GDP, Fiscal & Monetary Policy: True or False Statements
GDP and Economic Policy: True or False
Periods of negative GDP growth are called recessions. True
The production of an apple contributes more to GDP than the production of a gold ring because food is necessary for life itself.
If the lumberyard sells $1,000 of lumber to a carpenter and the carpenter uses the lumber to build a garage that he sells for $5,000, the contribution to GDP is $6,000. False. The garage is the final good, valued at $5,000.
If nominal GDP in 2018 exceeds nominal GDP in 2017, real output must have risen.
Nominal GDP employs current prices to value output while real GDP employs constant base-year prices to value output. True
A new car produced in 2017 but first sold in 2018, should be counted in 2018’s GDP because that is when it was first sold as a final good. False. Goods are counted in the year produced.
Since Spanish GDP increased in 2018 by 2.4%, it means that Spanish wealth increased that year by 2.4%. False. GDP in 2018 may or may not have led to wealth increases. It all depends on how income from GDP is spent.
The largest component of GDP is consumption. True
The propensity to consume has to be positive, and it can take on any positive value. False; it is positive, but it cannot take any value, as its value is between 0 and 1.
One factor in the 2009 recession was a drop in the value of the parameter co. True
Fiscal policy describes the choice of government spending and taxes. True
The equilibrium condition for the goods market states that consumption equals output. False; production is equal to the sum of consumption, investment, and government spending.
An increase of one unit in government spending leads to an increase of one unit in equilibrium output. False; it would only be true if marginal propensity to consume were zero.
An increase in the propensity to consume leads to a decrease in output. False. The opposite is true.
The LM curve is upward sloping because a higher level of the money supply is needed to increase output. False, output can be increased without increasing money supply, provided interest rates go up.
Government policy can increase output without changing the interest rate only if both monetary and fiscal policy variables change. True
Demand for money does not depend on the interest rate, because only bonds can offer an interest rate. False, the demand for money is inversely related to the level of interest rates.
Central banks can increase money supply by selling bonds in the bond market. False, by buying bonds.
Central banks can determine the level of money supply, but not the level of interest rates. True
Bond prices and interest rates always move in opposite directions. True
The LM curve is horizontal at the central bank’s policy choice of the interest rate, in those countries that set the level of interest rates, instead of the level of money supply. True
The real money supply is constant along the LM curve. True
The aggregate supply relation implies that an increase in output leads to an increase in the price level?
Expansionary monetary policy has no effect on the level of output in the medium run? True