These are multiple choice questions.

Q1. A carpenter buys $100 of wood from a lumber yard and $30 of material from a material store. She makes 3 chairs that are each sold for $50. GDP will increase by:

a. $130

b. $150

c. $280

d. $180

e. $20

Q2. If a company produces $30 million worth of pottery, 30 percent of which is sold on the domestic market and 70% which is exported overseas, then GDP

a. Increases by $30 million.

b. Increases by $9 million (30% of $30 million)

c. decreases by $12 million

d. Does not change

e. None of the above.

Q3. Purchasing Power Parity

a. compares the cost of a representative basket of goods and services across different countries to compare income between these two countries.

b. compares the cost of a representative good (like the Big Mac) across different countries to compare income between these two countries.

c. is only an effective measure of differences in income between two countries when the representative good or basket contains goods and services that can not be easily transferred between countries.

d. is only an effective measure of differences in income between two countries when the representative good or basket contains many services as compared to goods.

Q4. Which of the following statements is true:

a. the value-added approach to measuring GDP will always produce a higher calculation for GDP.

b. The expenditure approach to measuring GDP will always produce a higher calculation for GDP.

c. The income approach to measuring GDP will always produce a higher calculation for GDP.

d. All three approaches should provide the same calculation for GDP.

e. None of the above.

Q5. Assume the price of a good included in the basket used to measure CPI increases by 50%. Then

a. The cost of living would increase, but the substitution effect means that the CPI will overestimate the effect on the changes.

b. The cost of living would increase, but the substitution effect means that the CPI will underestimate the effect on the changes.

c. the cost of living decreases, and the substitution effect means that the CPI will overestimate the effect of the changes.

d. The cost of living would decrease and the CPI will exactly estimate the size of the change. e. People will stop buying that particular good. 3 Short Answer