TOPIC 1 Part A: Multiple Choice Questions

1. The phenomenon of scarcity stems from the fact that a. Most economies production methods are not very good. b. In most economies, wealthy people consume disproportionate quantities of goods and services. c. Governments restricts production of too many goods and services. d. Resources are limited. 2. Resources are a. Scarce for households but plentiful for economies. b. Plentiful for households but scarce for economies. c. Scarce for households and scarce for economies. d. Plentiful for households and plentiful for economies 3. Suppose an economist says that "Ceteris paribus, the lower the price of Weet Bix, the larger the amount of Weet Bix purchased". This statement indicates that: a. The quantity of Weet Bix purchased determines the price of Weet Bix. b. All factors other than the price of Weet Bix (for example, consumer tastes and incomes) are assumed to be constant. c. Economists can conduct controlled laboratory experiments. d. One cannot generalise about the relationship between the price of Weet Bix and the quantity purchased. 4. Which of the following would be considered a topic of study in macroeconomics? a. The effect of agricultural price support programs on the cotton industry b. The effect on domestic steel producers of an import quota imposed on foreign steel c. The effect of an increasing inflation rate on national living standards d. The effect of an increase in the price of imported coffee beans on the domestic coffee industry 5. In the simple circular-flow diagram, a. Households own the factors of production. b. Households buy all the goods and services that firms produce. c. Land, labor, and capital flow from households to firms. d. All of the above are correct. 6. An "increase in efficiency" suggests that an economy: a. Has moved from a point outside of, to a point on, its production possibilities curve. b. Has decided to produce more consumer goods and fewer capital goods. c. Is able to get less output from a given amount of input. d. Is able to get more output from a given amount of input.

7. In the equation Y = C + I + G + NX, a. Y represents the economys total expenditure. b. C represents household expenditures on services and durable goods. c. All of the variables are always positive numbers. d. All of the above are correct.

8. Over time, people have come to rely more on market-produced goods and less on goods that they produce for themselves. For example, busy people with high incomes, rather than cleaning their own houses, hire people to clean their houses. By itself, this change has a. Caused GDP to fall. b. Not caused any change in GDP. c. Caused GDP to rise. d. Probably changed GDP, but in an uncertain direction; the direction of the change depends on the difference in the quality of the cleaning that has resulted. 9. One bag of flour is sold for 1.50 to a bakery, which uses the flour to bake bread that is sold for 4.00 to consumers. A second bag of flour is sold to a consumer in a grocery store for 2.00. Taking these three transactions into account, what is the effect on GDP? a. GDP increases by 1.50. b. GDP increases by 3.50. c. GDP increases by 6.00. d. GDP increases by 7.50. 10. In a certain economy in 2005, the value of imports amounted to 80 percent of the value of exports. Consumption, investment, and government purchases added up to 5,000. The market value of all final goods and services produced within the economy was 5,500. It follows that the economy exported a. 500 worth of goods and services b. 1,000 worth of goods and services c. 1,500 worth of goods and services d. 2,500 worth of goods and services 11. During the current quarter, a firm produces consumer goods and adds some of those goods to the firms inventory rather than selling them. The value of the goods added to inventory is a. Not included in the current quarter GDP. b. Included in the current quarter GDP as investment. c. Included in the current quarter GDP as consumption. d. Included in the current quarter GDP as a statistical discrepancy. 12. In the country of Mainia, only cranberries and maple syrup are produced. In 2006, 50 units of cranberries are sold at 20 per unit, and 100 units of maple syrup are sold at 10 per unit. The price of cranberries was 10 per unit and the price of maple syrup was 15 per unit in 2005, which is the base year. For 2006, a. Nominal GDP is 2,000, real GDP is 2,000, and the GDP deflator is 100. b. Nominal GDP is 2,000, real GDP is 2,500, and the GDP deflator is 125. c. Nominal GDP is 2,500, real GDP is 2,000, and the GDP deflator is 83.3. d. None of the above is correct. 13. A country reported a nominal GDP of 115 billion in 2006 and 125 billion in 2005; it reported a GDP deflator of 85 in 2006 and a deflator of 100 in 2005. Between 2005 and 2006, a. Real output and the price level both rose. b. Real output rose and the price level fell. c. Real output fell and the price level rose. d. Real output and the price level both fell. 14. If nominal GDP is 10 trillion and real GDP is 8 trillion, the GDP deflator is a. 80, and this indicates that the price level has decreased by 20 percent since the base year. b. 80, and this indicates that the price level has increased by 80 percent since the base year.

c. 125, and this indicates that the price level has increased by 25 percent since the base year. d. 125, and this indicates that the price level has increased by 125 percent since the base year. 15. Suppose an apartment complex converts to a condominium, so that the former renters are now owners of their housing units a. The rent was included in GDP; the purchases of the condominiums are not included in GDP. b. The rent was included in GDP, and so are the purchases of the condominiums. c. The rent was not included in GDP; the purchases of the condominiums are included in GDP. d. The rent was not included in GDP, and neither are the purchases of the condominiums. 16. A professional gambler moves from a state where gambling is illegal to a state where gambling is legal. Most of his income was, and continues to be, from gambling. His move a. necessarily raises GDP. b. necessarily decreases GDP. c. doesn't change GDP because gambling is never included in GDP. d. doesn't change GDP because in either case his income is included. 17. To compute GDP, we a. add up the wages paid to all workers. b. add up the costs of producing all final goods and services. c. add up the market values of all final goods and services. d. take the difference between the market value of all final goods and services and the cost of producing those final goods and services. 18. Estimates of the values of which of the following non-market goods or services are included in GDP? a. the estimated rental value of owner-occupied homes b. the value of vegetables and other foods that people grow in their gardens c. the value of unpaid housework d. All of the above are included. 19. Which of the following statements about GDP is correct? a. Nominal GDP values production at constant prices, whereas real GDP values production at current prices. b. Nominal GDP values production at current prices, whereas real GDP values production at constant prices. c. Nominal GDP values production at market prices, whereas real GDP values production at the cost of the resources used in the production process. d. Nominal GDP consistently underestimates the value of production, whereas real GDP consistently overestimates the value of production. 20. For a certain economy in 2005, GDP was $2,000; investment was $400; government purchases were $300; and net exports were $70. It follows that consumption was a. $1,370. b. $1,330. c. $1,230. d. 60 percent of GDP.

21. In a given year an economy has consumption of $3,000, investment of $2,000, government purchases of $1,500, exports of $500, imports of $600, taxes of $1200, transfer payments of $400, and depreciation of $300. This economys GDP is a. $6,400. b. $7,000. c. $7,600. d. $8,900. 22. An American company operates a fast food restaurant in Romania. Which of the following statements is accurate? a. The value of the goods and services produced by the restaurant is included in both Romanian GDP and U.S. GDP. b. One-half of the value of the goods and services produced by the restaurant is included in Romanian GDP, and the other one-half of the value is included in U.S. GDP. c. The value of the goods and services produced by the restaurant is included in Romanian GDP, but not in U.S. GDP. d. The value of the goods and services produced by the restaurant is included in U.S. GDP, but not in Romanian GDP. 23. Real GDP is best described as the a. dollar value of output produced by a country, e.g. $14 trillion for US in 2009. b. actual output produced by a country including the value of illegal black market goods produced. c. actual output produced by a country including the value of nonmarket goods produced, e.g. at home vegetables grown in addition to vegetables bought at grocery stores. d. quantity of output produced by a country, e.g. 200 million cars.
Part B: Short Answer Questions

Question 1: The Production Possibilities Frontier shows the maximum possible combinations of food and clothing that can be produced in a given time period in a particular country. Under what circumstances would the production possibility curve be (I) a straight line; (II) bowed out from the origin? Explain why Question 2:
2004 PRI CE $30 $10 0 QTY 900 192 PRI CE $31 $10 2 2005 QTY 1000 200 PRI CE $36 $10 0 2006 QTY 1050 205

GOOD A GOOD B

Assuming 2004 is a base year, calculate nominal GDP in 2004, real GDP in 2005 and GDP deflator in 2006. Explain why do economists use real GDP rather than nominal GDP to gauge economic wellbeing? Question 3: The table below shows the nominal GDP and real GDP for Nation X between 2007 and 2009.

Year 2007 2008 2009

Nominal GDP ($m) $343,215 $334,404 $361,624

Real GDP ($m) $210,557 $211,227 $219,988

a) Calculate the GDP deflator for 2007, 2008 and 2009. b) Calculate the annual growth rate of the GDP deflator between 2007 and 2008 and also between 2008 and 2009. c) Calculate the annual growth rate of the nominal GDP and real GDP between 2007 and 2008 and also between 2008 and 2009. d) Why the economic performance of a nation is normally based on the growth rate of the real GDP and not the nominal GDP?