Question

**1. The country of Macroland produces only cookies.
Production is as follows: 300 kilograms of cookies in 2017 and 150
kilograms in 2018. Prices were as follows: 4 euros in 2017 and 6
euros in 2018. With these figures in mind we know that the change
in the GDP deflator in 2018 over 2017
was **

- unknown, since we need to fix a base year to calculate the change in the GDP deflator.
- no change since the percentage fall in quantity is equal to the percentage increase in prices
- an increase of 50%.
- a fall of 50%.

**2. Suppose a painting is produced and sold in 2018 for
£5,000. The expenses involved in producing the painting amounted to
£2,000. From those £2,000, £500 were spent on paying the model that
appears in the painting, £200 for the rental of the studio, and the
rest was used to purchase the material (intermediate goods).
According to the sum- of-value-added method of calculating GDP, the
value added by the final step of creating the painting
was:**

- £4,300.
- £3,700.
- £5,000.
- £2,000.

**3. In the production function, assume that there are
decreasing returns to capital, decreasing returns to labor, and
constant returns to scale. Now suppose that both capital and labour
decrease by 5 %. Given this information, we know that output (Y)
will?**

- decrease by less than 5 %.
- decrease by 5%.
- decrease by more than 5 %.
- not change.

**4. Suppose that in Macroland, real GDP in 2017 was
$1’000’000’000 (base year 1992) and $1’050’000 (base year 1992) in
year 2018. We can say that between 2017 and 2018**

- There is not enough information to know what has happened to output and prices
- Output rises 5%
- Price have risen 5%
- Prices have risen by 3% and output by 2%

**5. Which of the following will be included in the
calculation of GDP using the expenditure approach?**

- Dividends paid by firms to shareholders
- Interest paid by households for loans
- Services purchased by the government
- Wages paid to labour firms

Answer #1

1. Option a.

GDP deflator is calculated as =

Nominal GDP/Real GDP × 100.

Further to calculate nominal and real GDP we must fix base year.

2. Option d.

For **creation** of painting all expenses will be
added, viz rent, material and wages. This amounts to £2000. The
next step of value addition is included in selling of painting.

3. Option b.

Constant returns to scale means an increase or decrease in input
leads to **proportional** change in output. So if both
inputs decrease by 5%, Total output falls by 5%.

4. Option a.

From just Real GDP figures of two periods, information about changes in output and prices cannot be determined.

5. Option c.

GDP using Expenditure approach is -

GDP = C+I+G+ NX

The rest options used in Income approach of GDP calculation.

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