All of your answers should be either in bold or a color to make them stand out from the questions.
1. Why does the total expenditure of an economy have to equal the total income in the economy?
2. List at least four goods or services that are NOT included in GDP?
3. What are the two methods commonly used to determine GDP and explain how each works?
4. What is the difference between intermediate and final goods?
5. What is included in the "consumption" component of GDP?
6. What is included in the "investment" component of GDP ?
7. What is included in government purchases component of GDP?
8. What is the difference between real and nominal GDP?
9. What is a transfer payment?
10. See next page.
10. What is the GDP deflator for 2012 for a hypothetical economy, which produces only hot dogs and hamburgers, using the information below. Base year is 2011. Show all your work below.
Prices and Quantities
Year Price of Hot Dogs Quantity of Hot Dogs Price of Hamburgers Quantity of Hamburgers
2010 $1 100 $2 50
2011 $1.50 200 $2.5 75
2012 $2 300 $3 100
11. How is the consumer price index (CPI) created?
12. What does it measure?
13. Why is the CPI and imperfect measure?
14. Why is it unrealistic to compare the cost of something in an earlier year to its cost today?
15. What is the difference between the GDP deflator and the CPI?
16. What is the difference between nominal and real interest rates?
17. How does the producer price index (PPI) differ from the CPI?
18. Ann graduated from nursing school in 1962. Before she took her nursing boards and became a registered nurse, her hourly wage was $1.00. What is that equivalent to in 2015 dollars, using the Bureau of Labor Statistics website, www.bls.gov, CPI inflation Calculator? (You might think about what that means about the current minimum wage.)
19. In the country, Consumeria there are only three items purchased, chocolate bars, concert tickets, and compact disks. A standard market basket consists of the quantities shown. 2000 is the base year.
2000 2001
Items in the Basket Quantity Purchased Price Price
Chocolate Bars 12 $1.50 $1.75
Concert Tickets 4 $45 $60
Compact Disks 18 $16 $15
a. What is the CPI in 2001?
b. What was the inflation rate between 2000 and 2001?
20. Sally deposits $1,000 into a bank account that pays 10% interest per year. A year later she withdraws $1,100. If there was 6% inflation, what was the real interest rate that she received?