Answers to the test are at the end of the test.

I. Multiple Choice (10 questions - 5 points apiece)

Select the best answer to each of the following questions. Place your response to each question in the space provided below. Only answers placed in blanks will receive consideration.

1. ______

2. ______

3. ______

4. ______

5. ______

6. ______

7. ______

8. ______

9. ______

10. ______

1) In the United States(US) National Income and Product Accounts(NIPA), which of the following would lower Personal Income while NOT affecting National Income?

A. a decrease in transfer payments
B. a decrease in employee compensation
C. an increase in personal income taxes
D. a decrease in net interest

2) The largest category of expenditures in our national income is:

A. employee compensation
B. household consumption
C. transfer payments
D. corporate profits

3) If all prices have increase by 50% in the past ten years, and all quantities have doubled in that time period, then

A. nominal GDP will have doubled

B. real GDP will have remained constant

C. nominal GDP will have remained constant

D. real GDP will have doubled

4) Full employment occurs when

A. the level of unemployment equals to natural rate
B. the level of unemployment is at 0% in the economy
C. the level of unemployment equals the frictional level plus the cyclical level
D. the level of unemployment equals the structural level plus the cyclical level

5) Which if the following will NOT shift the aggregate demand curve?

A. changes in the export level
B. changes in the amount of government expenditures of goods and services
C. changes in the international value of the dollar
D. changes in the average price level

6) Suppose the US changed the base year to 1995. Thus, when calculating the GDP deflator for that year(1995), we would notice that

A. the GDP deflator is greater than 100
B. the GDP deflator is less than 100
C. the GDP deflator is equal to 100
D. we cannot tell since we do not know the 1995 output level

7) Transfer payments are flows of money from the government for

A. goods but not services
B. services but not goods
C. both goods and services
D. neither goods nor services

8) When the automobile replaced horse-drawn carriages as the principle means of transportation, firms producing horse-drawn carriages went bankrupt and permanently laid off all their workers, thereby increasing

A. frictional unemployment
B. structural unemployment
C. frictional and cyclical unemployment
D. cyclical unemployment

9) An increase in the labor force will shift

A. the short-run aggregate supply(AS) curve to left while leaving the long-run AS curve unchanged
B. the short-run AS curve to the left and the long-run AS curve to the left
C. the short-run AS curve to the right and the long-run AS curve to the right
D. the short-run AS curve to the right and while leaving the long-run AS curve unchanged

10) In the long-run, a decrease in the price level with no change in output could have been caused by a(n)

A. increase in aggregate demand
B. decrease in aggregate supply
C. increase in aggregate supply
D. decrease in aggregate demand

II. Problem Solving (25 points)

Provide numerical answers to the following questions, using the chart below. Partial credit will be given if applicable, so you need to show all work involved in your calculations. Please circle your final answer to each question. If you need more room, use the back side of this page. All values are in 1995 dollar values, unless stated explicitly as different.
Consumption 8000 Rental Income 800
Employee Compensation 7500 Net Interest 1000
Government Expenditures 4000 Net Investment 2000
Corporate Profits 2000 Net Taxes 6000
Proprietors Income 1700 Net Exports -1000
Depreciation 200 Real GDP (187$) 10000

1) Gross Domestic Product (1995$)

2) GDP deflator for 1995

3) Domestic Income (1995$)

4) Real Domestic Income (1987$)

5) Personal Savings (1995$)

III. Essay (25 Points)

Answer the following questions. Use the back of this sheet if necessary. If you need additional space, see me for an additional sheet.

One of the main concerns for macroeconomists is the level of Domestic Product. Explain the distinction between real and nominal GDP, and why this distinction is important to economists. Secondly, define the difference between gross and net domestic product. Finally, state which of these measures(real/net/gross/nominal) economists should be most concerned with, and explain why.

Answer Key

Multiple Choice

1. A

2. B

3. D

4. A

5. D

6. C

7. D

8. B

9. C

10. D

Analytical Problem

1) GDP = C+I+G+X= 8000 + 2000 + 4000 + -1000 = 13000

2) GDP deflator = (13,000/10,000) X 100 = 130

3) 4) and 5) do not pertain to our class

essay response

real net gdp is what economists should be most concerned with. Real because it eliminates the problems that inflation causes when determining gdp, and net because it is what remains after taking into account depreciation.