DAY 1 - Circular Flow and GDP

Problem Set
Use the figure below to answer question 1.

4. Gross domestic product is defined as:

A. consumer spending + government purchases + financial
spending + exports – imports.
B. consumer spending + government transfers + investment
spending + exports – imports.
C. disposable income + taxes + investment spending +
exports + imports.
D. consumer spending + government purchases +
investment spending + exports – imports.
E. consumer spending + government purchases +
investment spending + imports– exports.

5. Which of the following would be an example of an

intermediate good?
1. If the circular flow model is in equilibrium (the sum of
A. stocks and bonds purchased by a business executive
money flows into each box is equal to the sum of the
B. a cellular telephone purchased by a college student
money flows out of that box), which of the following is
C. a wedding ring purchased by a teacher for his fiancée
likely to happen if there is an increase in imports?
D. tires purchased from Goodyear by General Motors for
A. an increase in the nominal GDP
newly produced electric cars
B. a decrease in the nominal GDP
E. a subscription for satellite television services from
C. a decrease in the unemployment rate
DirectTV.
D. an increase in the nominal GDP and in the
unemployment rate
6. Suppose that Mr. Green Jeans sells $5,000 of wheat to Big
E. an increase in exports
Ben Bakery. Big Ben uses the wheat to make flour and then
hamburger buns, which they sell to Hamburger Heaven for
Use the table below to answer questions 2-3.
$11,000. Hamburger Heaven also buys $20,000 of beef from a
2013 (base year) 2014 rancher. Hamburger Heaven uses the beef and buns to make
Product Prices Prices 10,000 hamburgers which are sold for $5 each. How much do
Output Output these transactions add to GDP?
(per unit) (per unit)
A. $86,000
$1 per
Peanut Butter 200 units 250 units $1.10 B. $36,000
unit
C. $31,000
$2 per
Jelly 100 units 100 units $2.50 D. $50,000
unit
E. $46,000
2. A simple economy produces only peanut butter and jelly.
Using the data in the attached table, nominal GDP in 2014 Use the table below to answer question 7.
was ____ and real GDP in 2014 was _____. 2013 (base year) 2014
A. $450; $400 Product
Output Price Output Price
B. $525; $450
C. $525; $400 Gino’s Pizza 4,000 $10 4,000 $8
D. $450; $575 Bruno’s Spaghetti 3,000 $9 1,000 $6
E. $500; $450 Carlo’s Cookies 2,000 $6 1,000 $1
Aldo’s Salad 5,000 $7 2,000 $4
3. A simple economy produces only peanut butter and jelly.
Using the data in the attached table, from 2013 to 2014 7. Considering 2013 as the base year, real GDP in 2014 was:
real GDP ____ by _____%. A. $47,000.
A. increased; 12.5 B. $69,000.
B. decreased; 50 C. $72,000.
C. increased; 43.75 D. $114,000.
D. decreased; 12.5 E. $55,000
E. increased; 50

Computers DVDs Pizza

Year
Price Quantity Price Quantity Price Quantity
2012 $900 10 $10 100 $15 2
 2013 $1,000 10.5 $12 105 $16 2
2014 $1,050 12 $14 110 $17 3

8. The economy of Britannica produces three goods: computers, DVDs, and pizza. The table above shows the prices and output
of the three goods for the years 2012, 2013, and 2014.
a. Calculate nominal GDP in Britannica for each of the three years. What is the percent change in nominal GDP from 2012 to
2013 and from 2013 to 2014?

Percent change in
Year Nominal GDP
nominal GDP
2012
2013
2014

b. Calculate real GDP in Britannica using 2012 prices for each of the three years. What is the percent change in real GDP
from 2012 to 2013 and from 2013 to 2014?

Percent change in
Year Real GDP
real GDP
2012
2013
2014

9. Which of the following transactions will be included in GDP for the United States?
a. Coca-Cola builds a new bottling plant in the United States.

b. Delta sells one of its existing airplanes to Korean Air.

c. Ms. Moneybags buys an existing share of Disney stock.

d. A California winery produces a bottle of Chardonnay and sells it to a customer in Montreal, Canada.

e. An American buys a bottle of French perfume in Tulsa, OK.

f. Donald hires an accounting firm to keep track of his organization’s finances.