14.02 Principles of Macroeconomics Quiz # 1, Answers
Part I. 1. False. The GDP deflator is the ratio of nominal to real GDP it is a measure of the overall price level of the economy. The CPI is the cost of a given list of goods and services consumed by a typical urban dweller. So, in fact they are not based on the same basket of goods. Moreover, the GDP deflator is a Paasche index while the CPI is a Laspeyres index. This means that the weights used in the index are different. A Paasche index uses the current year, while the Laspeyres index uses the base year. Even if the baskets of GDP and the CPI were very similar, if the weights change in time, we can expect a difference between the CPI and the deflator of GDP. 2. True. Gross National Product (GNP) is the market value of the goods and services produced by labor and property supplied by residents of the country. Gross Domestic Product is the market value of the goods and services produced by labor and property located in the country. Although Honda is owned by Japanese citizens, it employs U.S. workers, so part of its value added is in fact generated by U.S. factors, hence it does increase U.S. GNP. However, it does not increase Japanese GDP, since its value added is produced inside the frontier of the U.S. 3. True. Marginal propensity to consume is the effect on consumption of an additional dollar in disposable income. Autonomous spending is the amount of demand that an economy will have with no income, in other words, that does not depend on income. If the marginal propensity to consume increases, the multiplier increases, additional autonomous spending will have a greater compounded effect in the equilibrium of the goods market. 4. Uncertain. Proportional income taxes change the multiplier. A progressive tax structure will make the multiplier fall at greater levels of income. However, consider an economy where we pass from a flat rate t, to a structure of rates t1< t< t2, such that t1 is active when Y< Y*...