ECON 304 PRACTICE EXAM 2025/2026 QUESTIONS WITH
ANSWERS GRADED A+
✔✔CPI versus GDP deflator - ✔✔Prices of capital goods:
included in GDP deflator (if produced domestically)
excluded from CPI
Prices of imported consumer goods:
included in CPI
excluded from GDP deflator
The basket of goods:
CPI: fixed
GDP deflator: changes every year
✔✔PCE deflator - ✔✔Personal Consumption Deflator
-Ratio of nominal to real consumer spending
✔✔core inflation - ✔✔A measure of inflation that doesn't include changes in the prices
of products that tend to experience volatile price swings, e.g. food and energy prices.
This gives policymakers a better indication of long-term changes in the price level.
✔✔unemployemnt rate - ✔✔unemployed/labor force
✔✔labor force participation rate - ✔✔labor force/adult population x 100
✔✔National Income and Product accoutns - ✔✔x this was just a header
✔✔GNP - ✔✔Gross National Product - the sum of all goods and services produced in a
nation in a year
✔✔Net National Product - ✔✔GNP - depreciation
✔✔National Income - ✔✔income earned but not received by factors of production
✔✔Personal Income - ✔✔-income taxes
-property tax
✔✔disposable personal income - ✔✔income remaining for people to spend or save
after all taxes have been paid
✔✔chapter summary - ✔✔gdp measures total income and expenditure
nominal gdp vs real gdp
, ✔✔3 main questions - ✔✔What determines the supply of goods and services?
What deteremines the demand of goods and services?
How is the supply and demand for goods and services equal?
✔✔production function - ✔✔Y=F(K,L)
✔✔labor and capital - ✔✔labor and capital
✔✔what does the production function show - ✔✔Shows how much output (Y AKA GDP)
the economy can produce from K units of capital and L units of labor
✔✔returns to scale assumes what - ✔✔increase return to scale
constant return to scale
decrease return to scale
✔✔the distribution of national income - ✔✔determined by *factor prices*, the prices per
unit firms pay for the factors of production.
*wage* = price of *L*
*rental rate* = price of *K*
✔✔what determines the price of labor - ✔✔wage rate
✔✔notation - ✔✔w= nominal wage (wage rate)
p=price of output (how much the goods cost that the labor used
w/p= real wage measured in units of output
✔✔How factor prices are determined - ✔✔supply and demand
supply is fixed by factor
demand MPL (marginal product of labor)
✔✔Demand for Labor - ✔✔-Assume that markets are competitive: each firm takes W,
R, and P as given
firms are price takers
firms wont have impact on market price
✔✔cont - ✔✔a firm would hire each successive of labor if benefit exceeds cost
✔✔cost=w/p=... - ✔✔real wage and benefit= MPL
✔✔marginal product of labor - ✔✔The extra amount of output the firm gets from one
extra unit of labor, holding the amount of capital fixed.
✔✔MPL equasion - ✔✔MPL=F(K,L + I ) - F(K,L)
ANSWERS GRADED A+
✔✔CPI versus GDP deflator - ✔✔Prices of capital goods:
included in GDP deflator (if produced domestically)
excluded from CPI
Prices of imported consumer goods:
included in CPI
excluded from GDP deflator
The basket of goods:
CPI: fixed
GDP deflator: changes every year
✔✔PCE deflator - ✔✔Personal Consumption Deflator
-Ratio of nominal to real consumer spending
✔✔core inflation - ✔✔A measure of inflation that doesn't include changes in the prices
of products that tend to experience volatile price swings, e.g. food and energy prices.
This gives policymakers a better indication of long-term changes in the price level.
✔✔unemployemnt rate - ✔✔unemployed/labor force
✔✔labor force participation rate - ✔✔labor force/adult population x 100
✔✔National Income and Product accoutns - ✔✔x this was just a header
✔✔GNP - ✔✔Gross National Product - the sum of all goods and services produced in a
nation in a year
✔✔Net National Product - ✔✔GNP - depreciation
✔✔National Income - ✔✔income earned but not received by factors of production
✔✔Personal Income - ✔✔-income taxes
-property tax
✔✔disposable personal income - ✔✔income remaining for people to spend or save
after all taxes have been paid
✔✔chapter summary - ✔✔gdp measures total income and expenditure
nominal gdp vs real gdp
, ✔✔3 main questions - ✔✔What determines the supply of goods and services?
What deteremines the demand of goods and services?
How is the supply and demand for goods and services equal?
✔✔production function - ✔✔Y=F(K,L)
✔✔labor and capital - ✔✔labor and capital
✔✔what does the production function show - ✔✔Shows how much output (Y AKA GDP)
the economy can produce from K units of capital and L units of labor
✔✔returns to scale assumes what - ✔✔increase return to scale
constant return to scale
decrease return to scale
✔✔the distribution of national income - ✔✔determined by *factor prices*, the prices per
unit firms pay for the factors of production.
*wage* = price of *L*
*rental rate* = price of *K*
✔✔what determines the price of labor - ✔✔wage rate
✔✔notation - ✔✔w= nominal wage (wage rate)
p=price of output (how much the goods cost that the labor used
w/p= real wage measured in units of output
✔✔How factor prices are determined - ✔✔supply and demand
supply is fixed by factor
demand MPL (marginal product of labor)
✔✔Demand for Labor - ✔✔-Assume that markets are competitive: each firm takes W,
R, and P as given
firms are price takers
firms wont have impact on market price
✔✔cont - ✔✔a firm would hire each successive of labor if benefit exceeds cost
✔✔cost=w/p=... - ✔✔real wage and benefit= MPL
✔✔marginal product of labor - ✔✔The extra amount of output the firm gets from one
extra unit of labor, holding the amount of capital fixed.
✔✔MPL equasion - ✔✔MPL=F(K,L + I ) - F(K,L)
