Answer Key to Study Questions for Test #2

Here is the key to the sample test problems. There are a few problems that are probably inappropriate in that they cover material we did not cover in these chapters. Also, since these problems were from old tests, there are a few duplicates. Moreover, since I'm using a different text this year, some of the terminology might be different (physical capital is the same as capital).

1-A, 2-C, 3-D, 4-D, 5-B, 6-A, 7-D,
8-A, 9-A [originally reported as D, thanks Yao], 10-B, 11-D, 12-A, 13-B, 14-B,
15-A, 16-B, 17-C, 18-B, 19-B, 20-C*, 21-C*,
22-B, 23-D, 24-A, 25-A, 26-D**, 27-A,
28-C [originally reported as A--thanks Mr. Gomez for the correction], 29-A***, 30-B***,
31-D [originally reported as A--thanks YSlacrosse], 32-D, 33-D, 34-D, 35-C, 36-C, 37-A,
38-B, 39-C, 40-A, 41-A, 42-B, 43-D, 44-A,
45-B, 46-A, 47-D, 48-C, 49-C,
50-D, 51-C, 52-A, 53-B, 54-D

Some comments:

* Problems 20 and 21 deal with price indexes. This comes in a later chapter which we haven't done yet. However, it is very similar to the construction of the GDP price index (GDP deflator), but what you are given are "market baskets of goods". But the GDP is like a market basket of goods. So to calculate a price index for a year you take the ratio to the base year. So given the info in these two problems, you calculate the PI for 2005 as (160/130) x 100 = 123.1, for 2004 it is (140/130) x 100 = 107.7. So for the inflation for 2005 you calculate the % change from the previous period, so inflation = [(123.1 - 107.7) / 107.7 ] = 14.2%

I will not have you construct a price index except maybe finding the GDP price index (deflator) given nominal and real GDP.

I hope you aren't confused. Just ignore these two problems if you want.

**I really don't expect you to know what GDP was in 2005, but updating it to 2006, you should be able to guess it to be about $13.2 trillion.

***Yes, this is an unorthodox circular flow diagram. This was a leftover from the previous text I used. However, you don't really need the diagram to answer this. From the equation

GDP = C + I + G + (X - M), if G increases, then GDP increases (29-A). If M increases, GDP decreases (30-B).

I will make every attempt to keep the jargon familiar.

Good luck.