1.

Out of these, best indicator to compare the economic progress of different countries, over the
time is:
a. Growth rate of Nominal Per Capita Income c. Growth rate of Per Capita Income at PPP
b. Growth rate of Real Per Capita Income d. All of the above
2. Most prominent component of of GDP measured with expenditure approach is
a. Consumption c. Govt Expenditures
b. Investment d. Net Exports
3. Which of the following is not included in gross investment?
a. Business and residential construction. c. Additions to business inventory.
b. Expenditures on consumer goods. d. Expenditures on machinery.
4. In a model in which there are household, business, government and foreign sectors, GDP is the
sum of:
a. Consumption, gross investment, government spending for goods and services and net
exports.
b. Consumption, net investment, government spending for goods and services and net
exports.
c. Consumption, gross investment, government spending for goods and services and gross
exports.
d. Wages, rent, interest, profit and depreciation.
5. Net Domestic Product ------------- Gross Domestic Product
a. > c. =
b. < d. Could be any
6. In short run, there is a trade off between inflation and ………….
a. GDP c. Unemployment
b. Purchasing Power of economic agents d. None of above
7. Agents bear a cost of Boom in the shape of
a. Low unemployment c. Higher inflation
b. Higher incomes d. Lower inflation
8. When the marginal propensity to consume is 0.75, the multiplier has value of:
a. 5 c. 3
b. 4 d. 2
9. In usual IS curve, Price level is taken to as
 a. Exogenously Fixed c. Exogenously determined but changing
b. Endogenously determined d. Can be both (a) and (c)
10. Which of the following will not result in an increase in the level of income?
a. An increase in autonomous spending. c. An increase in autonomous transfers.
b. A decrease in autonomous taxes. d. An increase in net tax revenues.

11. What are consumption goods?

a. Goods used for consumption in the production process

b. Goods such as tools, machinery, etc which are used to create final consumption goods

c. Goods and services that are consumed fully when purchased by the consumers

d. None of the above

12. Intermediate goods are not included to calculate the final output because:

a. they do not have value b. they have unknown value

c. their value is included in final goods so they are not added to avoid the problem of double
counting

d. none of the above

13. What does the term Gross investment mean while denoting a nation's economy?

a. Gross investment= Net investment + Depreciation

b. Gross investment= Net investment - Depreciation

c. Gross investment= Depreciation - Net investment

d. None of the above

14. The index used most often to measure inflation is the

a. consumer price index. c. student price index.

b. wholesale price index. d. producer price index.

15. If we compare GDP and GNP, then:

a. GNP = GDP - net income from abroad b. GNP = GDP + net income from abroad
 c. GNP = NNP - net income from abroad d. GNP = NNP + net income from abroad

16. Select the correct statement:

a. Transfer payment are included in NI c. Taxes are not included in NNP

b. Depreciation allowance is a part of GNP d. GDP means Gross Direct Production

17. If savings exceed investment then:

a. National income rises c. National income is not affected

b. National income falls d. None of the above

18. Rapid increases in the price level during periods of recession or high unemployment are known as

a. slump. c. stagflation.

b. stagnation. d. inflation.

9. As the MPS increases, the multiplier will

a. increase. c. remain constant.

b. depends on the size of the change in d. decrease.

investment.
20. Assume there is no government or foreign sector. If the MPC is .75, a Rs.20 billion decrease in
planned investment will cause aggregate output to decrease by

a. Rs. 80 billion. c. Rs. 26.67 billion.

b. Rs. 20 billion. d. Rs. 15 billion.

21. To avoid double counting in the estimation of GNP, economists suggest

a. Price of all goods and services bought and sold

b. Use the GNP Deflator

c. Price of intermediate good

d. Calculate value added at each stage of production

22. To transform GDP from market prices to basic prices it is necessary to:

a. Exclude imports b. Subtract taxes and subsidies

 c. Subtract taxes and add subsidies d. Add income from abroad

23. The national income is initially in equilibrium. If there was an increase in exports, which of the
following change would restore national income to its initial equilibrium level

a. An equivalent increase inn investment b. An equivalent increase in tax revenue

c. An equivalent reduction in saving

d. An equivalent reduction in Government expenditures on goods and services

24. If personal income is Rs.2000, personal tax is Rs.120, transfer payments is Rs.200, undivided
corporate profit is Rs.150, social security contribution is Rs.80, disposable personal income will be

a. Rs.2080 c. 2310

b. 1880 d.1800

25. Which of the following are regarded as withdrawal from the circular flow of the income?

a. Saving and Taxation c. Government expenditures

b. Export and import d. Consumption of business fixed investment

26. If planned injections are less than planned withdrawals:

a. Unemployment will tend to reduce c. Balance of trade will tend to improve

b. Inflation will tend to rise d. National income will tend to rise

27. If the consumption function runs along the 450 line, the saving function will:

a. Lie along the 450 line c. Lie along the horizontal axis

b. Lie along the vertical axis d. Be negative

28. The four main phases of a business cycle dos not include:

a. Depression c. Boom

b. Inflation d. Recession

29. A prolonged and deep recession is called

a. Hyperinflation c. Depression

b. Stagflation d. Great Depression

30. In a given economy, out of every additional Rs.1000 of national income, Rs.200 is taken in taxes,
Rs.100 is spent on imports, and Rs.5000 is spent on domestically produced goods. The multiplier is

a. 1.25 b. 2 c. 2.5 d. 1.67

31. Real GNP increases:

a. When there is an increase in the price level

b. When there is an increase in the output of goods and services

c. When there is an increase in the price level and/or the output of goods and services

d. All of the above

32. The equation 𝐶=$20+0.90(𝑌−𝑇) predicts that consumption is:

a. $90 when disposable income is $100. c. $110 when disposable income is $100.

b. $100 when disposable income is $90. d. $180 when disposable income is $200.

33. “Zero-sum society” is the term used for an economy:

a. Where inflation rate is equal to zero. c. Productivity growth rate is equal to zero.

b. Unemployment rate is equal to zero.

34. Which of the following statements is correct?

a. A variable is endogenous when its value is determined by forces outside the model

b. A change in an exogenous variable is classified as an autonomous change.

c. A variable is exogenous when its value is determined by forces within the model.

d. A variable is autonomous when its value is determined by forces within the model.

35. Which of the following is not included in gross investment?

a. Business and residential construction. c. Additions to business inventory.

b. Expenditures on consumer goods. d. Expenditures on machinery.

36. In a model in which there are household, business, government and foreign sectors, GDP is the sum
of:

a. Consumption, gross investment, government spending for goods and services and net
exports.
 b. Consumption, net investment, government spending for goods and services and net exports.

c. Consumption, gross investment, government spending for goods and services and gross
exports.

d. Wages, rent, interest, profit and depreciation.

37. Productivity level of an economy is measured by:

a. Growth rate of real GDP c. Growth rate of nominal GDP

b. Growth rate of real GNP d. Aggregate output produced per hour.

38. When nominal GNP is $1100 and real GNP is $1000, the GNP deflator is:

a. 9.09 b. 90.91 c. 1.11 d. 110

39. Suppose planned consumption equals $40+0.90(Y-T) and planned investment is $50. Autonomous
taxes are zero. The equilibrium level of income is:

a. $90 b. $400 c. $500 d. $900

40. Suppose planned saving equals -$40+0.20(Y-T) and planned investment is $60. Autonomous taxes
are zero. The equilibrium level of income is:

a. $100 b. $400 c. $500 d. $1000

41. When the marginal propensity to consume is 0.75, the multiplier has value of:

a. 5 b. 4 c. 3 d. 2

42. A change in autonomous spending is represented by:

a. A movement along a spending line. b. A shift of a spending line

c. A change in a behavioral coefficient.

True/False Questions
1. Any kind of income that is transferred to a person without any productive activity is not included
in GDP. True
2. Higher the value of a multiplier, smaller the stimulus needed to get desired output. True
3. Primary objective of stabilization policy is to promote economic growth and welfare.
 False (to minimize business cycles fluctuations)
4. Policy instruments of stabilization policy (including monetary and fiscal policies) operate through
aggregate demand management. True
5. When actual real GDP is above natural real GDP, there is an issue of unemployment is the
economy. False: the issue is of increasing inflation
6. According to the 'paradox of thrift,' increased efforts to save will cause a decrease in income and
an overall decrease in saving. True
7. If injections are less than withdrawals at the full-employment level of national income, there is
an inflationary gap. False; a deflationary gap.
8. The accelerator theory of investment says that induced investment is determined by the level of
aggregate demand. False; the level of national income.
9. The diagram that shows the money received and paid out by each sector of the economy is the
income-price diagram. False; circular flow diagram.
10. Cyclical unemployment is the unemployment that occurs during recessions and depressions.
True
11. The output Gap and Unemployment Gap move in the opposite direction if an economy has a
constant rate of inflation. False (In case of the constant inflation rate, the
economy will be on its potential level and unemployment will be equal to the natural rate of
unemployment. Thus both gaps will be zero).
12. The value of multiplier depends on the behavior of endogenous variables True
13. Govt use Demand side management policies to controL Business cycle fluctuations. True
14. The personal income is different from national income as the former is payments to individuals,
plus retained income from the corporate sector, less adjustments and later measures national
level income to persons and non profit corporations
False (The personal income is income to persons and nonprofit organizations)
15. The Keynesian Cross explains the determination of national income when actual expenditures of
an economy equal to income level or production of an economy.
False (When planned expenditures equal to Income)
16. Unemployment rate is calculated as 𝑈=𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑢𝑛𝑒𝑚𝑝𝑙𝑜𝑦𝑒𝑑𝑐𝑖𝑣𝑖𝑙𝑎𝑖𝑛
𝑒𝑚𝑝𝑙𝑜𝑦𝑒𝑑+𝑢𝑛𝑒𝑚𝑝𝑙𝑜𝑦𝑒𝑑. Major drawback of this definition is that it overestimates social
distress associated with state of being unemployed. False (underestimates)
17. Value of intermediate goods is not included in GDP to avoid double counting. True
18. Primary objective of stabilization policy is to promote economic growth and welfare.
False (to minimize business cycles fluctuations)
19. Policy instruments of stabilization policy (including monetary and fiscal policies) operate through
aggregate demand management. True
20. When net exports are positive, receivables from rest of the world exceed payables to the rest of
the world. This means domestic economy is net lender global financial market. True
21. Government debt and deficit are stock variables. False (debt: stock; deficit: flow)
22. One of the key assumptions of Keynesian Cross model is that price level is fixed. This implies that
aggregate supply is fixed so that impact of changes in demand gets translated into changes in
output. False (aggregate supply is not fixed; it’s perfectly elastic)
23. In Keynesian Cross model, equilibrium takes place where output, 𝑌 equals planned spending,
𝐸𝑃. Unintended inventory investment, 𝐼𝑢 is zero at equilibrium. True
 24. Planned expenditure, 𝐸𝑃 is identically equal to total output, 𝑌 implying that these two
magnitudes are always equal to each other by definition. False (Total expenditure)
25. If total output, 𝑌 is greater than planned expenditure, 𝐸𝑃 then there exist unsold goods in
economy. This implies positive amount of unintended inventory investment, 𝐼𝑢. True

Case Study
Suppose you are working in Pakistan Bureau of Statistics. A committee is formed to calculate and
release figures on different kind of National Income Accounts, including Gross Domestic Product, Gross
National Product, Net Domestic Product, Net National Product and National Income at factor cost i.e.
National Income that is transferred to owners of factors of production. The committee members gather
information from different departments and one of the members Mr. A is tasked to compile all that
information and report the final figures on different accounts. Seeing your good knowledge on National
income accounts and computational skills, the boss makes you assistant to Mr. A. Mr. A could only
compute Gross Domestic Product as 9256 billion rupees before he had to take some leaves due to some
domestic issues. To avoid deadline, he requested you to complete the report and forward it to him. He
also gives you following information he got from other members

Head Rs. in Billions

Compensation of Employees 5332
Proprietors’ Income 659
Rental Income of persons 146
Corporate Profits 893
Net Interest 468
Indirect business Taxes 604
Deprecation of fixed capital 1136
Factor income received from rest of the world 302
Payments of Factor income to rest of the world 322

Please complete your task and show necessary calculations.

Solution
GNP = GDP – Payment of factor income to rest of the world + factor income received from rest of the
world = 9256 – 322 + 302 = 9236
NDP = GDP – Depreciation = 9256 – 1136 = 8120
NNP = GNP – Depreciation = 9236 – 1136 = 8100
NI = NDP – Indirect Taxes + Subsidies = 8120 – 604 + 0 = 7516

CASE STUDY

Please show necessary calculations. You have the following information on 3 countries:

Soccerland Handeggland Neverland

GDP in the beginning of 2017 5000 1000 2000

Growth rate per year 5% 8% 10%

a) How long will it take until Soccerland’s GDP increases by 75%?

b) How long will it take until Soccerland and Handeggland have the same GDP?

c) Soccerland’s population is not happy that, eventually, Handeggland is going to have higher GDP than
their country. They feel that they are a much better country, so they are going to work harder to ensure
that Handeggland will never catch up with Soccerland. If Soccerland new growth rate is constant every
year, what is the minimum growth rate that ensures that Soccerland will always have a higher GDP than
Handeggland?

d) Neverland’s ambition is to host the World Cup. At the beginning of 2017, its GDP was 2,000 and it was
growing at 10% a year. Moreover, it will keep this pace until it hosts the World Cup. In order to host
such a big event, Neverland’s GDP must be at least 6,000. After the moment it reaches that GDP level, it
will host the World Cup in the beginning of the next year available for the event (remember that the
World Cup takes place every four years, in the years: 2014, 2018, 2022, etc.) During the year that
Neverland hosts the World Cup, their GDP will grow at 75%. Then, everything returns to normal, and
their GDP will keep growing at 10% a year forever onwards.

i) When will Neverland’s GDP reach 20,000?

ii) Suppose the Federation no longer requires Neverland to have a minimum GDP of 6,000 in order to
host the World Cup, and instead it lets Neverland host the World Cup in 2018. How does your answer
compare to part i), i.e., would Neverland be able to attain a GDP of 20,000 earlier, later or at the same
time as in part i)? (1 mark)

answer a) 11.19 years b) 53.65 years c) 8% d) i)2029 ii) Same time

Case Study

THE RECESSION OF 2001

The unemployment rate rose from 3.9 percent in December 2000 to 4.9 percent in August 2001 and to
6.3 percent in June 2003. The unemployment rate then began to decline. By January 2005,
unemployment had fallen back to 5.2 percent. What caused the recession, and what ended it?
The recession began with the end of the bubble in the stock market. During the 1990s, many stock-
market investors became optimistic about information technology, and they bid up stock prices,
particularly of high-tech companies. With hindsight, it is fair to say that this optimism was excessive.
Eventually, the optimism faded, and stock prices fell by about 25 percent from August 2000 to August
2001. The fall in the stock market reduced household wealth, which in turn reduced consumer spending.
In addition, when the new technologies started to appear less profitable than they had originally
seemed, investment spending fell.

The third event that put downward pressure on aggregate demand was a series of corporate accounting
scandals. During 2001 and 2002, several major corporations, including Enron and World Com, were
found to have misled the public about their profitability. When the truth became known, the value of
their stock plummeted. Even honest companies experienced stock declines, as stock-market investors
became less trustful of all accounting data. This fall in the stock market further depressed the demand
side of the economy.

Policymakers were quick to respond to these events. As soon as the economic slowdown became
apparent, the Federal Reserve pursued expansionary monetary policy. Money growth accelerated, and
interest rates fell. The federal funds rate (the interest rate on loans between banks that the Fed uses as
its short-term policy target) fell from 6.5 percent in December 2000 to 1.0 percent in June 2003. At the
same time, with the president’s urging, Congress passed a tax cut in 2001, including an immediate tax
rebate, and another tax cut in 2003.

Q#1. Explain the fluctuations in the unemployment rate with the help of fluctuations in the GDP of an
economy.

Answer: Any deviation of Actual Real GDP from Potential Real GDP creates the deviation in the Actual
and Natural rate of Unemployment but with an opposite direction. If Actual real GDP will be more than
potential level of GDP, then the unemployment rate will be less than the natural rate of unemployment
of that economy.

Q #.2 Explain graphically that how excessive optimism and series of corporate accounting scandals affect
the economy.

Answer: The aggregate demand (planned expenditure curve) will shift downward and income level of
the economy will reduce.

Q #. 3 Explain with the help of theory and graph that how an increase in Money supply will affect the
equilibrium in the economy?

Answer: Lower interest rates stimulated spending by reducing the cost of borrowing that will put the
pressure on aggregate demand by increasing the level of consumption and investment expenditures.
The curve of planned expenditure will shift upward.

Q #. 4 Show the effect of tax cut on the income level of the economy and unemployment by graphically.

Answer: The tax cut will increase the consumption and investment level in the economy. In the result of
this aggregate demand curve (Planned expenditure curve) will shift upward.
 Case Study

eBay runs an online marketplace with over 220 million registered users who buy and sell 2.4 billion
items a year, ranging from children’s toys to oil paintings. In December 2007, one eBay user auctioned
off a 1933 Chicago World’s Fair pennant. The winning bid was just over $20.

eBay is traded on the New York Stock Exchange, employs hundreds of people, and has a market value of
about $40 billion. With regard to eBay, what do you think gets counted as part of current GDP?

That 1933 pennant, for example, does not get counted. The production of that pennant was counted
back in 1933. The many cartons of K’nex bricks sent from one home to another don’t count either. Their
value was counted when the bricks were first produced. What about a newly minted Scrabble game?
One of the interesting features of eBay is that it has changed from being a market in which individuals
market their hand-me-downs to a place that small and even large businesses use as a sales site. The
value of the new Scrabble game would be counted as part of this year’s GDP if it were produced this
year.

So do any of eBay’s services count as part of GDP? eBay’s business is to provide a marketplace for
exchange. In doing so, it uses labor and capital and creates value. In return for creating this value, eBay
earns fees to the sellers that use its site.

Recalling your knowledge about calculation of GDP, answer following questions:

1. Should a 1933 pennant auctioned at eBay be counted in GDP? Why or why not?

Ans. No. GDP includes only currently produced goods and services. Value of 1933 pennant has already
been counted in 1933 GDP.

2. Mention the necessary condition for Scrabble game to be counted in current year’s GDP.

Ans. The Scrabble game should be produced within the country in the current year.

3. Should earnings of eBay be included in GDP? Why or why not?

Ans. Earnings of eBay should be included in GDP because eBay provides services of connecting buyers
with sellers. Important thing is to distinguish between eBay earnings (profits) and sales.