Economics 【Reading 17】Sample following, investment, government, net, 2012

hinsafdar

Which of the following least accurately describes a component of gross domestic product?

A) Net imports.

B) Investment.

C) Consumption.

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The components of GDP are consumption, investment, government spending, and net exports, which is exports minus imports.

hinsafdar

Which method of calculating gross domestic product requires data from each stage of production of goods?

A) Sum of value added method.

B) Value of final output method.

C) Income method.

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The sum-of-value-added method of calculating GDP requires data on the value added to goods at each stage of production and distribution. The value-of-final-output method only requires data on the final values of goods and services. The income approach to calculating GDP measures the total income of households and companies, rather than the value of goods and services.

hinsafdar

The GDP deflator is the percentage difference between:

A) nominal GDP and real GDP.

B) GDP calculated using the income and expenditure approaches.

C) GDP calculated using the value-of-final-output method and the sum-of-final-output method.

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The GDP deflator is the percentage difference between nominal GDP and real GDP, reflecting inflation since the base period.

hinsafdar

The difference between personal income and personal disposable income is:

A) fixed expenses.

B) savings.

C) taxes.

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Personal disposable income equals personal income minus taxes.

hinsafdar

Total investment is one of the components of a country’s GDP. Which of the following is least likely to be considered a source of funds for investment?

A) Household expenditures.

B) National savings.

C) Foreign borrowing.

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Total investment is one of the major components of GDP (the others are consumption, government spending, and net exports). Investment is defined as expenditures allocated to fixed assets and inventory. The sources of funds for investment are national savings, foreign borrowing, and government savings.

hinsafdar

If the government is running a budget deficit, which of the following relationships are least likely to occur in the economy at the same time?

Exports relative to imports

Savings relative to investment

A) exports > imports private savings < private investment

B) exports < imports private savings < private investment

C) exports < imports private savings > private investment

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A government budget deficit, a trade surplus, and an excess of private investment over private savings cannot all occur at the same time. If the government runs a budget deficit, the deficit must be financed by a trade deficit (exports < imports), surplus private savings (private savings > private investment), or both.

hinsafdar

The relationship between savings (S), investment (I), government spending (G), government tax revenue (T), exports (X), and imports (I) is:

A) (G − T) = (S − I) + (X − M).

B) (S − I) = (G − T) + (X − M).

C) (X − M) = (S − I) + (G − T).

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The fundamental relationship of saving to investment, the fiscal balance, and the trade balance is S = I + (G − T) + (X − M), or (S − I) = (G − T) + (X − M). This relationship can be solved for the fiscal balance, (G − T) = (S − I) − (X − M), or for the trade balance, (X − M) = (S − I) − (G − T).

hinsafdar

If a fiscal budget deficit increases, which of the following factors must also increase if all other factors are held constant?

A) Investment.

B) Savings.

C) Trade surplus.

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The relationship between the fiscal balance, savings, investment, and the trade balance is (G − T) = (S − I) − (X − M). An increase in a fiscal budget deficit (G − T) must be funded by an increase in savings (S), a decrease in investment (I), or a decrease in net exports (X − M), which would decrease a trade surplus or increase a trade deficit.

hinsafdar

An increase in real interest rates can be expected to:

A) decrease investment and increase net exports.

B) increase government spending and decrease consumption.

C) decrease investment and decrease consumption.

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An increase in real interest rates can be expected to decrease business investment and decrease consumption. The impact on government spending and net exports is not clear-cut.

hinsafdar

Which of the following is least likely a reason that the aggregate demand curve slopes downward?

A) The wealth effect causes consumers to spend less when the price level rises.

B) Business investment declines as a rising price level increases interest rates.

C) Because entitlements are adjusted for inflation, a rising price level forces government spending to increase.

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The aggregate demand curve plots real GDP against the price level. Rising entitlement payments that result from an increasing price level affect nominal GDP, but not real GDP. Both remaining choices describe reasons why the consumption and investment components of real GDP decrease when the price level increases.