Short free-response question

From nominal to real GDP

Unit 2
5 points
About 12 minutes

You can use a calculator on this question, just like on exam day.

A shorter question on one or two models, often with data in a table. You might calculate something like an unemployment rate, real GDP or the spending change needed to close a gap, draw a labeled graph (described in words on this site), and explain an effect. On the exam: Questions 2 and 3 of 3 in Section II; each is worth a quarter of the section score, with about 12 minutes suggested for each. A four-function calculator is allowed.

The question and its sources

The tables show data for the economy of Lindmere. Year 1 is the base year.

Table 1. Lindmere's spending in Year 1 (billions of dollars)

Component	Amount
Consumer spending	560
Gross private domestic investment	120
Government purchases of goods and services	160
Exports	80
Imports	120

Source: Hypothetical data

Table 2. Lindmere's nominal GDP and GDP deflator

Year	Nominal GDP (billions of dollars)	GDP deflator
Year 1	800	100
Year 2	924	110

Source: Hypothetical data

Suggested time: 12 minutes

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Part (a)

1 point

Using Table 1, calculate Lindmere's GDP in Year 1. Show your work.

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Part (b)

1 point

Using Table 2, calculate Lindmere's real GDP in Year 2, measured in Year 1 dollars. Show your work.

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Part (c)

1 point

Calculate the percentage change in Lindmere's real GDP from Year 1 to Year 2. Show your work.

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Part (d)

1 point

Nominal GDP in Lindmere rose by 15.5 percent from Year 1 to Year 2. Explain why real GDP rose by less than nominal GDP.

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Part (e)

1 point

In Year 2, a family in Lindmere sells a five-year-old car to a neighbor for $5,000. Explain how this sale affects Lindmere's GDP in Year 2.

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