Question

1 Which of the following statements is NOT true? a. GDP deflator is the ratio of real GDP to nominal GDP b. A GDP deflator greater than 1 indicates inflation c. A GDP deflator greater than 1 indicates that nominal GDP exceeds real GDP

2 Which of the following is the best description of the LM curve? a. The value of production using prices of the current year b. The relationship between real output (GDP) demanded and the price level, holding other factors constant c. Combinations of GDP and the interest rate such that demand and supply of real money balances are equal

3 Which of the following conditions is true when the economy is at its full, or natural, level of output: a. The economy is operating at its maximum possible level of output given its existing resources. b. All resources are fully utilized and the unemployment rate is zero. c. There is only a small stable pool of unemployed workers (job seekers equal job vacancies) looking for and transitioning into new jobs.

4 An economic forecasting firm has estimated the following equation from historical data based on the neoclassical growth model: Potential output growth = 1.55 + 0.69(Growth of labor) + 0.32(Growth of capital) Which of the following statements is true? a. The intercept (1.55) in this equation is best interpreted as the long run sustainable growth rate b. The coefficient on the growth rate of capital (0.32) in this equation is best interpreted as the share of income earned by capital. c. The coefficient on the growth rate of labor (0.69) in this equation is best interpreted as the labor force participation rate.

5 Which of the following is NOT implied by diminishing marginal productivity of capital? a. The growth rates of developing countries should be lower than those of developed countries. b. The income of emerging market countries will converge to the income of developed countries over time. c. Increasing the supply of capital cannot be the basis for sustainable growth.

6 Which of the following is a description of the IS curve? a. This curve reflects the relationship between real output (GDP) demanded and the price level, holding underlying factors constant. b. This curve reflects combinations of income and the real interest rate such that demand and supply of real money balances are equal. c. This curve represents combinations of income and the real interest rate at which planned expenditure equals income

7 Which of the following statements is NOT an appropriate description of gross domestic product (GDP)? a. GDP is the total amount spent on all final goods and services produced within the economy over a given period of time. b. GDP is the market value of all final goods and services produced within the economy in a given period of time c. GDP is the aggregate income earned by all households and all companies within the economy in a given period of time.

8 Which of the following conditions contributes to an increase in a country’s GDP? a. An increase in transfer payments b. An increase in imports. c. An increase in domestic consumption.

Answer 1

1. (a) GDP Deflator is the ratio of real GDP to nominal GDP.

GDP Deflator is the ratio of nominal GDP to real GDP times 100 and so the above statement is not true.

2. (c) Combinations of GDP and the real interest rate such that the demand and supply of real money balances are equal.

The LM curve shows the combination off the interest rate and income levels where the suppy and demand of the real money balances are equal.

3. (c) There is only a small stable pool of unemployed workers looking for and transitioning into new jobs.

Full employment is a condition where all the people in acountry who are able to work are employed. But, there always remains some workers who are switching between new jobs and which don't come under unemployment so when there is a small stable pool of unemployed workers who are looking and transitioning into new jobs, the economy is said to be at full employment.

4. (b) The coefficient on the growth rate of capital (0.32) in this equation is best interpreted as the share of income earned by capital.

The coefficient on the growth rate of capital which is the dependent variable shows how much mean of the dependent variable changes, given a unit shift in the independent variable, which is potential output growth here, holding other factors constant.

5. (a) The growth rates of developing country should be lower than those of developed countries.

The diminishing marginal productivity of capital says that as we go on adding more capital, there would be diminishing productivity. At lower capital in developing countries there would be higher productivity and at higher capital in developed countries there would be lower productivity.

6. (c) This curve reresents combinations of income and the real interest rate at which planned expenditure equals income.

The IS curve shows the combinations of income and interest rate where the goods and service market is in equlibrium which occurs when the planned expenditure equals income.

7. (c) GDP is the aggregate income earned by all households and all companies within the economy in a given period of time.

GDP shows the total value of all goods produced in a nation in a given period of time and it does not show the aggregate income.

8. (c) An increase in domestic consumption.

When the domestic consumption increases, the country's GDP also increases.