By Joanne Wagner,2014-06-13 19:41
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PM 008


    1. Calculate GDP using the following information (where there is no government and no foreign trade.

    C = consumption

    I = Investment

    Y = GDP

    C = 100 + 0.8Y

    I = 1000


    Y = 1000 + 100+ 0.8Y

    Y – 0.8Y = 1000+100

    Y – 0.8Y = 1100

    0.2Y = 1100

    Y = 5500

    2. How will the answer change if I increases to a) 2000

     b) 4000

     c) 10000

    3. If investment is now back to 1000 and the consumption function isC = -200 + 0.9Y

    What is the GDP now?

    4. What do you think are likely to be the main determinants of investment by firms?5. Is it likely that individual consumer’s marginal propensity to consume will vary with the age of the consumer? If so how will it vary?

    6. Explain how the equilibrium in the circular flow will be restored if there were a fall in investment.

    7. For what reasons might GDP be a poor indicator of the level of development of a country and its rate of economic development?

    8. Why might one country experience faster rates of economic growth than another?9. How would you derive a figure for household disposable income when starting from the GDP figure?

    10. Explain how GDP at factor cost can be calculated using the expenditure method.

Multiple Choice

    1. Which of the following is not an example of investment in the expenditure method of calculating GDP? Peugeot

    a) buys a new auto stamping machine

    b) adds 500 new cars to stocks

    c) buys French government bonds

    d) buys another assembly plant

    2. Which of the following is true for the aggregate economy? Income equals

    a) expenditure but these are not generally equal to GDP

    b) GDP but expenditure is generally less than these

    c) expenditure equals GDP

    d) Expenditure equals GDP only if there are no government or foreign sectors3. saving can be measured as income minus

    a) taxes

    b) transfer payments

    c) taxes minus consumer expenditure

    d) net taxes minus consumer expenditure

    4. Investment plus miscellaneous investment income is a component of which approach

    to measuring GDP?

    a) factor incomes approach

    b) expenditure approach

    c) injections approach

    d) output approach

    5. To obtain the factor cost of a good from its market price one must

    a) add indirect taxes and subtract subsidies

    b) subtract indirect taxes and add subsidies

    c) subtract both indirect taxes and subsidies

    d) add both indirect taxes and subsidies

    6. Which of the following is an example of a leakage from the circular flow of income?

    a) exports

    b) investment

    c) saving

    d) subsidies

7. The value of a firm’s output minus the value of inputs purchased is

    a) net exports

    b) value added

    c) net profit

    d) indirect production

    8. The existence of which of the following is not a reason for the fact that GDP gives an

    underestimate of the value of total output in the economy?

    a) crime

    b) non market activities

    c) the underground economy

    d) capital consumption allowance9. Consider the data in the table

    Yearnominal GDPreal GDPGDP deflator

    (? billions)(? billions(1990 = 100)

    1990 ? s)




    What is the GDP deflator in 1999?

    a) 160

    b) 250

    c) 200

    d) 125

    10. From the above data, what is real GDP in 2000?

    a) 225

    b) 275

    c) 220

    d) 110

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