ZIRLOTT TEST 2 EC 111 QUESTIONS WITH CORRECT ANSWERS LATEST UPDATE 2026

ZIRLOTT TEST 2 EC 111 QUESTIONS WITH CORRECT ANSWERS LATEST UPDATE 2026 Gross Domestic Product (GDP) - Answers measures total income of everyone in the economy and is the market value of all final goods and services produced within a country GDP also measures - Answers total expenditure on the economy's output of goods and services income= expenditure because? - Answers every dollar a buyer spends is a dollar of income for the seller GDP examples - Answers CURRENTLY PRODUCED GOODS dvd's, beer, dry cleaning, cell phone services What is the time period for GDP - Answers year or quarter What are the four components of total spending (GDP) - Answers Consumption (C) Investment (I) Government (G) Purchases Net Exports (NX) Formula for GDP - Answers Y= C+I+G+NX Consumption (C) - Answers total spending by households on goods and services what is consumption for home owners - Answers the rental value NOT purchase price or mortgage payments Investment (I) - Answers Total spending on goods that will be used in the future to produce more goods Examples of Investment - Answers Machines, tools tech factories office buildings inventory residential fixed investment Government Purchases (G) - Answers all spending on the goods and services purchased by the gov at federal state and local levels Government purchases EXCLUDE - Answers transfer payments such as social security, unemployment insurance Net Exports (NX) - Answers (NX)= exports- imports exports represent - Answers foreign spending on the economy's g&s imports represent - Answers portions of C,I,G that are spent on g&s produced abroad Nominal GDP - Answers values output using current prices. NOT CORRECTED FOR INFLATION PXQ Real GDP - Answers values output using the prices of a base year. Real GDP IS CORRECTED FOR INFLATION base year price X quantity GDP deflator - Answers 100x nominal GDP/Real GDP measure the economy's inflation rate by - Answers computing the percentage increase in the GDP deflator from one year to next Real GDP per capita is the main indicator of the - Answers average person's standard of living GDP does not value - Answers leisure time, environment, equitable distribution of income, parent taking care of child at home GDP is important bc - Answers large GDP means better schools, environment and health care Customer Price Index - Answers measures the typical consumers cost of living How is CPI calculated - Answers 1. Determines what the typical consumer is buying 2. collects prices of those items 3. figure out the total cost of it all 4. choose a base year and compute the index 5. compute inflation rate CPI equation - Answers 100x cost of basket in current year/cost of basket in base year Inflation rate for CPI formula - Answers CPI this year- CPI last year/ CPI last year X100 Problems with CPI (substitution Bias) - Answers some prices rise faster than others consumers substitute goods for cheaper ones OVERSTATES the cost of living Problems with CPI (New goods) - Answers increases variety and allows consumers to buy products closer to their needs OVERSTATES the cost of living Problems with CPI (Unmeasured quality change) - Answers Improvements in the quality of goods i the basket increase the value of each dollar OVERSTATES the cost of living CPI overstates inflation by - Answers .5% per year Differences between CPI and GDP Deflator (imported consumer goods) - Answers Included in CPI excluded from GDP deflator Differences between CPI and GDP Deflator (Capital Goods) - Answers excluded from CPI included in GDP deflator (if produced domestically) Differences between CPI and GDP Deflator (basket) - Answers CPI uses fixed basket GDP deflator uses basket of currently produced goods and services Correcting Variables for Inflation formula - Answers amount in todays dollars= amount in year T dollars X Price level today/ Price level in year T Nominal interest rate - Answers rate of growth in the dollar value of a deposit or debt Real interest rate - Answers rate of growth in the purchasing power of a deposit or debt =(nominal interest rate)- (inflation rate)