Question

Suppose that in a closed economy GDP is equal to 11,000, taxes are equal to 2,500, transfer payments are equal to 500, consumption equals 7,500 and government purchases equal 2,000. What are private saving, public saving, and national saving?

a. 1,500, 0, and 1500, respectively

b. 1,000, 500, and 1,500, respectively

c. 500, 1,500, and 1,000, respectively

d. None of the above is correct

During the current quarter, a firm produces consumer goods and adds some of those goods to the firm’s inventory rather than selling them. The value of the goods added to inventory is

a. not included in the current quarter GDP.

b. included in the current quarter GDP as investment.

c. included in the current quarter GDP as consumption.

d. included in the current quarter GDP as a statistical discrepancy.

9. When the price level rises, the number of dollars required to buy a fixed basket of goods

Increases, and so the value of money rises

Decreases, and so the value of money rises

Increases and so the value of money falls

Decreases and so the value of money falls

10. The nominal interest rate is 8.5% and the inflation rate is 3%. What is the real interest rate?

11.5%

8.5%

5.5%

3%

11. If the net export of a country is positive, then its

saving is greater than domestic investment and

saving is greater than domestic investment and

saving is less than domestic investment and

saving is less than domestic investment and

Answer 1

7. Option A.

Explanation: Private Savings = GDP - (Taxes - Tranfer payments) - Consumption = 11,000 - (2,500 - 500) - 7,500 = 11,000 - 2,000 - 7,500 = 1,500

Public savings = Taxes - (Government expenses + transfer payments) = 2,500 - (2,000 + 500) = 2,500 - 2,500 = 0

National savings = public savings + private savings = 0 + 1500 = 1500

8. Option B

Explanation: Unsold inventory is treated as investment expenditure. Therefore, it is added in the current quarter GDP as an investment.

9. Option C. Increases and so the value of money falls

Explanation: When price level rises i.e. inflation takes place, the purchasing power of a dollar falls. So, we need to spend more dollars to buy a fixed basket of goods.

10. Option C. 5.5%

Explanation: Real interest rate = nominal interest rates - inflation = 8.5% - 3% = 5.5%