Question

11. The dollar level of government spending in total is not necessarily equal to the dollar level of government as a component of GDP. This is so because

1. Government itself does not produce anything, so it cannot be included in a variable that measures production
2. Government spending is offset by taxes and borrowing, so only positive net spending can be included in the computation of GDP, not total spending
3. Government spending is offset by positive levels of taxes and negative levels of transfer payments, assuring that government will be a smaller portion of GDP than its actual spending
4. Government spending in total includes a substantial amount of transfer payments, which cannot included in the computation of GDP as they are unrelated to current production

12. Assume that we find the actual level of output, Y, is greater than the planned level of spending (E_p) at that level of Y. We may conclude that:

1. The level of unplanned investment will be zero
2. The level of unplanned investment will be negative
3. The level of unplanned investment will be positive
4. The level of both planned and unplanned investment will rise in response the gap between Y and planned spending

13. Which of the following would be the best description of what is measured by GDP?

1. GDP measures the total final retail sales of all firms in a given country
2. GDP measures the level of current production done within the borders of a country
3. GDP measures the level of production done by domestic companies both domestically and overseas
4. GDP measures current expenditures done by the private, domestic sector plus output produced for export

14. If we find that nominal (current dollar) GDP fell last quarter, then we can conclude which of the following is true:

1. If inflation was positive then real GDP must, in all cases, have risen
2. If we had falling prices, or deflation, it will always exactly offset the fall in nominal, resulting in zero growth for real GDP in all cases
3. If inflation was positive then real GDP must have fallen as well
4. If inflation was zero, then real GDP growth rate will also be zero

Answer 1

1 - Option D

Government spending includes a substantial part of transfer payments which are not included in GDP.

This is the reason of the difference in the actual spending and the spending which is included in GDP.

2 - Option C

Level of unplanned investment will be positive

If it will be negative , the income will be less than planned , and if it will be Zero , income will be equal to planned. Hence Option C will only be correct

3 - Option B.

GDP measures the level of current production done within the borders of country.

Expenditure should also include part of government . Overseas production is not included. Hence Option B will be correct

4 - Option C.

If inflation was positive , real GDP must have fallen as well

This is as a result of the formula

Real GDP = Nominal GDP - Inflation.

Hence positive inflation would give lesser RGDP.