GDP
GDP represents all of the following EXCEPT?
A. total production in the economy
B. Total income in the economy
C. total wealth in the economy
D. Total expenditure in the economy
C Total wealth in the economy
Assume a standard production function. If an earthquake destroys some of the nation’s
physical capital (without affecting any other factors of production), then
a. GDP decreases and NDP decreases
b. GDP decreases and NDP increases
c. GDP increases and NDP decreases
d. GDP decreases and NDP could increase or decrease
d. GDP decreases and NDP could increase or decrease
Suppose that in the base year the Consumer Price Index (CPI) is 100. Which of the
following is true about CPI in the subsequent years
a. CPI is never below 100
b. CPI is always less than 100
c. CPI is always more than 100
d. CPI can be less than, greater than, or equal to 100
d. CPI can be less than, greater than, or equal to 100
Suppose in a certain country, the adult population is 30 million people, of which 24
million are employed and 3 million are searching for jobs. What are the labor force
participation rate and the unemployment rate in this country?
90.0% and 11.1%
GDP is used to measure the economic well-being of a country. Briefly explain the pros
and cons of using GDP to measure well-being. Should we use GDP to measure non-
economic well-being, too?
GDP is a measure of production and was never intended as a measure of well-
being. GDP does not take into account leisure, equality, the environment, health, or
accumulated wealth.
However, GDP is clear and easy to understand and is correlated with key components of
wellbeing such as health, education, and the environment.
No, GDP should not be used for non-economic well-being.
Sarah, a German national, purchased a Ford truck (made in the United States) for $50,000 in
2022. In the same year, Bob, an American national, purchased a BMW (made in Germany) for
$90,000.
Which of the following statements about the impact of these transactions on German
GDP and expenditure components is FALSE?
a. Change in Consumption = $50,000
b. Change in Net Exports = $40,000
c. Change in GDP = $40,000
d. Change in GDP = $90,000
c. Change in GDP = $40,000
What is true about production in the economy in the long run?
a. Production is determined by the available factors of production, and
aggregate demand adjusts to that amount
b. Production is determined by the aggregate demand in the economy, and amount
of factors of production adjusts to that amount
c. Production is determined 50% by the available factors of production, and 50% by
aggregate demand
d. Production is determined by other things than factors or production and aggregate
demand
Production is determined by the available factors of production, and
aggregate demand adjusts to that amount
Which of the following can lead to a permanent increase in the growth rate of an
economy?
I. Increase in investment
II. Increase in population
III. Increase in the rate of technological progress
Only III
Suppose a country’s labor market was initially in equilibrium. The government then
adopts a minimum wage policy. Which of the following will likely contribute to a rise in
unemployment?
I. Employers will want to hire fewer workers at the minimum wage
II. Labor demand curve will shift outwards (to the right)
III. More people will be willing to work at the minimum wage
I and III only
Pro-market economists argue that technological progress and accumulation of human capital
will happen by themselves, and no governmental intervention is necessary. Other economists
argue that governmental intervention is warranted. Give arguments on both sides of this debate.
Technological progress occurs because businesses engage in research and development to create
new products and earn profit, so they will do it without any governmental intervention. Likewise,
people invest in their education and skills in order to earn higher salaries, so they will do this on
their own. However, research and development runs into a free-rider problem: an invention
obtained by one firm can become public knowledge and used by competitors. Correspondingly,
education of one person has an externality for the whole society. Therefore, many believe that the
government should stimulate both processes by protection on intellectual property, subsidies,
grants, and other mechanisms.
Which of the following statements is TRUE:
I. You can use the GDP Deflator to calculate the rate of inflation.
II. One benefit of using real GDP is that it accounts for the change in quality of
goods.
III. Using a chain-weighted index and frequently changing the base year make the
real GDP calculation more accurate.
I and III
Consider the production function 𝑌 = 𝐴√𝐾𝐿, and suppose L=1, A=2, and the
depreciation rate is 20%. The value of capital that maximizes net domestic product is
K = 9
b. K = 16
c. K = 25
d. K = 36
K = 25
Which of the following statements are true regarding inflation?
I. It represents a sustained increase in the aggregate price level in an economy
II. People’s purchasing power decreases only when price inflation exceeds wage
inflation
III. Whenever there is inflation, it means that the price of each and every good in the
economy is increasing
I and II
A
ccording to the efficiency wage theory, firms want to pay workers a higher than
equilibrium wage for all of the following reasons except:
a. To stimulate workers to elicit more effort
b. To make workers afford a healthier lifestyle
c. To attract a better pool of job applicants
d. To stimulate workers to look for a new job more frequently
d. To stimulate workers to look for a new job more frequently
Suppose a large multinational firm builds new identical manufacturing plants in two
countries: in the United States and in Indonesia. Suppose that you know three facts about
the two countries: 1) the population in the two countries is roughly the same, 2) US has
twice the capital stock of Indonesia, 3) labor productivity in the US is twice as high as in
Indonesia. In which country will the new plant have a bigger effect on the GDP? Provide
arguments why it could be both the US and Indonesia.
Since Indonesia has a smaller capital stock to start with, the plant may
have a bigger effect on its GDP because of the diminishing marginal effect
feature. There is simply more labor available to work at this new plant. At the
same time, the United States has a higher labor productivity, which is perhaps
due to higher level of human capital, better technologies, and better organization
of production. If so, the US plant will be staffed by more productive labor and
hence may have a bigger effect on the GDP.
Suppose that between two years, your salary went up from $50,000 to $55,000 while the
CPI rose from 120 to 132. Did your salary go up or down in real terms?
c. The salary did not change in real terms
Adam was working as an accountant but left his job because he was worried about the
impact of AI on his job. He immediately enrolled full time in a computer science degree
program at a community college. Which of the following best describes his current labor
force status?
a. In labor force
b. Not in labor force
c. Employed
d. Unemployed
b. Not in labor force
During COVID-19, several countries experienced a sharp rise in unemployment rates in
the initial phases of the pandemic. After some time, the unemployment rate was observed
to come down faster than expected. Briefly explain what could have caused the sharp rise
in unemployment rate at the onset of the pandemic and unexpected rapid decline in
unemployment rate after the pandemic.
At the onset of the pandemic, firms reduced the number of employed
workers due to a reduction in production activities (lockdown restrictions and fall
in demand). Also, some people remained temporarily unemployed because of the
generous unemployment benefits offered by the government. During/shortly after
the pandemic, the economy recovered quickly, restoring, or creating jobs. At the
same time, during the recovery, some people chose to remain outside of the labor
force, and therefore did not count as unemployed and thus lowered the
unemployment rate yet further.
Suppose that in 2022, a U.S. manufacturer produced $10 bn worth of silicon. They sold
this silicon to another U.S. manufacturer who produced $100 bn worth of microchips out
of this silicon. The microchips were then sold to a manufacturer in China, who produced
$300 bn worth of computers using these microchips and sold them back to the US, also in
2022. As a result of these transactions, US GDP went up by
$100 bn
Suppose a government wants to achieve acceleration of economic growth by stimulating
extra investment in the economy. Suppose that this investment is not accompanied by
technological progress or growth in any other factors of production. What will the
government manage to achieve via this policy?
a. Economic growth will accelerate temporarily but then slow down again
b. Economic growth will not accelerate at first, but will become faster later
c. Economic growth will accelerate immediately and will be higher forever
d. Economic growth will not accelerate at all
a. Economic growth will accelerate temporarily but then slow down again
Suppose that a large cohort of workers retires, reducing a country’s labor force by 5%.
According to the standard labor market model, what will happen to equilibrium wages in
this country, holding all other factors constant?
Wages will increase
List the three categories of expenditure which are classified as investment I in macroeconomic
statistics. Give an example of such an expenditure in each of the three categories.
Business fixed investment. An example is when a company builds a factory or buys new
equipment
2. Residential construction. An example is when a developer builds a new private house.
3. Accumulation of inventories. An example is when a company produces a certain good and
stores it in order to sell in the following year.