University of Illinois Department of Economics
Econ 103 – Fall 2014
Exercise 3
TA: Zheng Zhang
1. Which of the following statements about price support and subsidy is NOT
true.
A In price support, the government comes in as an extra consumer to buy excess
products at a price higher than equilibrium price.
B In Subsidy, the farmers are asked by the government to sell the products at
market equilibrium price
C When the cost is the same under price support and subsidy, the goverement
would opt for price support over subsidy because it benefits poor people
D Goverment supports farmers in part because they fear a decline of agriculture
would negatively impact the whole economy
E Government prefers to use price support over subsidy when the demand for
agricultural products is more inelastic because the cost is less.
2 Which of the following is an example of a final good or service?
A Wheat a bakery purchases to make bread
B Coffee beans Starbucks purchase to make coffee
C A tractor purchased by a farmer to cultivate his farm
D Lumber purchased by a constructive company to use in building
houses.
3. Which of the following would be counted in 2010’s GDP?
A The value of a loan you take in 2010
B The value of a TV that was produced in 2009 but not sold until
2010
C The bonus check a stockbroker gets from his/her company in 2010
D The value of a bond sold by the federal government
Use the following information to answer the next six questions
(4-8). Assume this economy produces only two goods, Good A and
Good B.
Output
Prices($)
Year 1
Year 2
Year 3
Year 1
Year 2
Year 3
Good A
20
40
100
1.0
1.0
1.2
Good B
100
100
120
0.4
0.8
1.1
4. What is nominal GDP in year 2?
A 100
B 120
C 80
D 158
University of Illinois Department of Economics
E None of the above
5. What is real GDP in year 2, using year 1 as the base year?
A 120
B 60
C 100
D 116
E None of the above
6. What is real GDP in year 1, using year 1 as the base year?
A 108
B 60
C 100
D 80
E None of the above
7. What is real GDP in year 1, using year 1 as the base year?
A 108
B 60
C 100
D 80
E None of the above
8 Using year 2 as the base year, what is the growth rate of real GDP
from year 1 to year 2?
A 100%
B -17%
C -50%
D 20%
E None of the above
Use the following information to answer the next six questions
(9-11). Assume this economy produces only two goods, Good A and
Good B.
An economy’s NGDP, RGDP, and GDP Deflator data are given below:
NGDP
RGDP
GDP Deflator
2008
12
-----118
2009
12.5
10.4
-----
University of Illinois Department of Economics
9 The Real GDP in 2008 is $….. billion
A. 10
B. 1.017
C. 10.17
D. 101.7
10 The GDP Deflator for 2009 is…...
A. 1.20
B. 12.9
C. 129.1
D. 120.19
11 What is the inflation rate from 2008 to 2009?
A 4.17%
B 2.26%
C 1.86%
D 3.46%
12 GDP is not a perfect measure of social welfare and the society’s economic
well-being because
A it does not include all economic activities in the economy
B it does not say anything about the distribution of income.
C GDP accounting rules do not adjust for production that causes
negative externalities.
D All of the above
13 Which of the following statements is NOT true about CPI and GDP deflator?
A CPI and GDP deflator are both price index
B CPI tends to overestimate the price level because it uses a fixed basket and ignore the fact that
people may substitute lower priced items for expensive ones.
C The growth rate of CPI and GDP deflator can be used to measure inflation rate.
D All the goods and services included in the calculation of CPI are also included in the
calculation of GDP deflator.
Answer Key:
1. C 2. C 3. C 4. B 5. E 6. B 7. E 8. D 9. C 10. D 11. C 12. D 13. D