Question

Questions on Lecture and D2L Readings

5. The distinction of nominal vs. real GDP is necessary to

a. adjust GDP for the actual quality of life.

b. account for inflation.

c. distinguish exports from imports.

d. determine if the economy is in a recession.

e. both a) and b) are correct.

6. A often used indicator of a recession is two consecutive quarterly falls in ______. The official determination is made, however, by _________.

a. either nominal or real GDP // the Federal Reserve Bank

b. real GDP // NBER (National Bureau of Economic Research)

c. nominal GDP // BLS (Bureau of Labor Statistics)

d. real GDP // BEA (Bureau of Economic Analysis)

e. real GDP // a consensus of economic commentators of the major news channels

7. Deflation is the converse of inflation. In deflation the CPI would be declining and the real value of money would increase. Therefore deflation

a. would benefit everyone.

b. makes debtors better off and creditors worse off.

c. make creditors better off and debtors worse off.

d. help corporate profits at the expense of wage earners.

8. Buying a U.S. treasury bond is lending money to the government. In the last month the nominal interest rate has declined by about 1.5 percentage points from 2.5 to 1.0 percent. It’s still a better buy then before as long as the inflation rate

a. Is steady

b. falls by more than 1.5 percentage points

c. rises moderately.

d. falls at any rate greater than 0.

Answer 1

5. The distinction of nominal vs. real GDP is necessary to account for inflation. Real GDP is used to determine realistic economic growth. This is because real GDP reflects a more accurate production value than nominal GDP. Its values are adjusted for inflation or deflation. Standard of living is the amount of goods and services available to purchase in a country.Real GDP is a good measure of standard of living but not quality of life.Standard of living only measures the wealth of material things its citizens have, but not quality of life.

6. A often used indicator of a recession is two consecutive quarterly falls in real GDP. The official determination is made, however, by NBER (National Bureau of Economic Research). A recession is when the economy contracts for at least two quarters. A recession is when the real GDP growth rate is negative for two consecutive quarters or more.Businesses, investors, and government officials track various economic indicators that can help predict or confirm the onset of recessions, but they're officially declared by the NBER. A variety of economic theories have been developed to explain how and why recessions occur.

7.Deflation is the converse of inflation. In deflation the CPI would be declining and the real value of money would increase. Therefore deflation make creditors better off and debtors worse off. Deflation increases the real value of money and the real value of debt. Deflation makes it more difficult for debtors to pay off their debts. Therefore, consumers and firms have to spend a bigger percentage of disposable income on meeting debt repayments.

8.Buying a U.S. treasury bond is lending money to the government. In the last month the nominal interest rate has declined by about 1.5 percentage points from 2.5 to 1.0 percent. It’s still a better buy then before as long as the inflation rate rises moderately. A real interest rate is an interest rate that has been adjusted to remove the effects of inflation to reflect the real cost of funds to the borrower and the real yield to the lender or to an investor. Real Interest Rate = Nominal Interest Rate - Inflation Rate. Any rise in inflation rate will decrease the real rate thus decreasing return to investor.