Question

1a) Suppose consumers typically buy some combination of various meats (chicken, beef, pork, and fish). Suppose the price of fish and beef rise much more than chicken and pork. The effect on the price index is likely ________; this is called the _________.

overstated; substitution effect

understated; substitution effect

overstated; price effect

understated; price effect

b) If nominal GDP increases from one year to the next by more than real GDP, which of the following must be true?

there is not enough information to tell what happened to prices or production

only production increased

production increased and so did prices

only prices increased

c) Which of the following is included in the consumption component of U.S. GDP?

all of these are consumption components

purchases of natural gas by U.S. households

purchases of newly constructed homes by U.S. households

purchases of staplers, paper clips, and pens by U.S. business firms

d) Which of the following scenarios would NOT affect GDP overall?

Jane spends money on a new laptop from a local manufacturer for her personal business, and she bought last year's model on sale

Jackie buys a new car from General Motors at a local dealership

David buys a new table at a local furniture store

Susan purchases a case of champagne for an event, imported from France

e) For an economy as a whole, income must equal expenditure because

every dollar of saving by some consumer is a dollar of spending by some other consumer.

the number of firms is equal to the number of households in an economy.

every dollar of spending by some buyer is a dollar of income for some seller.

individuals can only spend what they earn each period.

Answer 1

Q.1.

a)

For a consumer, typical basket for meat consists of combination of various meats such as chicken, beef, pork, and fish.

If we assume that the price of fish and beef rise much more than chicken and pork, the effect on price index is likely to be overstated.

In price effect, only price of one of the commodity changes. However while analyzing substitution effect, prices of both goods changes (One becomes costlier, one becomes cheaper, that's why a consumer is willing to substitute for costlier good with a cheaper alternative).

Hence correct Option - A

b)

Nominal GDP is calculated at current market prices. Hence it takes into account both price effects and quantity effects. On the other hand, real GDP is calculated at base prices. Hence it isolates price effect from the analysis and comment solely on the quantity/production change.

If nominal GDP increases from one year to the next by more than real GDP, this means that production increased and so did prices.

Correct Option - C

c)

Purchases of natural gas by U.S. households - included in household consumption

purchases of newly constructed homes by U.S. households - included in Residential investment

purchases of staplers, paper clips, and pens by U.S. business firms - included in Business fixed investment

Hence correct ans - B

d)

Jane bought last year's computer model for her business. This does not affect the current GDP level because the computer was built last year.

Correct Ans - A

e)

For an economy as a whole, income must equal expenditure because every dollar of spending by some buyer is a dollar of income for some seller.

Correct Ans - C