Quiz 1 Solutions

Quiz 1 for Chapter 2 and Chapter 3 (First half)
1) Suppose nominal GDP increased in a given year. Based on this information, we

know with certainty that
A) real output has increased.
B) the price level (GDP deflator) has increased.
C) real output and the price level (GDP deflator) have both increased.
D) either real output or the price level (GDP deflator) have increased.
E) real output has increased and the price level has decreased.
Answer: D
Comment: Formula of GDP deflator
2) Use the following information to answer this question. If nominal GDP rises from
$100 trillion to $120 trillion, while the GDP deflator rises from 2.0 to 2.2, the
percentage change in real GDP is approximately equal to
A) -10%.
B) 10%.
C) 20%.
D) 9.1%.
E) 0%.
Answer: D
Comment: First calculate Real GDP before and after, the calculate the increase percentage.
3) In a given year, suppose a company spends $100 million on intermediate goods

and $200 million on wages, with no other expenses. Also assume that its total sales
are $800 million. The value added by this company equals
A) $200 million.
B) $300 million.
C) $500 million.
D) $700 million.
E) $800 million.
Answer: D
Comment: Standard value-added approach.
4) A firm's value added equals

A) its revenue minus all of its costs.
B) its revenue minus its wages.
C) its revenue minus its wages and profit.
D) its revenue minus its cost of intermediate goods.
E) none of the above
Answer: D
Comment: Standard value-added approach.
5) Suppose nominal GDP in 2009 does not change (compared its previous level in
2008). Given this information, we know with certainty that
A) real GDP increased during 2009.
B) the GDP deflator increased during 2009.
C) both the GDP deflator and real GDP fell during 2009.
D) more information is needed to answer this question.
Answer: D
Comment: GDP deflator depends on both nominal and real GDP, while real GDP have no
correlation with nominal GDP.
6) GDP in current dollars is equivalent to which of the following?

A) real GDP
B) GDP in terms of goods
C) GDP in 2000 dollars
D) GDP in constant dollars
Answer: E
7) Which of the following represents real GDP?

A) GDP in constant dollars
B) GDP in terms of goods
C) GDP in base year dollars
D) all of the above
Answer: D
8) Based on the notation presented in Chapter 2, which of the following expressions

represents real GDP?
A) Yt
B) PtYt
C) Yt/Pt
D) $Yt/Pt
Answer: A
Comment: Generally speaking, both A and C are correct. But A is more suitable
answer as we did not specify the price index as GDP deflator, so it might be CPI, then
in this case, C would not be correct in this case.
9) In the United States, someone is classified as unemployed if he or she

A) does not have a job.
B) does not have a job, or else has a job but is looking for a different one while
continuing to work.
C) does not have a job, has recently looked for work, and is collecting unemployment
insurance.
D) none of the above
Answer: C
Comment: To be considered as unemployed, you need to be in labor force and looking for
job.
10) Which of the following tends to occur when the unemployment rate increases?
A) a reduction in the labor force participation rate
B) a reduction in the number of discouraged workers
C) an increase in the number of employed workers
D) all of the above
Answer: A
Suppose a country using the United States' system of calculating official

unemployment statistics has 100 million people, of whom 50 million are working age.
Of these 50 million, 20 million have jobs. Of the remainder: 10 million are actively
searching for jobs; 10 million would like jobs but are not searching; and 10 million do
not want jobs at all.
11) Refer to the information above. The labor force is

A) 20 million.
B) 30 million.
C) 60 million.
D) 80 million.
E) 100 million.
Answer: B
Comment: People not searching for jobs are not inside labor force calculations. So we count
the 20M who have a job and 10M who are actively searching for jobs only.
12) Refer to the information above. The labor force participation rate is
A) .2.
B) .3.
C) .4.
D) .6.
E) .8.
Answer: D
Comment: 30/50 = 0.6
13) Refer to the information above. The official unemployment rate is

A) .1.
B) .2.
C) .33.
D) .4.
E) .66.
Answer: C
Comment: 10/30 = 0.33
14) Which of the following would not be considered part of fixed investment
spending (I)?
A) Toyota buys a new robot for its automobile assembly line.
B) Apple computer builds a new factory.
C) Exxon increases its inventories of unsold gasoline.
D) An accountant buys a newly built home for herself and her family.
E) all of the above
Answer: C
15) Which of the following is an exogenous variable in our model of the goods market
in Chapter 3?
A) consumption (C)
B) saving (S)
C) disposable income (YD)
D) government spending (G)
Answer: D
16) Which of the following is an endogenous variable in our model of the goods
market in Chapter 3?
A) consumption (C)
B) disposable income (YD)
C) saving (S)
D) total income (Y)
E) all of the above
Answer: E
17) Let the consumption function be represented by the following equation: C = c 0 +

c1YD. For this equation, we assume that c 1 is
A) negative.
B) larger than c0.
C) different at different levels of income.
D) equal to one.
Answer: E
18) Which of the following equals demand in an open economy?

A) C + I + G + X
B) C + I + G + X - IM
C) C + I + G + IM - X
D) C + I + G
Answer: B
19) Which of the following equals demand in a closed economy?

A) C + I + G + X
B) C + I + G + X - IM
C) C + I + G + IM - X
D) none of the above
Answer: D
20) Fill in the blank for the following: GDP is the value of all ________ produced in a
given period.
A) final and intermediate goods and services produced by the private sector only
B) final goods and services
C) final and intermediate goods and services, plus raw materials
D) all of the above
Answer: B

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Quiz 1 for Chapter 2 and Chapter 3 (First half)

1) Suppose nominal GDP increased in a given year. Based on this information, we

3) In a given year, suppose a company spends $100 million on intermediate goods

4) A firm's value added equals

6) GDP in current dollars is equivalent to which of the following?

7) Which of the following represents real GDP?

8) Based on the notation presented in Chapter 2, which of the following expressions

9) In the United States, someone is classified as unemployed if he or she

Suppose a country using the United States' system of calculating official

11) Refer to the information above. The labor force is

13) Refer to the information above. The official unemployment rate is

17) Let the consumption function be represented by the following equation: C = c 0 +

18) Which of the following equals demand in an open economy?

19) Which of the following equals demand in a closed economy?

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