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CFA Level 2 – Economics, Session 4 – Reading 20, Measuring Economic Activity-LOS c
(Practice Questions, Sample Questions)
LOS c: Differentiate between current and constant prices, and describe the GDP deflator.
1. Which is the least accurate statement regarding the Gross Domestic Product (GDP) deflator?
A) The GDP deflator that is calculated from the expenditure component of GDP is also known as the implicit price deflator.
B) The GDP deflator is consistently an accurate predictor of general inflationary trends even though the composition of GDP may change over time.
C) The GDP deflator is an not an accurate predictor in times of swiftly changing prices.
<Explanation>: B) The GDP deflator is directly affected by changes in the composition of GDP because it is derived from the expenditure component of GDP.
2. Which of the following statements regarding the reporting of Gross Domestic Product (GDP) components is CORRECT? The three components of GDP are:
A) collected and reported using three different methods.
B) collected in current prices and reported in constant prices.
C) collected and reported using the same methods.
<Explanation>: A) Output data is collected in both current and constant prices, while expenditure and income data is collected in current prices. All are restated in constant prices using an index or deflator.
3. Calculate the nominal Gross Domestic Product (GDP) for a country that has a 6% rate of inflation and a 2.5% real GDP.
A) 2.4%.
B) 3.5%.
C) 8.5%.
<Explanation>: C) A 2.5% real GDP, adjusted for 6% inflation indicates an 8.5% nominal GDP.
