good.
	B.	An export..
	C.	A financial transaction.
	D.	Investment spending.
	E.	Consumption spending.

3) The purchase of a new home is considered:

	A.	A government purchase.
	B.	Consumption spending.
	C.	Transfer payment.
	D.	Investment spending.
	E.	A financial transaction.

Answer 1

Question 1

The big problem with using prices as a ruler to measure the size of our economyand how fast it grows is that prices generally vary from year to year and such variation can be large as well as small.

Large variation in prices between two years can show significant increase in size of economy and growth rate. However, actual production of goods and services may not have increased at same pace. Thus, in real terms, economy may not have grown at that pace.

Hence, the correct answer is the option (E).

Question 2

When household buy goods and services, it is termed as consumption spending.

So, when the French couple purchases gasoline, it is termed as consumption spending.

Hence, the correct answer is the option (E).

Question 3

Residential investment is an component of investment spending.

So, the purchase of a new home is considered as investment spending.

Hence, the correct answer is the option (D).