Chapter 7 Check Your Understanding

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chapter:
7
>> Tracking the
Macroeconomy
Krugman/Wells
CHECK YOUR UNDERSTANDING
©2009  Worth Publishers
Check Your Understanding 7-1
Questions 1-3
1) Which of the following statements is true about the three
methods to calculate GDP?
1.
2.
3.
4.
The total value added of all domestically produced final goods is
less than the total spending on domestically produced final goods
and services because services are not included in the value added
component.
The total spending on domestically produced final goods and
services is less than the total value added of all domestically
produced final goods because the value added component
incorporates efficiencies achieved through technology.
Total spending on domestically produced final goods and services
and total factor income are equal because all spending that is
channeled to firms to pay for purchases of domestically produced
final goods and services is revenue for firms.
There are three methods for calculating GDP that usually produce
different results.
2a) How are households NOT linked with other sectors
of the economy?
1.
2.
3.
4.
They are linked to the rest of the world
through exporting goods and services.
They are linked with firms through
purchases from firms of final goods and
services.
They are linked to the government
through their payment of taxes.
They are linked to the government
through their lending of funds to the
government to finance government
borrowing via the financial markets.
2b) The various sectors to which firms make sales are
households, the government, the rest of the world and
other firms.
1.
2.
True
False
3) Consider the table below and suppose you mistakenly believed that
total value added was $30,500, the sum of the sales price of a car and
a car’s worth of steel. What items would you be counting twice?
1.
2.
3.
4.
You would be counting the wage used to assemble the car
twice.
You would be counting the total payment to factors twice.
You would be counting the value of steel twice.
None of the above.
Check Your Understanding 7-2
Question 1
1ai*) In 2006, 1,000,000 servings of french fries were sold at $0.40 each
and 800,000 servings of onion rings at $0.60 each. From 2006 to 2007, the
price of french fries rose by 25% and the servings sold fell by 10%; the price
of onion rings fell by 15% and the servings sold rose by 5%.
What was the price and quantity of french fries in 2007?
1.
2.
3.
4.
NEW
$0.65; 900,000
$0.50; 900,000
$0.50; 1,000,000
$0.30; 600,000
CHECK YOUR UNDERSTANDING
1aii*) In 2006, 1,000,000 servings of french fries were sold at $0.40 each
and 800,000 servings of onion rings at $0.60 each. From 2006 to 2007, the
price of french fries rose by 25% and the servings sold fell by 10%; the price
of onion rings fell by 15% and the servings sold rose by 5%.
What was the price and quantity of onion rings in 2007?
1.
2.
3.
4.
NEW
$0.65; 900,000
$0.50; 900,000
$0.51; 840,000
$0.45; 805,000
CHECK YOUR UNDERSTANDING
1ai) Nominal GDP in 2006 is _______.
1.
2.
3.
4.
$864,000
$980,000
$880,000
$878,400
French Fries
Price
Quantity
Onion Rings
Price
Quantity
2006
$0.40 1,000,000 $0.60
800,000
2007
$0.50
840,000
900,000
$0.51
1aii) Nominal GDP in 2007 is _______.
1.
2.
3.
4.
$864,000
$980,000
$880,000
$878,400
French Fries
Price
Quantity
Onion Rings
Price
Quantity
2006
$0.40 1,000,000 $0.60
800,000
2007
$0.50
840,000
900,000
$0.51
1aiii) Real GDP (using 2006 as a base year) in 2007 is
_______.
1.
2.
3.
4.
$864,000
$980,000
$880,000
$700,000
French Fries
Price
Quantity
Onion Rings
Price
Quantity
2006
$0.40 1,000,000 $0.60
800,000
2007
$0.50
840,000
900,000
$0.51
1bi*) Nominal GDP changed by ______ .
1.
2.
3.
4.
NEW
-0.18%
-1.8%
1.6%
1.9%
Nominal GDP
Real GDP
2006
$880,000
$880,000
2007
$878,400
$864,000
CHECK YOUR UNDERSTANDING
1bii*) Real GDP changed by ______ .
1.
2.
3.
4.
NEW
-0.18%
-1.8%
1.6%
1.9%
Nominal GDP
Real GDP
2006
$880,000
$880,000
2007
$878,400
$864,000
CHECK YOUR UNDERSTANDING
2. From 1990 to 2000, the price of electronic equipment fell
dramatically and the price of housing rose dramatically. If 1990 is
used as a base year to calculate 2007 real GDP, the price of
electronics will be overstated.
1.
2.
True
False
Check Your Understanding 7-3
Questions 1-3
1. Using the table calculate the post frost price index that
includes 100 oranges, 50 grapefruits, and 200 lemons.
1.
2.
3.
4.
100
180
80
56
Calculating the Cost of a Market Basket
Pre Frost Post Frost
Price of Orange
$0.20
$0.40
Price of Grapefruit
$0.60
$1.00
Price of Lemon
$0.25
$0.45
2a) A typical family owns more cars than it would have a decade ago.
Over that time, the average price of a car has increased more than the
average price of other goods. Using a 10-year-old market basket
would underestimate inflation.
1.
2.
True
False
2b) Virtually no households had broadband Internet access a decade
ago. Now many households have it, and the price has regularly fallen
each year. Using a 10-year-old market basket would underestimate
inflation.
1.
2.
True
False
3. The consumer price index in the US was 201.6 in 2006
and 207.3 in 2007. What is the inflation rate between 2006
and 2007?
1.
2.
3.
5.7%
2.7%
2.8%

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