Review questions for chapters 23

1. What components of GDP would each of the following transactions affect?

a. A family buys a fridge.
b. You buy ice cream.
c. Your parents buy a painting made in France.
d. In Germany, Mercedes sells a car from its inventory
e. The government repaves E11 (highway from AD to Dubai)
2. Which of the following transactions will not affect GDP? Why
a. Jeff cleans his house.
b. Fatema buys a used computer.
c. The government builds a new road.

3. Below is a table with some data from the land of milk and chocolate. Refer to the table for
questions a to c:
Year Price of milk Quantity of milk Price of chocolate Quantity of chocolate
2010 $2 100 liters $5 50 liters
2011 $2 200 $5.50 100
2012 $2.50 200 $6 100
a. How high is nominal GDP in 2010?
b. How much did nominal GDP increase from 2010 to 2011?
c. Using 2010 as a base year (using 2010 prices), calculate real GDP for 2012

4. The country of Sportsville produces two goods: footballs and basketballs. Below is a table
showing prices and quantities of output for three years:

Year Price of Quantity of Price of Quantity of

Footballs Footballs Basketballs Basketballs
Year 1 10 120 12 200
Year 2 12 200 15 300
Year 3 14 180 18 275
a. What is Nominal GDP in year 1?
b. What is Real GDP in year 2?
c. What is the GDP deflator in year 3?

5. Which of the following is not included in GDP? ________ (A. carrots grown in your garden and
eaten by your family, B. carrots purchased at a grocery store and eaten by your family, C. none
of the above are included in GDP)

6. GDP is the market value of all intermediate and final goods and services produced in a country
in a given period of time. ___________ (True or False).

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 7. Below is a table with some data from the land of milk and honey.

Year Price of milk Quantity of milk Price of honey Quantity of honey

2010 $1 100 liters $2 50 liters
2011 $1 150 $2 200
2012 $2 300 $4 200
a. How high is nominal GDP in 2010?
b. How much did nominal GDP increase from 2010 to 2011?
c. Using 2010 as a base year (using 2010 prices), calculate real GDP for 2012.
d. What is the difference between nominal and real GDP? Which measure is more
meaningful to determine the health of an economy? Explain.

8. When economists talk about growth in the economy, they measure that growth as the
a. absolute change in nominal GDP from one
period to another.
b. percentage change in nominal GDP from one
period to another.
c. absolute change in real GDP from one period
to another.
d. percentage change in real GDP from one
period to another.

Review questions for chapters 24

1. Solve the following questions:

CPI basket (water 100 liters, bread 50 kg)

Year Price of water Price of bread

2010 $1 $2
2011 $2 $4
2012 $2 $5
The CPI basket cost $200 in 2010, the base year.

a. Compute the CPI in 2011.

b. What was the inflation rate from 2011-2012?

2. Contrasting the CPI and GDP deflator; in each scenario, determine the effects on the CPI and the
GDP deflator:
a. The price of petrol rises.
b. A local manufacturer raises the price of hydraulic cleaners (for industrial use)
c. Honda raises the price of their cars in Abu Dhabi.

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 3. If all I care about is purchasing power, when did I make more money? $100,000 in 2000 or
$147,000 in 2013? CPI in 2000 = 89 and CPI in 2013 = 120.

4. Christina deposits $1000 in her savings account. The nominal interest rate is 9%. During the
year, inflation is 3.5%. What is the real interest rate?

5. Inflation can be measured using either the GDP deflator or the consumer price index. _________
(True or False)
6. If the consumer price index is 120 in 2009 and 139.2 in 2010, then the rate of inflation for 2010
is 39.2 percent. __________ (True or False).

7. Solve the following question:

CPI basket (20 kg of beef, 100 liters of yoghurt, 50 loaves of bread)

Year Unit price of beef Unit price of yoghurt Unit price of bread
2011 $5 $1.50 $3
2012 $6 $2.00 $3.50
a. What was the cost of the market basket in 2011?
b. What is the cost of the market basket in 2012?
c. Using 2011 as the base year, calculate the CPI for 2012 (show your calculations).
d. What is the inflation rate in 2012? (Show your calculations.)

8. In 1970, Professor Plum earned 15,000 dirhams; in 1990, he earned 40,000. If the CPI was 60 in
1970, and 120 in 1990, then in real terms, when was Professor Plum's salary highest? Show
calculations.
9. In 2009, your annual income is $48,000 and the CPI is 143.6. In 2010, your annual income is
$52,232 and the CPI is 150.7. From 2009 to 2010, has your real income (income adjusted for
inflation) risen, fallen or remained the same?

10. Solve the following question:

CPI basket (30 kg of chicken, 150 liters of milk, 10 loaves of bread)

Year Unit price of chicken Unit price of milk Unit price of bread
2011 $6 $1.50 $3
2012 $7 $2.00 $3.50
a. What was the cost of the market basket in 2011?
b. What is the cost of the market basket in 2012?
c. Using 2011 as the base year, calculate the CPI for 2012 (show your calculations).
d. What is the inflation rate in 2012? (Show your calculations.)

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 11. The consumer price index is
a. not very useful as a measure of the cost of
living.
b. a perfect measure of the cost of living.
c. a useful measure, but not a perfect measure,
of the cost of living.
d. not used as a measure of the cost of living.