Question

1) The Consumer Price Index (CPI) is a fixed basked price index. Which of the following is a potential problem with fixed basket price indices? A) A fixed basket approach tends to overestimate the rate of inflation, because people tend to buy more of things as they get more expensive. B) A fixed basket approach tends to overestimate the rate of inflation, because people tend to buy less of things as they get more expensive. C) A fixed basket approach tends to underestimate the rate of inflation, because people tend to buy more of things as they get more expensive. D) A fixed basket approach tends to underestimate the rate of inflation, because people tend to buy less of things as they get more expensive. For questions 2-4, use the following information about the economy of Macrovia. Year 1 Year 2 Personal Consumption $3,000,000 $4,000,000 Expenditures Gross private domestic $1,000,000 $2,000,000 investment Government purchases of goods $500,000 $1,900,000 and services Exports $300,000 $800,000 Imports $800,000 $ 700,000 Population 200 400 2) The GDP of Macrovia in year 1 is A) $4,000,000 B) $5,600,000 C) $6,600,000 D) $5,000,000 3) Between year 1 and year 2, the GDP of Macrovia A) stayed the same B) increased by 300% C) doubled D) tripled 4) Between year 1 and year 2, per capita GDP in Macrovia A) stayed the same B) increased 300% C) doubled D) tripled

Answer 1

1. Ans: B) A fixed basket approach tends to overestimate the rate of inflation, because people tend to buy less of things as they get more expensive.

2.Ans: A ) $4,000,000

Explanation:

GDP = C + I + G + ( X - M)

The GDP of Macrovia in year 1 ;

= $3,000,000 + $1,000,000 + $500,000 + ( $300,000 - $800,000)

= $4,500,000 - $500,000

= $4,000,000

3.Ans: C) doubled

Explanation:

The GDP of Macrovia in year 1 ;

= $3,000,000 + $1,000,000 + $500,000 + ( $300,000 - $800,000)

= $4,500,000 - $500,000

= $4,000,000

The GDP of Macrovia in year 2 ;

= $4,000,000 + $2,000,000 + $1,900,000 + ( $800,000 - $700,000)

= $7,900,000 + $100,000

= $8,000,000

4.Ans: A) stayed the same

Explanation:

Per capita GDP = GDP of the year / Total population

Per capita GDP in Marcovia in year 1 = $4,000,000 / 200 = $20,000

Per capita GDP in Marcovia in year 2 = $8,000,000 / 400 = $20,000