EC 302 Exam 1 Questions With Correct Answers

EC 302 Exam 1 Questions With Correct
Answers
GDP ||(Gross ||domestic ||product) ||- ||CORRECT ||ANSWER✔✔-Sum ||of ||all ||final ||products ||in ||an
||economy




GDE ||(Gross ||aggregate ||demand) ||- ||CORRECT ||ANSWER✔✔-Sum ||of ||consumption ||and
||investment




GDI ||(Gross ||domestic ||income) ||- ||CORRECT ||ANSWER✔✔-wages ||+ ||gross ||profits



The ||3 ||measures ||are ||equal: ||- ||CORRECT ||ANSWER✔✔-



What ||is ||a ||correct ||measure ||of ||well-being? ||and ||what ||is ||it? ||- ||CORRECT ||ANSWER✔✔-In
||fact, ||a ||correct ||measure ||of ||the ||well ||being ||of ||a ||nation ||is ||the ||real ||GDP, ||which ||is ||the


||value ||of ||goods ||and ||services ||measured ||using ||a ||constant ||set ||of ||prices.




What ||is ||the ||formula ||for ||GDP ||Deflator? ||- ||CORRECT ||ANSWER✔✔-The ||GDP ||deflator ||is
||defined ||as ||the ||ratio ||between ||nominal ||GDP ||and ||real ||GDP.




GDP ||Deflator ||= ||Nominal ||GDP/Real ||GDP



What ||is ||the ||most ||used ||measure ||of ||the ||level ||of ||prices? ||- ||CORRECT ||ANSWER✔✔-Despite
||its ||usefulness, ||the ||GDP ||deflator ||is ||not ||the ||most ||used ||measure ||of ||the ||level ||of ||prices.


||The ||most ||used ||measure ||is ||the ||CPI, ||the ||Consumer ||price ||index.

,What ||is ||CPI? ||- ||CORRECT ||ANSWER✔✔-The ||consumer ||price ||index ||is ||a ||weighted ||sum ||of
||the ||prices ||of ||a ||basket ||of ||goods. ||The ||weights ||take ||into ||account ||the ||importance ||of ||the


||different ||goods ||in ||consumption.




What ||are ||the ||differences ||between ||GDP ||deflator ||and ||CPI ||Index? ||- ||CORRECT ||ANSWER✔✔-
1) ||The ||CPI ||includes ||only ||goods ||and ||services ||bought ||by ||consumers, ||while ||the ||GDP
||deflator ||includes ||all ||types ||of ||goods.




2) ||The ||CPI ||also ||includes ||goods ||produced ||abroad, ||while ||the ||GDP ||deflator ||only ||includes
||goods ||produced ||domestically. ||'




3) ||Statistical ||difference: ||The ||GDP ||uses ||weights ||that ||change ||over ||time, ||while ||in ||the ||CPI
||the ||weights ||are ||fixed.




What ||is ||the ||formula ||like? ||- ||CORRECT ||ANSWER✔✔-Once ||equipped ||with ||the ||CPI ||we ||can
||calculate ||the ||inflation ||rate ||n^t ||between ||year ||t ||and ||year ||t ||+ ||1




n^t ||= ||CPI ||t+1 ||- ||CPI ||t/ ||CPI ||t



What ||is ||aggregate ||consumption? ||- ||CORRECT ||ANSWER✔✔-Aggregate ||consumption ||is
||defined ||as ||the ||sum ||of ||total ||expenditure ||by ||households ||for ||goods ||and ||services. ||There


||are ||different ||theories ||of ||consumption.




What ||are ||the ||different ||theories ||of ||consumption? ||- ||CORRECT ||ANSWER✔✔-- ||Keynesian
||theory ||of ||consumption ||(the ||Keynesian ||theory ||has ||been ||the ||most ||used ||theory ||for ||a


||long ||time)



- ||The ||fisher ||theory

- ||The ||Life ||Cycle ||Theory

- ||Permanent ||income ||Theory

, - ||Hall's ||random ||walk ||Theory



The ||Keynesian ||theory ||of ||consumption ||is ||the ||sum ||of ||two ||components: ||- ||CORRECT
||ANSWER✔✔-1) ||A ||fixed ||component. ||we ||denote ||it ||by ||C0 ||(This ||can ||be ||thought ||as
||necessary ||consumption, ||such ||as ||goods ||needed ||for ||survival)




2) ||A ||component ||dependent ||on ||income. ||Keynes ||postulates ||that ||a ||fixed ||share ||of
||disposable ||income ||is ||spent ||in ||consumption: ||we ||denote ||this ||by ||cY ||(Y ||= ||disposable


||income ||and ||c ||= ||marginal ||propensity ||to ||consume)




Only ||current ||income ||matters



What ||are ||the ||assumptions ||with ||the ||marginal ||propensity ||to ||consume? ||- ||CORRECT
||ANSWER✔✔-The ||marginal ||propensity ||to ||consume ||may ||differ ||across ||consumers. ||In
||particular ||it ||is ||generally ||thought ||that ||rich ||households ||have ||lower ||propensity ||to


||consume ||than ||poor ||households. ||We ||do ||not ||consider ||these ||differences ||and ||we ||assume


||that ||all ||households ||have ||the ||same ||propensity ||to ||consume.




The ||graphical ||interpretation ||of ||the ||Keynesian ||consumption ||function ||is: ||- ||CORRECT
ANSWER✔✔-Check ||lap ||top ||images
||




The ||average ||propensity ||to ||consume ||formula: ||- ||CORRECT ||ANSWER✔✔-(C0+cY)/Y ||= ||(C0/Y)
||+ ||c




The ||average ||propensity ||to ||consume ||decreases ||when ||Y ||increases ||because ||the ||fixed
||component ||of ||consumption ||decreases ||in ||importance




What's ||the ||difference ||between ||the ||Keynesian ||theory ||and ||the ||fisher ||theory ||(neoclassical
||theory)? ||- ||CORRECT ||ANSWER✔✔-- ||The ||main ||drawback ||of ||the ||Keynesian ||theory ||is ||that
||only ||current ||income ||matters ||for ||consumption.