CLEP Macroeconomics chapter practice4 questions

07 Nominal GDP, Real GDP, Price Indexes, and Inflation

These questions come directly from the chapter practice in the book. Choose the best answer, check your reasoning, and use the explanation to correct any gap.

Question 1

Question 1 of 4

Nominal GDP in Country X is 840 and real GDP for the same year is 800. The GDP deflator equals

Dividing nominal output by real output and scaling gives (840)/(800)×100=105. Choice A reports the raw 40-unit gap, B inverts the ratio and lands near 95, C assumes prices never moved, and E adds the gap to the base of 100.
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D. 105

Dividing nominal output by real output and scaling gives (840)/(800)×100=105. Choice A reports the raw 40-unit gap, B inverts the ratio and lands near 95, C assumes prices never moved, and E adds the gap to the base of 100.

Question 2

Question 2 of 4

A representative market basket costs 600 in one year and 624 in the next year. The cost of the basket rises by

The basket costs 24 more on a base of 600, and (24)/(600)=0.04. Choice A divides by the later cost of 624, C reports the 24-unit change as though it were already a rate, D slips the decimal in 0.04, and E gives the index level (624)/(600)×100 rather than the change in it.
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B. 4 percent

The basket costs 24 more on a base of 600, and (24)/(600)=0.04. Choice A divides by the later cost of 624, C reports the 24-unit change as though it were already a rate, D slips the decimal in 0.04, and E gives the index level (624)/(600)×100 rather than the change in it.

Question 3

Question 3 of 4

Disinflation and deflation are often confused. Which of the following situations is correctly called disinflation?

Disinflation means prices are still rising, only more slowly, which is what a fall from 6 percent to 3 percent describes. Choice A is deflation, B is accelerating inflation, D is a constant inflation rate, and E reports a level below the base year, which says nothing about the current rate.
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C. Inflation falls from 6 percent to 3 percent.

Disinflation means prices are still rising, only more slowly, which is what a fall from 6 percent to 3 percent describes. Choice A is deflation, B is accelerating inflation, D is a constant inflation rate, and E reports a level below the base year, which says nothing about the current rate.

Question 4

Question 4 of 4

Inflation turns out higher than the parties to a nominal contract expected. Which of the following parties benefits?

Borrowers repay in dollars that buy less than either side expected, so the real burden of a fixed repayment falls. Choice A collects those cheaper dollars, B holds a nominal income stream that never adjusts, C watches idle balances lose value, and E is insulated by indexation and so neither gains nor loses.
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D. Borrowers with fixed-rate loans

Borrowers repay in dollars that buy less than either side expected, so the real burden of a fixed repayment falls. Choice A collects those cheaper dollars, B holds a nominal income stream that never adjusts, C watches idle balances lose value, and E is insulated by indexation and so neither gains nor loses.

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