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Chapter 13
Tracking the Macroeconomy
True/False Questions
1. Gross domestic product (GDP) is the market value of all goods and services produced in an
economy over some time period.
ANSWER: F
2. GDP has four parts: consumption, investment, government purchases, and net exports.
ANSWER: T
3. Net private domestic investment is a measure of the change in the nation's capital stock.
ANSWER: T
4. Excluding intermediate goods from GDP causes the measure to understate the value of
production.
ANSWER: F
5. Goods produced but not sold during the year are included in GDP.
ANSWER: T
6. Government expenditures on goods and services is the largest component of GDP.
ANSWER: F
7. If net investment is positive, an increase in the nation's capital stock occurs.
ANSWER: T
8. Government purchases include both government purchases of goods and services and transfer
payments.
ANSWER: F
9. An increase in nominal GDP indicates that output has increased.
ANSWER: F
10. A price index measures the price level for a given period relative to the base period.
ANSWER: T
11. Real GDP is derived by using the GDP deflator to deflate nominal GDP.
ANSWER: T
12. The value of a meal John cooks for his family is excluded from GDP.
ANSWER: T
13. Recurring fluctuations in the level of economic activity are referred to as economic fluctuations.
ANSWER: F
14. The business cycle consists of four phases: expansion, peak, contraction, and trough.
ANSWER: T
427
428  Chapter 13/Tracking the Macroeconomy
15. Unemployment increases during the expansion phase of a business cycle.
ANSWER: F
16. Aggregate demand shows the total amount of goods and services that will be sold at each price
level.
ANSWER: F
17. As the price level rises, interest rates will increase, and investment and consumption will fall.
ANSWER: T
18. The aggregate demand curve is negatively sloped because as the price level falls, consumers will
buy more of the goods and services that are relatively cheaper.
ANSWER: F
19. Expansionary fiscal policy will cause a decrease in aggregate demand.
ANSWER: F
20. The aggregate supply curve shows the total output of final goods and services that will be
produced at each price level.
ANSWER: T
21. An increase in the price level will cause aggregate quantity supplied to increase only if output is
less than the full employment level of output.
ANSWER: T
22. An increase in government spending will shift the aggregate supply curve to the right.
ANSWER: F
23. The equilibrium level of real GDP occurs where the aggregate supply curve and the aggregate
demand curve intersect.
ANSWER: T
Multiple-Choice Questions
1. GDP is defined as:
a. the market value of all goods and services bought and sold in the economy over some time
period.
b. the market value of all final goods and services produced in the economy over some time
period.
c. the quantity of all final goods and services produced in the economy over some time period.
d. the quantity of all goods and services bought and sold in the economy over some time period.
ANSWER: b
2. A good that is purchased for final use is:
a. an intermediate good.
b. a final good.
c. an inventory good.
d. an ultimate good.
ANSWER: b
Test Bank  429
3. A good that is purchased for resale or for use in producing other goods is:
a. an intermediate good.
b. a final good.
c. an inventory good.
d. an ultimate good.
ANSWER: a
4. Intermediate goods are excluded from GDP in order to avoid:
a. double counting.
b. understating GDP.
c. over counting.
d. erratic price fluctuations.
ANSWER: a
5. Consumption is:
a. the largest component of GDP.
b. a relatively stable component of GDP.
c. household purchases of both durable and nondurable goods and services.
d. All of the above.
ANSWER: d
6. The consumption of fixed capital refers to:
a. the deduction made from GDP in order to allow for the purchase of new issues of stocks and
bonds.
b. the depreciation of and accidental damage to the nation's capital stock.
c. the allowance made for the purchase of used capital equipment.
d. the allowance made for the trade of capital equipment between the United States and other
countries.
ANSWER: b
7. In order to determine how much the capital stock has grown, one must examine:
a. total private domestic investment.
b. gross private domestic investment plus the consumption of fixed capital.
c. net private domestic investment.
d. net private domestic investment plus investment in the United States by other countries.
ANSWER: c
8. Government purchases refers to purchases of goods and services by:
a. the federal government.
b. by state governments.
c. by local governments.
d. All of the above.
ANSWER: d
9. Which of the following statements is correct?
a. Real GDP holds quantity constant.
b. Real GDP holds prices constant.
c. Nominal GDP holds quantity constant.
d. Nominal GDP holds prices constant.
ANSWER: b
430  Chapter 13/Tracking the Macroeconomy
10. Real GDP refers to:
a. output measured in current prices.
b. output measured in constant prices.
c. output measured in current average prices.
d. output measured in terms of a base year output.
ANSWER: b
11. Which of the following best describes business cycle activity?
a. Business cycles are recurring fluctuations in the level of economic activity.
b. Each phase of the business cycle lasts a predictable length of time.
c. The contraction phase of the business cycle generally lasts longer than the expansion phase.
d. The trough of a business cycle generally lasts about three months.
ANSWER: a
12. Aggregate demand consists of:
a. consumption, investment, government purchases, government transfers, and net exports.
b. consumption, investment, government purchases, and exports.
c. consumption, investment, government purchases, and net exports.
d. consumption, investment, government transfers, and exports.
ANSWER: c
13. Aggregate demand shows:
a. the total amount of labor that will be hired at various real wage rates.
b. the amount of final goods and services that will be purchased when the economy is at full
employment.
c. the amount of final goods and services that will be purchased at various price levels.
d. the amount of all goods and services that will be purchased at various price levels.
ANSWER: c
14. The aggregate demand curve is negatively sloped because:
a. higher prices cause a substitution of foreign goods for domestic goods.
b. higher prices will erode the value of financial assets that have values fixed in dollar terms.
c. higher prices will lead to an increase in interest rates.
d. All of the above.
ANSWER: d
15. The aggregate demand curve is negatively sloped because of:
a. the real balance effect, the interest rate effect, and the government debt effect.
b. the real balance effect, the interest rate effect, and the price level's effect on net exports.
c. the productivity effect, the interest rate effect, and the price level's effect on net exports.
d. the real balance effect, the government debt effect, and the price level's effect on net exports.
ANSWER: b
16. Fiscal policy refers to:
a. changes in the money supply designed to achieve full employment.
b. changes in government regulations designed to achieve full employment.
c. special incentives given to businesses to hire groups with traditionally high unemployment
rates.
d. changes in taxes and government spending designed to achieve full employment.
ANSWER: d
Test Bank  431
17. Monetary policy is conducted by:
a. the Federal Reserve.
b. the federal government.
c. state governments.
d. all of the above.
ANSWER: a
18. Expansionary monetary policy refers to:
a. an increase in the growth rate of the money supply.
b. a decrease in the growth rate of the money supply.
c. a decrease in the growth rate of bank deposits.
d. increased taxes.
ANSWER: a
19. The aggregate supply curve shows:
a. the total quantity of resources that will be supplied at various price levels.
b. the total quantity of goods and services that will be supplied at various price levels.
c. the total quantity of final goods and services that will be supplied at various price levels.
d. the total quantity of consumer goods and services that will be supplied at various price
levels.
ANSWER: c
20. The aggregate supply curve:
a. is positively sloped.
b. is negatively sloped.
c. is vertical.
d. has both a positively sloped and a vertical segment.
ANSWER: d
21. The positively sloped portion of the aggregate supply curve is drawn on the assumption that:
a. resources are scarce.
b. wealth is constant.
c. there is no change is fiscal policy.
d. price levels are constant.
ANSWER: a
22. The vertical portion of the aggregate supply curve:
a. occurs when the level of output is less than the full employment level.
b. occurs when the level of output is equal to the full employment level.
c. occurs when the only type of unemployment is structural.
d. occurs when the only type of unemployment is frictional.
ANSWER: b
23. The vertical portion of the aggregate supply curve is drawn on the assumption that:
a. resource prices are constant.
b. resources and technology do not change.
c. the price level is constant.
d. there is no change in fiscal policy.
ANSWER: b
432  Chapter 13/Tracking the Macroeconomy
Critical Thinking Multiple-Choice Questions
24. Which of the following would be included in GDP?
a. The purchase of Genotech stock.
b. The purchase of used car.
c. The purchase of a new home.
d. A bakery's purchase of flour to make gourmet cookies.
ANSWER: c
25. Which of the following would not be included in GDP in 1998?
a. A car that is produced in 1997 and sold in 1998.
b. A car that is produced and sold in 1998.
c. A car that is produced in 1998, but not sold.
d. The amount you pay your doctor for health care in 1998.
ANSWER: a
26. Which of the following is included in GDP?
a. the illegal sale of marijuana.
b. the money you pay to your baby-sitter that is not reported as income when she files her tax.
c. the money you pay a maid to clean your home.
d. the value of the time you spend cleaning your home.
ANSWER: c
27. Which of the following would be considered a final good?
a. The steel used in the construction of a skyscraper.
b. The stereo Ford installs in a new Concord.
c. The paper in your textbook.
d. A computer you buy for use in your home.
ANSWER: d
28. Which of the following describe an intermediate good?
a. John buys pizza for diner.
b. Jack buys cheese for his pizza shop.
c. Jerry buys cheese to make himself pizza for lunch.
d. Jeremy buys gas for his car that he drives to work everyday.
ANSWER: b
29. Which of the following describe an intermediate good?
a. John buys a baseball bat to play with his son.
b. Jack buys a baseball bat for his professional baseball club.
c. Jerry buys a baseball bat as a gift for his friend.
d. Jeremy buys a baseball bat to play with his friends in the park.
ANSWER: b
30. Which of the following would be considered an intermediate good?
a. The pencil you are using to take this exam.
b. A computer in your instructor’s office
c. The bricks used to construct a new home.
d. The automobile you drive.
ANSWER: c
Test Bank  433
31. Sugar sold to Betty Crocker is excluded from GDP because:
a. it is an intermediate good.
b. double counting would occur if it were included.
c. it is an input used to produce a final product.
d. All of the above.
ANSWER: d
32. Which of the following is an example of double counting?
a. Summing the total market value of baseballs and baseball bats.
b. Summing the total market value of new housing and the lumber used to construct the
housing.
c. Summing the total market value of eyeglasses and contacts.
d. Summing the total market value of apples and computer floppy disks.
ANSWER: b
33. Which of the following would be considered a personal consumption expenditure?
a. A household's purchase of new lawn mower.
b. A firm's purchase of a computers for its statisticians.
c. A household's purchase of a new home.
d. The government's purchase of a new computer.
ANSWER: a
34. Which of the following would be included in gross investment?
a. The purchase of a 20-year government bond.
b. The purchase of Wal-Mart stock.
c. The construction of an automobile assembly plant.
d. All of the above.
ANSWER: c
35. Which of the following would be included in gross investment?
a. The purchase of a 20-year government bond.
b. The purchase of stocks in New York Stock Exchange.
c. The purchase of a new automobile by a cab company.
d. The purchase of a house to live in.
ANSWER: c
36. Suppose gross investment is $975 billion. If the consumption of fixed capital is $700 billion,
then net investment is:
a. $1,675 billion.
b. $975 billion.
c. $700 billion.
d. $275 billion.
ANSWER: d
37. Suppose that net investment is greater than zero. We know that:
a. the nation's capital stock has grown.
b. the nation's capital stock has decreased.
c. there has been no change in the capital stock.
d. the consumption of fixed capital must also be greater than zero.
ANSWER: a
434  Chapter 13/Tracking the Macroeconomy
38. Suppose that net investment is negative. We know that:
a. the nation's capital stock has grown.
b. the nation's capital stock has decreased.
c. there has been no change in the capital stock.
d. the consumption of fixed capital is also negative.
ANSWER: b
39. Suppose that net investment is zero. We know that:
a. the nation's capital stock has grown.
b. the nation's capital stock has decreased.
c. there has been no change in the capital stock.
d. the consumption of fixed capital is also zero.
ANSWER: c
40. Suppose federal government purchases of goods and services is $475 billion, state government
purchases of goods and services is $700 billion, and local government purchases of goods and
services is $200 billion. What figure would GDP use for government purchases?
a. $1,375 billion.
b. $1,175 billion.
c. $900 billion.
d. $475 billion.
ANSWER: a
41. Which of the following would be counted in the government purchases component of GDP?
a. State and federal government expenditures for highway construction.
b. The federal government's payments for Social Security.
c. AFDC payments made to a low-income family with dependent children.
d. Local government spending for retirement benefits for former employees.
ANSWER: a
42. Suppose the United States imports $750 billion of goods and services and exports $620 billion of
goods and services. For the purposes of GDP, net exports are:
a. $1,370 billion.
b. $750 billion.
c. $130 billion.
d. -$130 billion.
ANSWER: d
Use the following table to answer question 43 – 45.
Consumption
Gross Investment
Consumption of Fixed Capital
Government Purchases
Government Transfer Payments
Exports
Imports
$8,100
2,250
1,000
3,300
9,500
900
750
Test Bank  435
43. According to the information given, net exports is:
a. $250.
b. $300.
c. $480.
d. $150.
ANSWER: d
44. According to the information given, net investment is:
a. $2,250.
b. $2,300.
c. $1,800.
d. $1,250.
ANSWER: d
45. According to the information given, GDP is:
a. $25,800.
b. $22,300.
c. $14,800.
d. $13,800.
ANSWER: d
46. Suppose prices for 1998 are, on average, $500. Prices for the base period are $400. The price
index is:
a. 2.25.
b. 1.25.
c. 0.80.
d. 0.75.
ANSWER: b
47. Suppose that over a given time period nominal GDP rises by 6 percent and real GDP rises by 4
percent. Over this period, we know that:
a. the quantity of goods and services produced fell while prices increased.
b. the quantity of goods and services produced increased while prices fell.
c. both the quantity of goods and services produced and prices increased.
d. both quantity of goods and services produced and prices fell.
ANSWER: c
48. Suppose that nominal GDP fell from $5,000 billion in 1997 to $4,800 billion in 1998. Suppose
that over this same period real GDP did not change. In this instance:
a. price increased and quantity was constant.
b. price decreased and quantity was constant.
c. quantity increased and price was constant.
d. quantity decreased and price was constant.
ANSWER: b
436  Chapter 13/Tracking the Macroeconomy
49. Suppose that in 1998, nominal GDP in Liveria is $4,500 billion. If the GDP deflator is 150, real
GDP in 1998 is:
a. $300 billion.
b. $3,000 billion.
c. $5,000 billion.
d. $6,750 billion.
ANSWER: b
Use the following diagram to answer question 50 – 53.
Real GDP
A
. .B
0
.C
D
.
Time
50. In the diagram above, the letters A, B, C, and D, represent which phases of the business cycle?
a. expansion, peak, contraction, and trough, respectively.
b. peak, contraction, trough, and expansion, respectively.
c. expansion, contraction, trough, and peak, respectively.
d. contraction, trough, expansion, and peak, respectively.
ANSWER: b
51. In the diagram above, unemployment is likely to be the greatest problem at point:
a. A.
b. B.
c. C.
d. D.
ANSWER: c
52. In the diagram above, inflation is likely to be the greatest problem at point:
a. A.
b. B
c. C.
d. D.
ANSWER: a
Test Bank  437
53. In the diagram above, unemployment will likely be decreasing at point:
a. A.
b. B.
c. C.
d. D.
ANSWER: d
54. Real GDP is increasing rapidly and unemployment is falling during:
a. the trough of a business cycle.
b. the contraction phase of a business cycle.
c. the expansion phase of a business cycle.
d. the peak of a business cycle.
ANSWER: c
55. Real GDP is decreasing and unemployment is increasing during:
a. the trough of a business cycle.
b. the contraction phase of a business cycle.
c. the expansion phase of a business cycle.
d. the peak of a business cycle.
ANSWER: b
56. Real GDP is at its greatest during:
a. the trough of a business cycle.
b. the contraction phase of a business cycle.
c. the expansion phase of a business cycle.
d. the peak of a business cycle.
ANSWER: d
57. Real GDP will be smallest during:
a. the trough of a business cycle.
b. the contraction phase of a business cycle.
c. the expansion phase of a business cycle.
d. the peak of a business cycle.
ANSWER: a
58. During the past two quarters real GDP has fallen by 1.5 percent and the unemployment rate has
increased by 1 percentage point. Economists predict that during the next quarter unemployment
will rise by another percentage point. The economy is most likely:
a. at the peak of the business cycle.
b. in a recession.
c. in an expansion.
d. at the trough of the business cycle.
ANSWER: b
438  Chapter 13/Tracking the Macroeconomy
59. During the past three quarters real GDP has fallen by 4 percent and the unemployment rate has
climbed from 5 to 7 percent. Economists predict that in the next quarter GDP will show a modest
growth of 0.5 percent and unemployment may fall to 6.8 percent. The economy is most likely:
a. at the peak of the business cycle.
b. in a contraction phase.
c. in an expansion phase.
d. at the trough of the business cycle.
ANSWER: d
60. During the past quarter real GDP increased by 2.5 percent and the unemployment rate dropped to
5.40 percent. Economists predict that in the next quarter GDP will grow at a rate of 3.1 percent
and the unemployment rate will fall to 5.38 percent. The economy is most likely:
a. at the peak of the business cycle.
b. in a contraction phase.
c. in an expansion phase.
d. at the trough of the business cycle.
ANSWER: c
61. As the price level falls the purchasing power of your currency increases. This is an example of:
a. the interest rate effect.
b. the real balance effect.
c. the valuation effect of prices.
d. the substitution effect.
ANSWER: b
62. As the price level increases, consumers increase their borrowing in order to maintain purchasing
power. As a result of this increased borrowing, the interest rate rises and investment falls. This
is an example of:
a. the interest rate effect.
b. the real balance effect.
c. the valuation effect of prices.
d. the substitution effect.
ANSWER: a
63. As the domestic price level falls:
a. both exports and imports will increase.
b. both exports and imports will decrease.
c. exports will increase and imports will decrease.
d. exports will decrease and imports will increase.
ANSWER: c
64. As a result of an increase in government spending:
a. there will be an increase in aggregate quantity demanded.
b. there will be a decrease in aggregate quantity demanded.
c. there will be an increase in aggregate demand.
d. there will be a decrease in aggregate demand.
ANSWER: c
Test Bank  439
65. Which of the following is likely to lead to a decrease in aggregate demand?
a. contractionary fiscal policy.
b. expansionary fiscal policy.
c. expansionary monetary policy.
d. the interest rate effect.
ANSWER: a
66. An increase in aggregate demand would most likely be caused by:
a. a decrease government purchases.
b. an increase in taxes.
c. contractionary monetary policy.
d. expansionary monetary policy.
ANSWER: d
Use the following diagram to answer questions 67 – 68.
GDP Deflator
AD2
AD1
0
Real GDP
67. A shift in aggregate demand from AD1 to AD2 would most likely by caused by:
a. contractionary monetary policy.
b. contractionary fiscal policy.
c. expansionary monetary policy.
d. a decrease in the general price level.
ANSWER: c
68. A shift in aggregate demand from AD2 to AD1 would most likely be caused by:
a. increased optimism about the future of the economy.
b. a decrease in taxes.
c. a decrease in the money supply.
d. an increase in the general price level.
ANSWER: c
440  Chapter 13/Tracking the Macroeconomy
69. A change in the price of resources will cause:
a. a movement along the positively sloped portion of the aggregate supply curve.
b. the vertical portion of the aggregate supply curve to shift.
c. the positively sloped portion of the aggregate supply curve to shift.
d. the entire aggregate supply curve to shift.
ANSWER: c
70. A change in technology will cause:
a. a movement along the positively sloped portion of the aggregate supply curve.
b. the vertical portion of the aggregate supply curve to shift.
c. the positively sloped portion of the aggregate supply curve to shift.
d. the entire aggregate supply curve to shift.
ANSWER: d
71. Suppose the wage rate decreases. As a result we would expect:
a. the entire aggregate supply curve to shift left.
b. the entire aggregate supply curve to shift right.
c. the positively sloped portion of the aggregate supply curve to shift left.
d. the positively sloped portion of the aggregate supply curve to shift right.
ANSWER: d
Use the following diagram to answer questions 72 – 73.
GDP Deflator
AS 1
AS
2
A
. .
B
0
Real GDP
72. A technological advance is most likely to cause:
a. a shift from AS1 to AS2.
b. a shift from AS2 to AS1.
c. a movement from point A to point B.
d. a movement from point B to point A.
ANSWER: a
Test Bank  441
73. An increase in the price level is most likely to cause:
a. a shift from AS1 to AS2.
b. a shift from AS2 to AS1.
c. a movement from point A to point B.
d. a movement from point B to point A.
ANSWER: d
Use the following diagram to answer questions 74 – 75.
GDP Deflator
AS
P
2
P1
AD
0
GDP 1GDP GDP
2
3
Real GDP
74. In the diagram above, the equilibrium level of real output and the equilibrium price level are:
a. GDP1 and P1, respectively.
b. GDP2 and P2, respectively.
c. GDP1 and P2, respectively.
d. GDP2 and P1, respectively.
ANSWER: b
75. Suppose the price level in the above graph is currently P1. In this instance, the economy would
most likely be experiencing:
a. a depression.
b. recession.
c. an excess supply of goods and services.
d. an excess demand for goods and services.
ANSWER: d
76. Suppose the GDP deflator is currently 115 while the equilibrium GDP deflator is 111. In this
instance:
a. an excess supply of goods and services will cause the deflator to increase.
b. an excess supply of goods and services will cause the deflator to decrease.
c. an excess demand for goods and services will cause the deflator to decrease.
d. an excess demand for goods and services will cause the deflator to increase.
ANSWER: b
442  Chapter 13/Tracking the Macroeconomy
77. Suppose the GDP deflator is currently 121 while the equilibrium GDP deflator is 128. In this
instance:
a. an excess supply of goods and services will cause the deflator to increase.
b. an excess supply of goods and services will cause the deflator to decrease.
c. an excess demand for goods and services will cause the deflator to decrease.
d. an excess demand for goods and services will cause the deflator to increase.
ANSWER: d
78. Suppose that the price of inputs decreases. As a result, we would expect:
a. aggregate supply to increase.
b. aggregate supply to decrease.
c. aggregate demand to increase.
d. aggregate demand to decrease.
ANSWER: a
Essay and Discussion Questions
1. Which of the following is a better indicator of an increase in the nation's productive
capacity, gross investment or net investment? Defend your answer.
In order to answer this question, the student should recall that gross investment includes the
consumption of fixed capital. This, in turn, includes both depreciation and an estimate for
accidental destruction of the nation's capital stock. This portion of gross investment simply
replaces capital equipment that wears out or is destroyed; hence, net investment (gross
investment less the consumption of fixed capital) is the better indicator of increases in the
nation's productive capacity.
2. "Much of the fluctuation in GDP is caused by changes in consumption expenditures." Is
this statement true or false? Defend your answer.
This statement is false. The student should recall that although consumption expenditures are the
major component of GDP, they are also relatively stable. Thus, they do not account for much of
the fluctuation in GDP. Instead, much of this fluctuation can be accounted for by changes in
investment spending. While investment accounts for a much smaller proportion of GDP than
does consumption, it is a much less stable component.
3. "When GDP increases, there has been an increase in the nation's output." Is this
statement true or false? Defend your answer.
This statement would only be correct if we were referring to real GDP. Nominal GDP could
increase because the nation's output has increased. It could also increase because the price level
has increased. Thus, this statement is not correct.
4. Suppose the economy is currently producing at its potential. The government enacts
expansionary fiscal policy. How will this impact the economy?
Expansionary fiscal policy will result in an increase in aggregate demand. However, it the
economy is producing at potential, the increase in aggregate demand will simply increase prices.
There will be no change in output. The student can use the aggregate demand-aggregate supply
model to show this result.
Test Bank  443
5. Evaluate the following statement. "An increase in wages and salaries can lead to an
increase in the price level and a decrease in the nation's output."
This statement is correct. The student should recognize that an increase in wages and salaries
will lead to a decrease in aggregate supply. As a result, the price level will increase and output
will fall.
6. "The aggregate demand curve is negatively sloped because as the price level falls, goods
become relatively less expensive. As a result, people buy more goods and services." Is this
statement correct? Defend your answer.
This statement is incorrect. A decrease in the price level does not indicate that goods become
relatively less expensive. This is true because we are dealing with all goods and services
produced in the nation. Instead, people buy more because of the real balance effect, the interest
rate effect, and the impact of changes in the price level have on the relative prices of imports and
exports.
Problems
1. Use the data in the table below to calculate GDP.
Item
Consumption
Gross Investment
Net Investment
Government Purchases
Government Transfers
Exports
Imports
Amount
$1,200
350
175
325
700
79
95
GDP = Consumption + Gross Investment + Government Purchases +
Net Exports
GDP = $1,200 + $350 + $325 + ($79 - $95)
GDP = $1,859.
Use the data in the following table to answer questions 2 - 4.
Item
Amount
Consumption
$3,000
Gross Investment
900
Consumption of Fixed Capital
650
Government Purchases
625
Government Transfers
890
Exports
200
Imports
195
2. What is net investment?
Net Investment = Gross Investment - Consumption of Fixed Capital
Net Investment = $900 - $650
Net Investment = $250
444  Chapter 13/Tracking the Macroeconomy
3. What are net exports?
Net Exports = Exports - Imports
Net Exports = $200 - $195
Net Exports = $5
4. What is GDP?
GDP = Consumption + Gross Investment + Government Purchases + Net Exports
GDP = $3,000 + $900 + $625 + ($200 - $195)
GDP = $4,530
5. Suppose nominal GDP is $750 billion. The implicit price deflator is 150. What is real
GDP?
Real GDP is nominal GDP divided by the implicit price deflator. Thus
Real GDP = $750/1.50
Real GDP = $500
6. Use the information in the following table to calculate GDP.
Market Value of Goods and Services
Produced in 1998
Computers
Automobiles
Tires used in production of automobiles
Supplemental Security Income
Highway system
Residential housing
Leisure
Volunteer services
$9,500,000
8,000,000
950,000
850,000
9,000,000
19,000,000
4,500,000
3,200,000
GDP is the value of final goods and services produced in an economy. Tires used in the
production of automobiles is an intermediate good and would be excluded. Supplemental
Security Income is a government transfer payment and would be excluded. Also the value of
leisure and volunteer services would be excluded from GDP. After making the appropriate
exclusions, GDP is equal to $45,500,000 (9,500,000 + $8,000,000 + $9,000,000 + $19,000,000).
7. Suppose nominal GDP for 1998 is $9,900 billion and the GDP deflator is 300. What is real
GDP?
Real GDP = $9,900/3.00
Real GDP = $3,300
Test Bank  445
8. Suppose nominal GDP for 1998 is $8,000 billion and real GDP is $5,000. What is the GDP
deflator?
We know that:
Real GDP = Nominal GDP/GDP Deflator.
Rearranging terms we find that:
GDP Deflator = Nominal GDP/Real GDP.
GDP Deflator = $8,000/$5,000
GDP Deflator = 1.60
1.60 is the deflator in decimal terms. To turn it into a percentage multiply by 100. Thus, the
deflator in percentage terms is 160.
9. Suppose the GDP deflator is 125 and real GDP is $8,000 billion. What is nominal GDP?
We know that:
Real GDP = Nominal GDP/GDP Deflator.
Rearranging terms we find that:
Nominal GDP = Real GDP x GDP Deflator.
Nominal GDP = $8,000 x 1.25
Nominal GDP = $10,000.