Problem Set 1 Part I．Multiple-choice questions 1. The flow-of-product and earnings or cost approaches to GDP: a. measure two different aspects of GDP and are therefore unrelated to each other. b. are two different ways of measuring the same thing. c. should both arrive at the same number if GDP is measured in real terms, but not if GDP is measured nominally. d. have nothing to do with the circular-flow diagram. e. none of the above. 2. If nominal GDP was $360 (billion) in 1992 and if the price level rose by 20 percent from 1990 to 1992, then the 1992 GDP, measured in 1990 prices, was (in billions): a. $300. b. $320. c. $340. d. $360. e. $432. 3. What is the consumer price index (CPI) calculating? a. The CPI is a measure of the average change over time in prices paid by urban consumers for a market basket of consumer goods and services. b. The CPI is a price index that included the prices of all goods and services produced in the country (consumption, investment, government purchases, and net exports). c. The CPI measures the level of prices at the wholesale or producer stage. It includes the prices of foods, manufactured product, and mining products. d. The CPI is equally weighted average of food, housing, and gas prices. e. None of the above. 4. The nonaccelerating inflationary rate of unemployment (NAIRU) is the rate at which: a. upward and downward forces on price and wage inflation are in balance. b. inflation is stable. c. the economy has the lowest level of unemployment that can be maintained without upward pressure on inflation. d. all of the above. e. choices b. and c. only. 5. The Phillips curve shows the relationship between: a. cost of producing a good and its selling price. b. inflation and unemployment. c. inflation and exports. d. unemployment and GDP. e. none of the above. 6. According to Okun’s Law, suppose potential GDP rose by 9 percent between 2005 and 2008 but actual GDP did not change, then unemployment would climb from 5.8 percent in 2005 to_____ in 2008: a. 6.1 percent. b. 10.3 percent. c. 11.2 percent. d. 8.8 percent. e. 9.7 percent. 7. Which of the following is NOT considered as the goals of macroeconomics for a typical modern economy? a. High levels and rapid growth of output and consumption. b. Low unemployment rate, with an ample supply of good jobs. c. Price-level stability (or low inflation). d. More exports than imports. 8. Which of the following is NOT true about macroeconomic measurements? a. GDP = C + I + G + X b. GDP = National income + Depreciation. c. GDP = National income – Depreciation. d. Disposable income = GDP – Taxes – Net business saving – Depreciation + Transfer payments. 9. Which of the following is NOT true abou ...

1. Problem Set 1
Part I．Multiple-choice questions
1. The flow-of-product and earnings or cost approaches to GDP:
a. measure two different aspects of GDP and are
therefore unrelated to each
other.
b. are two different ways of measuring the same thing.
c. should both arrive at the same number if GDP is measured in
real terms,
but not if GDP is measured nominally.
d. have nothing to do with the circular-flow diagram.
e. none of the above.
2. If nominal GDP was $360 (billion) in 1992 and if the price
level rose by 20
percent from 1990 to 1992, then the 1992 GDP, measured in
1990 prices, was (in
billions):
a. $300.
b. $320.
c. $340.
d. $360.
e. $432.

2. 3. What is the consumer price index (CPI) calculating?
a. The CPI is a measure of the average change over time in
prices paid by
urban consumers for a market basket of consumer goods and
services.
b. The CPI is a price index that included the prices of all goods
and services
produced in the country (consumption, investment, government
purchases,
and net exports).
c. The CPI measures the level of prices at the wholesale or
producer stage. It
includes the prices of foods, manufactured product, and mining
products.
d. The CPI is equally weighted average of food, housing, and
gas prices.
e. None of the above.
4. The nonaccelerating inflationary rate of unemployment
(NAIRU) is the rate at
which:
a. upward and downward forces on price and wage inflation are
in balance.
b. inflation is stable.
c. the economy has the lowest level of unemployment that can
be maintained

3. without upward pressure on inflation.
d. all of the above.
e. choices b. and c. only.
5. The Phillips curve shows the relationship between:
a. cost of producing a good and its selling price.
b. inflation and unemployment.
c. inflation and exports.
d. unemployment and GDP.
e. none of the above.
6. According to Okun’s Law, suppose potential GDP rose by 9
percent between
2005 and 2008 but actual GDP did not change, then
unemployment would climb
from 5.8 percent in 2005 to_____ in 2008:
a. 6.1 percent.
b. 10.3 percent.
c. 11.2 percent.
d. 8.8 percent.
e. 9.7 percent.
7. Which of the following is NOT considered as the goals of
macroeconomics for a

4. typical modern economy?
a. High levels and rapid growth of output and
consumption.
b. Low unemployment rate, with an ample supply of good
jobs.
c. Price-level stability (or low inflation).
d. More exports than imports.
8. Which of the following is NOT true about macroeconomic
measurements?
a. GDP = C + I + G + X
b. GDP = National income + Depreciation.
c. GDP = National income – Depreciation.
d. Disposable income = GDP – Taxes – Net business
saving – Depreciation
+ Transfer payments.
9. Which of the following is NOT true about a price index?
a. GDP price index is intended to measure the price of all
goods and services
produced in the country rather than of a single component.
b. The PPI is a measure of the average change over time in the
prices paid by
urban consumers for a market basket of consumer goods and
services.
c. A price index is a measure of the average level of price of
the components
in the index relative to a base year.

5. d. GDP price index is also called the GDP deflator.
10. According to the Okun’s law, if GDP rises 8% above its
potential, the
unemployment rate will _______.
a. rise about 4 percentage points
b. rise about 16 percentage points
c. fall about 4 percentage points
d. fall about 16 percentage points
11. According to the Phillips Curve, when output is high and
unemployment is low,
a. wages and prices tend to rise more rapidly.
b. wages and prices tend to fall more rapidly.
c. wages and prices tend to remain unchanged.
d. wages and prices tend to fall moderately.
Part II. Problem-solving questions
12. Given the following CPI index numbers (1982-1984 = 100):
CPI (2007): 207.34; CPI (2008): 215.30
Calculate the inflation rate from 2007 to 2008.
Your answer: The inflation rate: _________________
(%)
(Keep two decimal points)
13. Suppose a nation’s GDP was $260 billion in 2010 and

6. $325 billion in 2020. Both
figures were computed as usual in terms of market prices for the
year involved.
The price index rose from 100 in 2010 to 130 in 2020.
a. Real output ___ (increased / decreased) from 2010
through 2020.
b. In terms of 2020 prices, the 2010 GDP would be $___.
c. In terms of 2010 prices, the 2020 GDP would be $___.
d. The overall rate of inflation during the ten years is
about ___.
Your answers: a: _________________(increased / decreased)
b: __________________
c: __________________
d: __________________
14. Refer to the table below and answer the following
questions.
(1) (2) (3) (4) (5)
GDP in billions of
current dollars

7. GDP Deflator
Real GDP (GDP in
2000 dollars)
Real GDP
Growth Rate
Inflation as
measured by GDP
deflator
2000: 100
2000 9,817.0 100.0 9,817.0 3.66% 2.18%
2001 10,128.0 102.4 9,890.7 0.75% 2.40%
2002 10,469.6 104.2 10,048.8 1.60% 1.75%
2003 10,960.8 106.4 10,301.0 2.51% 2.13%
2004 11,685.9 109.5 10,675.8 3.64% 2.87%
2005 12,421.9 113.0 2.94% 3.26%
2006 13,178.4 116.7 11,294.8 2.78% 3.22%
2007 13,807.5 119.8 11,523.9 2.03% 2.69%
2008 14,264.6 122.4 1.12% 2.17%
What were real GDPs in 2005 and 2008 (GDP in 2000
dollars)?
(Keep two decimal points)
Your Answer: Real GDPs in 2005: ________
Real GDPs in 2008: ________

8. 15. The following table provides information on a country’s
nominal GDP, real GDP
and GDP deflator for 4 consecutive years.
Year
Nominal
GDP
Real
GDP
GDP
deflator
1 7800 90
2 8000 ? 95
3 8540 100
4 ? 8700 120
Calculate real GDP in years 2 and nominal GDP in year 4.
Your answer: Real GDP in Year 2: ______________
(Keep the integer part)
Nominal GDP in Year 4: ___________ (Keep the
integer part)
Calculate the inflation rate from year 2 to year 3 based on the
GDP deflator.
Your answer: The inflation rate: _______________% (Keep
two decimal points)

9. 16. Refer to the Appendix at the end of this problem set,
calculate (or confirm) the
following:
a. The inflation rate in 1999. (Keep two decimal points)
b. The growth rate of real GDP in 1982. (Keep two decimal
points)
c. The average inflation rate from 1969 to 1979 (10 years) and
from 1989 to
1999 (10 years). Use geometric method. (Keep two decimal
points for
percentage; e.g., if your answer is 7.05%, write down 7.05.)
d. The average growth rate of real GDP from 1970 to 1999.
Use geometric
method. (Keep two decimal points for percentage; e.g., if your
answer is
7.05%, write down 7.05.)
Your answer: a. The inflation rate in 1999:
_____________%

10. b. Real GDP growth 1982:
______________%
c. Average inflation for the 1970s: ________%
Average inflation for the 1990s : ________%
d. Average growth rate of real GDP: _______%
Refer to the table below for the Question 17 and 18.
Line 2005 2006 2007 2008 2009 2010
1 Gross domestic product 12,623.0 13,377.2 14,028.7 14,291.5
13,939.0 14,526.5
2 Personal consumption expenditures 8,803.5 9,301.0 9,772.3
10,035.5 9,866.1 10,245.5
3 Goods 3,076.7 3,224.7 3,363.9 3,381.7 3,197.5 3,387.0
4 Durable goods 1,123.4 1,155.0 1,188.4 1,108.9 1,029.6
1,085.5
5 Nondurable goods 1,953.4 2,069.8 2,175.5 2,272.8 2,167.8
2,301.5
6 Services 5,726.8 6,076.3 6,408.3 6,653.8 6,668.7 6,858.5
7 Gross private domestic investment 2,172.3 2,327.1 2,295.2
2,087.6 1,546.8 1,795.1
8 Fixed investment 2,122.3 2,267.2 2,266.1 2,128.7 1,707.6
1,728.2
9 Nonresidential 1,347.3 1,505.3 1,637.5 1,656.3 1,353.0
1,390.1
10 Structures 351.8 433.7 524.9 586.3 449.9 374.4
11 Equipment and software 995.6 1,071.7 1,112.6 1,070.0 903.0
1,015.7
12 Residential 775.0 761.9 628.7 472.4 354.7 338.1
13 Change in private inventories 50.0 60.0 29.1 -41.1 -160.8
66.9
14 Net exports of goods and services -722.7 -713.1 -391.5 -

11. 516.9
15 Exports 1,305.1 1,471.0 1,661.7 1,846.8 1,583.0 1,839.8
16 Goods 906.1 1,024.4 1,162.0 1,297.5 1,064.7 1,277.8
17 Services 399.0 446.6 499.7 549.3 518.4 562.0
18 Imports 2,027.8 2,240.3 2,374.8 2,556.5 1,974.6 2,356.7
19 Goods 1,708.0 1,884.9 2,000.7 2,146.3 1,587.3 1,947.3
20 Services 319.8 355.4 374.0 410.1 387.3 409.4
21 Government consumption expenditures and gross investment
2,369.9 2,518.4 2,674.2 2,878.1 2,917.5
22 Federal 876.3 931.7 976.3 1,080.1 1,142.7 1,222.8
23 National defense 589.0 624.9 662.3 737.8 774.9 819.2
24 Nondefense 287.3 306.8 314.0 342.3 367.8 403.6
25 State and local 1,493.6 1,586.7 1,697.9 1,798.0 1,774.8
1,780.0
17. What was the amount of U.S. net exports in 2006? What
was the percentage of
net exports in U.S. GDP in 2006?
Your answer: The Amount of U.S. Net Exports:
___________ (Keep one
decimal point)
Your answer: The Percentage of U.S. Net Exports:
_________% (Keep two
decimal points)
18. What was the amount of U.S. government purchase in
2010? What was the
percentage of government purchase in U.S. GDP in 2010?

12. Your answer: The Amount of U.S. Government Purchase:
____________ (Keep
one decimal point)
Your answer: The Percentage of U.S. Government
Purchase: __________ (Keep
two decimal points)
Part III. Essay
19. Who was the founder of macroeconomics? What is
macroeconomics about?
20. What is potential GDP? What happens when output rises
above potential GDP in
an economy?
Appendix:
Table 5 U.S. Nominal and Real GDP ($,
billion), 1929-2008
(1) (2) (3) (4) (5)
GDP in billions of
current dollars
GDP Deflator
GDP in billions of

13. chained 2000 dollars
Real GDP
Growth Rate
Inflation as
measured by GDP
deflator
2000: 100 (3) =[(1)/(2)]*100
1929 103.6 12.0 865.2
1930 91.2 11.5 790.7 -8.61% -3.67%
1931 76.5 10.3 739.9 -6.42% -10.36%
1932 58.7 9.1 643.7 -13.00% -11.80%
1933 56.4 8.9 635.5 -1.27% -2.68%
1934 66.0 9.4 704.2 10.81% 5.60%
1935 73.3 9.6 766.9 8.90% 1.98%
1936 83.8 9.7 866.6 13.00% 1.17%
1937 91.9 10.1 911.1 5.14% 4.31%
1938 86.1 9.8 879.7 -3.45% -2.97%
1939 92.2 9.7 950.7 8.07% -0.91%
1940 101.4 9.8 1,034.1 8.77% 1.11%
1941 126.7 10.5 1,211.1 17.12% 6.69%
1942 161.9 11.3 1,435.4 18.52% 7.81%
1943 198.6 11.9 1,670.9 16.41% 5.38%
1944 219.8 12.2 1,806.5 8.12% 2.37%
1945 223.1 12.5 1,786.3 -1.12% 2.65%
1946 222.3 14.0 1,589.4 -11.02% 11.99%
1947 244.2 15.5 1,574.5 -0.94% 10.89%
1948 269.2 16.4 1,643.2 4.36% 5.63%
1949 267.3 16.4 1,634.6 -0.52% -0.18%
1950 293.8 16.5 1,777.3 8.73% 1.09%
1951 339.3 17.7 1,915.0 7.75% 7.18%

14. 1952 358.3 18.0 1,988.3 3.83% 1.71%
1953 379.4 18.2 2,079.5 4.59% 1.24%
1954 380.4 18.4 2,065.4 -0.68% 0.95%
1955 414.8 18.7 2,212.8 7.14% 1.78%
1956 437.5 19.4 2,255.8 1.94% 3.46%
1957 461.1 20.0 2,301.1 2.01% 3.32%
1958 467.2 20.5 2,279.2 -0.95% 2.30%
1959 506.6 20.8 2,441.3 7.11% 1.23%
1960 526.4 21.0 2,501.8 2.48% 1.40%
1961 544.7 21.3 2,560.0 2.33% 1.12%
1962 585.6 21.6 2,715.2 6.06% 1.36%
1963 617.7 21.8 2,834.0 4.38% 1.06%
1964 663.6 22.1 2,998.6 5.81% 1.53%
1965 719.1 22.5 3,191.1 6.42% 1.83%
1966 787.8 23.2 3,399.1 6.52% 2.85%
1967 832.6 23.9 3,484.6 2.52% 3.09%
1968 910.0 24.9 3,652.7 4.82% 4.27%
1969 984.6 26.1 3,765.4 3.09% 4.96%
1970 1,038.5 27.5 3,771.9 0.17% 5.29%
Table 5 U.S. Nominal and Real GDP ($, billion), 1929-2008
(Continued)
(1) (2) (3) (4) (5)
GDP in billions of
current dollars
GDP Deflator
GDP in billions of
chained 2000 dollars

15. Real GDP
Growth Rate
Inflation as
measured by GDP
deflator
2000: 100 (3) =[(1)/(2)]*100
1970 1,038.5 27.5 3,771.9 0.17% 5.29%
1971 1,127.1 28.9 3,898.6 3.36% 5.00%
1972 1,238.3 30.2 4,105.0 5.29% 4.34%
1973 1,382.7 31.8 4,341.5 5.76% 5.58%
1974 1,500.0 34.7 4,319.6 -0.50% 9.03%
1975 1,638.3 38.0 4,311.2 -0.19% 9.43%
1976 1,825.3 40.2 4,540.9 5.33% 5.78%
1977 2,030.9 42.8 4,750.5 4.62% 6.35%
1978 2,294.7 45.8 5,015.0 5.57% 7.03%
1979 2,563.3 49.5 5,173.4 3.16% 8.29%
1980 2,789.5 54.0 5,161.7 -0.23% 9.07%
1981 3,128.4 59.1 5,291.7 2.52% 9.39%
1982 3,255.0 62.7 5,189.3 -1.94% 6.10%
1983 3,536.7 65.2 5,423.8 4.52% 3.96%
1984 3,933.2 67.7 5,813.6 7.19% 3.75%
1985 4,220.3 69.7 6,053.7 4.13% 3.04%
1986 4,462.8 71.2 6,263.6 3.47% 2.20%
1987 4,739.5 73.2 6,475.1 3.38% 2.73%
1988 5,103.8 75.7 6,742.7 4.13% 3.41%
1989 5,484.4 78.6 6,981.4 3.54% 3.78%
1990 5,803.1 81.6 7,112.5 1.88% 3.86%
1991 5,995.9 84.4 7,100.5 -0.17% 3.50%
1992 6,337.7 86.4 7,336.6 3.33% 2.30%
1993 6,657.4 88.4 7,532.7 2.67% 2.31%
1994 7,072.2 90.3 7,835.5 4.02% 2.13%

16. 1995 7,397.7 92.1 8,031.7 2.50% 2.05%
1996 7,816.9 93.9 8,328.9 3.70% 1.90%
1997 8,304.3 95.4 8,703.5 4.50% 1.66%
1998 8,747.0 96.5 9,066.9 4.18% 1.11%
1999 9,268.4 97.9 9,470.3 4.45% 1.45%
2000 9,817.0 100.0 9,817.0 3.66% 2.18%
2001 10,128.0 102.4 9,890.7 0.75% 2.40%
2002 10,469.6 104.2 10,048.8 1.60% 1.75%
2003 10,960.8 106.4 10,301.0 2.51% 2.13%
2004 11,685.9 109.5 10,675.8 3.64% 2.87%
2005 12,421.9 113.0 10,989.5 2.94% 3.26%
2006 13,178.4 116.7 11,294.8 2.78% 3.22%
2007 13,807.5 119.8 11,523.9 2.03% 2.69%
2008 14,264.6 122.4 11,652.7 1.12% 2.17%
Source: Bureau of Economic Analysis, U.S. Department of
Commerce (www.bea.gov).
Table 6 U.S. CPI and CPI Inflation
Year Index Change Year Index Change Year Index Change
1913 9.90 1946 19.50 8.33% 1979 72.60 11.35%
1914 10.00 1.01% 1947 22.30 14.36% 1980 82.40 13.50%
1915 10.10 1.00% 1948 24.10 8.07% 1981 90.90 10.32%
1916 10.90 7.92% 1949 23.80 -1.24% 1982 96.50 6.16%
1917 12.80 17.43% 1950 24.10 1.26% 1983 99.60 3.21%
1918 15.10 17.97% 1951 26.00 7.88% 1984 103.90 4.32%
1919 17.30 14.57% 1952 26.50 1.92% 1985 107.60 3.56%
1920 20.00 15.61% 1953 26.70 0.75% 1986 109.60 1.86%
1921 17.90 -10.50% 1954 26.90 0.75% 1987 113.60 3.65%
1922 16.80 -6.15% 1955 26.80 -0.37% 1988 118.30 4.14%
1923 17.10 1.79% 1956 27.20 1.49% 1989 124.00 4.82%
1924 17.10 0.00% 1957 28.10 3.31% 1990 130.70 5.40%
1925 17.50 2.34% 1958 28.90 2.85% 1991 136.20 4.21%

17. 1926 17.70 1.14% 1959 29.10 0.69% 1992 140.30 3.01%
1927 17.40 -1.69% 1960 29.60 1.72% 1993 144.50 2.99%
1928 17.10 -1.72% 1961 29.90 1.01% 1994 148.20 2.56%
1929 17.10 0.00% 1962 30.20 1.00% 1995 152.40 2.83%
1930 16.70 -2.34% 1963 30.60 1.32% 1996 156.90 2.95%
1931 15.20 -8.98% 1964 31.00 1.31% 1997 160.50 2.29%
1932 13.70 -9.87% 1965 31.50 1.61% 1998 163.00 1.56%
1933 13.00 -5.11% 1966 32.40 2.86% 1999 166.60 2.21%
1934 13.40 3.08% 1967 33.40 3.09% 2000 172.20 3.36%
1935 13.70 2.24% 1968 34.80 4.19% 2001 177.10 2.85%
1936 13.90 1.46% 1969 36.70 5.46% 2002 179.90 1.58%
1937 14.40 3.60% 1970 38.80 5.72% 2003 184.00 2.28%
1938 14.10 -2.08% 1971 40.50 4.38% 2004 188.90 2.66%
1939 13.90 -1.42% 1972 41.80 3.21% 2005 195.30 3.39%
1940 14.00 0.72% 1973 44.40 6.22% 2006 201.60 3.23%
1941 14.70 5.00% 1974 49.30 11.04% 2007 207.34 2.85%
1942 16.30 10.88% 1975 53.80 9.13% 2008 215.30 3.84%
1943 17.30 6.13% 1976 56.90 5.76% 2009 214.54 -0.36%
1944 17.60 1.73% 1977 60.60 6.50%
1945 18.00 2.27% 1978 65.20 7.59%
Note: The U.S. consumer price index was for all urban
consumers.
Base period: 1982-1984 = 100.
Source: U.S. Bureau of Labor Statistics,
http://data.bls.gov/PDQ/servlet/SurveyOutputServlet