Write true or false against the statements and explain why. Suppose that I sell
ID: 1163799 • Letter: W
Question
Write true or false against the statements and explain why.
Suppose that I sell all my old economics textbooks on e-Bay. This transaction is counted as part of GDP in the National Income and Product Accounts.
According to the model of income determination in Chapter 3, a$100 billion increase in Government spending and a simultaneous $100 billion increase in tax revenues will have no effect on real GDP.
A cattle farmer sells three things: (1) fattened young cows to slaughter houses, (2) young bulls to other cattle farmers, and (3) cow manure to home gardeners. All three of these types of transactions are included in GDP.
Explanation / Answer
1. FALSE because the price of old economic books has already taken into account in GDP when the person bought economics books. Again recording this transaction in GDP will create double accounting problem.
2. FALSE because suppose the multiplier is 5 , then $100 billion increase in government spending would increase real GDP by $(5)(100) = $ 500 billion. And when tax revenue increase by $100 billion ,then real GDP would change by less than $500 billion because initial consumption would increase by less amount (as because of MPC) .
As a whole ,because of net effect , there is increase in real GDP . But in question it is mentioned there will have no effect on real GDP.
3. FALSE because some are intermediate goods for others in the process for final goods.
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