Chapter 6 Practice Problems

#1 If the nominal interest rate is 8 % and the rate of inflation is 3%, the real interest rate is ______%

(Ans = 5%)

#2 A major difference between the CPI and GDP inflator is:

The GDP deflator reflects the prices of all final goods and services produced domestically, whereas the consumer price index reflects the prices of a market basket of goods and services bought by consumers.

#3 Describe 3 problems that make the consumer price index an imperfect measure of the cost of living.

1- substitution bias
2- introduction of new goods
3- unmeasured quality changes

Chapter 5 Practice Problems

CHAPTER 5

#1) Macroeconomists study decisions of economy wide phenomena. (T/F)
TRUE

#2)The basic tools of supply and demand are central to microeconomic analysis, but seldom used in macroeconomic analysis (T/F)
FALSE

#3) Many things that society values, such as good health, high-quality education, enjoyable recreation opportunities, and desirable moral attributes of the population, are not measured as part of GDP.

Therefore, GDP is not a useful measure of society's welfare. (T/F)
FALSE


#4) In a certain economy in 2005, households spent $1,200 on goods and services; purchases of capital equipment, inventories, and structures amounted to $250; government spent $350 on goods and services; and the value of imports exceeded the value of exports by $50. ( or NX =-50) It follows that 2005 GDP for this economy was:

ans: $1750 C =1200 I =250 G = 350 NX =-50
1200+250+350+(-50) =1750

#5) Write the equation that includes the four components of GDP and identify each component.

Y = C + I + G + NX

Y = GDP
C= consumption
I= investment
G= government purchases
NX= net exports

Chapter 3 Practice Problems

1) Explain how absolute advantage and comparative advantage differ.

Absolute advantage reflects a comparison of productivity for one person, firm, or nation. Being more productive gives one an absolute advantage.

Comparative advantage is based on the relative opportunity costs of the person, firm, or nation. Having lower opportunity costs gives one a comparative advantage.

Note: it is possible for one person or country to have an absolute advantage in everything, but it is impossible to have a comparative advantage in all goods and services.

2) Will a nation tend to import or export goods for which it has a comparative advantage? Explain.

A nation will export goods for which it has a comparative advantage. It will do this because it has a smaller opportunity cost of producing those goods.


3) Why do economists oppose policies that restrict trade among nations?

Restrictions on trade prevent countries from receiving gains from trade. Restrictions on trade prevent citizens from achieving greater prosperity. Restrictions on trade are harmful to all countries.


4) Production Possibilities Frontier and Trade

a) Draw a PPF for two goods

b) Show a point indicating a possible efficient level of production and consumption without trade, label it ‘A.’

c) Show a point of possible consumption with trade, label it ‘B.’

d) What does the location of this point in reference to the PPF indicate?