Economics Chapter 1: Gross Domestic Product (GDP)

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Questions and Answers

Under conditions of maximized profit (Π), if the marginal product of labor (MPL) is 18 and the wage (W) is 6, what is the price level (P)?

3 (correct)

If the current marginal product of capital (MPK) is 22, but under profit maximization it should be 20, what adjustment should firms make with their capital (K)?

Increase K to increase MPK

Decrease K to reduce MPK

Increase K to reduce MPK (correct)

Decrease K to increase MPK

Which of the following is considered an endogenous variable within an economic model?

Consumer preferences

Government spending (G)

Potential GDP (Y) (correct)

Technological advancements

A new apartment building being constructed would be classified under which component of GDP?

Residential fixed investment (I) (D) Signup and view all the answers

A sandwich purchased at the grocery store is classified as which item within GDP?

Nondurable good (B) Signup and view all the answers

What does the expression $ΔF(L, K) / ΔL$ represent in the context of production?

The marginal product of labor. (B) Signup and view all the answers

If both labor (L) and capital (K) are held constant, and ‘A’ increases, what is the impact on the marginal product of labor (MPL) and the real wage (W/P)?

MPL increases and W/P increases. (A) Signup and view all the answers

Which of the following equations best describes the real rental price of capital?

$R/P = MPK$ (B) Signup and view all the answers

According to the law of diminishing marginal returns, if the amount of labor (L) increases while capital (K) remains constant, what would most likely happen to the marginal product of labor (MPL) and the real wage (W/P)?

MPL decreases and W/P decreases. (C) Signup and view all the answers

Given the example provided, where W = $18/hr, P = $3/unit, and R = $60/per K; Current MPL = 4 unit output/1 more hour and Current MPK = 22 unit output/1 more K. What action is most likely to maximize profits?

Increase L and decrease K. (D) Signup and view all the answers

When calculating GDP using the expenditure approach, an increase in inventory is counted as:

An increase in investment (I) (A) Signup and view all the answers

Which of the following would be included in the calculation of government spending (G) when computing GDP?

The building of a new road network by the federal government (B) Signup and view all the answers

A country's net exports (NX) are negative. This means that:

The country has a trade deficit. (D) Signup and view all the answers

What is the definition of 'value added' when calculating GDP?

The value of an output minus the value of intermediate goods used to produce it. (C) Signup and view all the answers

If a car is produced in 2023 and added to inventory, but not sold until 2024, how is this recorded in GDP?

It is counted in 2023's GDP as investment and is removed from investment in 2024. (B) Signup and view all the answers

Which of the following is considered an intermediate good?

Steel sold to a car manufacturer (B) Signup and view all the answers

Which of the following statements is correct regarding the difference between Gross Domestic Product (GDP) and Gross National Product (GNP)?

GNP measures the income earned by a nation's factors of production regardless of location, while GDP measures the income earned within a country's borders regardless of nationality. (C) Signup and view all the answers

A German citizen works for a company in the USA. Their wages are included in:

USA's GDP but not USA's GNP (A) Signup and view all the answers

How is real Gross Domestic Product (GDP) calculated?

Using base period prices to value all goods and services produced. (B) Signup and view all the answers

Which of the following is the correct formula for calculating the Consumer Price Index (CPI)?

$rac{MB_t}{MB_b} \times 100$ (C) Signup and view all the answers

Which of the following best describes the Personal Consumption Expenditure (PCE) deflator?

A measure of the price level that is based on nominal consumer spending divided by real consumer spending. (B) Signup and view all the answers

Which of the following is a reason why the Consumer Price Index (CPI) might overstate the true rate of inflation?

It does not account for the substitution effect. (B) Signup and view all the answers

How does the GDP deflator differ from the CPI?

The GDP deflator includes prices of domestically produced capital goods, while CPI excludes them. (B) Signup and view all the answers

What does 'core inflation' typically exclude?

Food and energy prices. (C) Signup and view all the answers

In the long run, what are the primary determinants of real GDP (Y)?

Production technology (A), labor (L) and capital (K). (C) Signup and view all the answers

According to the classical model, how are prices determined?

By the interaction of supply and demand. (D) Signup and view all the answers

What is the primary goal of a firm maximizing its profits, $\pi$ , in terms of labor?

To find the optimal number of labor hours (L*). (C) Signup and view all the answers

Which of the following best describes the role of 'A' in the equation Y = F(K, L, A) in the long run?

It represents the level of production technology. (A) Signup and view all the answers

Study Notes

Chapter 1: Gross Domestic Product (GDP)

GDP is the total monetary value of all finished goods and services produced within a country's borders in a specific time period.
Nominal GDP uses current prices to calculate the value of goods and services.
Real GDP adjusts nominal GDP for inflation, using constant prices from a base year.
GDP deflator is used to convert nominal GDP into real GDP.
Calculating real GDP involves dividing nominal GDP by the GDP deflator and multiplying by 100.

Calculating Real Values

The Producer Price Index (PPI) measures the average change over time in the selling prices received by domestic producers for their output.
The Consumer Price Index (CPI) is a measure of the average change over time in the prices paid by urban consumers for a basket of consumer goods and services.
To calculate the rate of inflation from the base period for either the CPI or PPI, take the new CPI or PPI and subtract the base period CPI or PPI and divide the result by the base period CPI or PPI and multiply by 100.
The GDP deflator is a measure of the price level of all new, domestically produced final goods and services in an economy.

Chapter 2: Inflation

CPI might overstate inflation due to substitution bias, new goods, and unmeasured quality changes.
The GDP Deflator differs from CPI because it measures the prices for all goods and services included in GDP, whereas CPI measures only prices for consumer goods and services.

Chapter 3: Long-Run Output

The long-run output or income of an economy is often denoted by Y, and is the function of capital (K), labor (L), and technology (A).
In the long run, if labor, capital, and technology are increased, then the output of an economy will be increased as well.

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Description

This quiz explores the concepts of Gross Domestic Product (GDP), including nominal and real GDP, as well as the calculations involved in determining real values. You'll also learn about the Producer Price Index (PPI) and Consumer Price Index (CPI) and how they're used to measure inflation. Test your knowledge on these key economic indicators.