Quiz 2 Coverage Review Questions

REVIEW QUESTIONS FOR QUIZ 2
Answer the following questions completely. Bring the copy of your answers on our next face to
face meeting for discussion and checking.
MODULE 11: MEASURING NATION’S INCOME
1. What components of GDP (if any; consumption, investments, government spending, net exports)
would each of the following transactions affect? Explain.
a. Uncle Henry buys a new refrigerator from a domestic manufacturer.
b. Aunt Jane buys a new house from a local builder.
c. The Jackson family buys an old Victorian house from the Walker family.
d. You pay a hairdresser for a haircut.
e. Ford sells a Mustang from its inventory to the Martinez family.
f. Ford manufactures a Focus and sells it to Avis, the car rental company.
g. California hires workers to repave Highway 101.
h. The federal government sends your grandmother a Social Security check.
i. Your parents buy a bottle of French wine.
j. Honda expands its factory in Ohio.
2. A farmer sells wheat to a baker for $2. The baker uses the wheat to make bread, which is sold for
$3. What is the total contribution of these transactions to GDP?
3. Many years ago, Peggy paid $500 to put together a record collection. Today, she sold her albums
at a garage sale for $100. How does this sale affect current GDP?
4. Fill in the blanks:

5. Below are some data from the land of milk and honey.
a. Compute nominal GDP, real GDP, and the GDP deflator for each year, using 2016 as the
base year.
b. Compute the percentage change in nominal GDP, real GDP, and the GDP deflator in 2017
and 2018 from the preceding year. For each year, identify the variable that does not change.
Explain why your answer makes sense.
c. Did economic well-being increase more in 2017 or 2018? Explain.
6. Consider an economy that produces only chocolate bars. In year 1, the quantity produced is 3 bars
and the price is $4. In year 2, the quantity produced is 4 bars and the price is $5. In year 3, the
quantity produced is 5 bars and the price is $6. Year 1 is the base year.
a. What is nominal GDP for each of these three years?
b. What is real GDP for each of these years?
c. What is the GDP deflator for each of these years?
d. What is the percentage growth rate of real GDP from year 2 to year 3?
e. What is the inflation rate as measured by the GDP deflator from year 2 to year 3?
MODULE 12: MEASURING THE COST OF LIVING
1. The CPI measures approximately the same economic phenomenon as

A. nominal GDP.
B. real GDP.
C. the GDP deflator.
D. the unemployment rate.
2. The largest component in the basket of goods and services used to compute the CPI is
A. food and beverages.
B. housing.
C. medical care.
D. apparel.
3. If a Pennsylvania gun manufacturer raises the price of rifles it sells to the U.S. Army, its price
hikes will increase
A. both the CPI and the GDP deflator.
B. neither the CPI nor the GDP deflator.
C. the CPI but not the GDP deflator.
D. the GDP deflator but not the CPI.
4. Because consumers can sometimes substitute cheaper goods for those that have risen in price,
A. the CPI overstates inflation.
B. the CPI understates inflation.
C. the GDP deflator overstates inflation.
D. the GDP deflator understates inflation.
5. If the CPI is 200 in year 1980 and 300 today, then $600 in 1980 has the same purchasing power
as ________ today.
A. $400
B. $500
C. $700
D. $900
6. You deposit $2,000 in a savings account, and a year later you have $2,100. Meanwhile, the CPI
rises from 200 to 204. In this case, the nominal interest rate is _____ percent, and the real interest
rate is _____ percent.
A. 1, 5
B. 3, 5
C. 5, 1
D. 5, 3
7. The residents of Vegopia spend all of their income on cauliflower, broccoli, and carrots. In 2016,
they spend a total of $200 for 100 heads of cauliflower, $75 for 50 bunches of broccoli, and $50
for 500 carrots. In 2017, they spend a total of $225 for 75 heads of cauliflower, $120 for 80
bunches of broccoli, and $100 for 500 carrots.
a. Calculate the price of one unit of each vegetable in each year.
b.Using 2016 as the base year, calculate the CPI for each year.
c. What is the inflation rate in 2017?
8. A small nation of ten people idolizes the TV show The Voice. All they produce and consume are
karaoke machines and CDs, in the following amounts:
a. Using a method similar to the CPI, compute the percentage change in the overall price
level. Use 2017 as the base year and fix the basket at 1 karaoke machine and 3 CDs.
b.Using a method similar to the GDP deflator, compute the percentage change in the overall
price level. Also use 2017 as the base year.
c. Is the inflation rate in 2018 the same using the two methods? Explain why or why not.

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REVIEW QUESTIONS FOR QUIZ 2

MODULE 11: MEASURING NATION’S INCOME

4. Fill in the blanks:

MODULE 12: MEASURING THE COST OF LIVING

1. The CPI measures approximately the same economic phenomenon as

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