The Income Identity Y = C + I + G

question 29

Multiple Choice

The income identity Y = C + I + G + X implicitly assumes that the left-hand variable Y is simultaneously real GDP, real output, and real income. It is an exact interpretation when

• A) all nominal variables are converted into real variables by dividing by a price index.
• B) nominal depreciation is subtracted from GDP before the value for Y is recorded.
• C) all nominal variables are converted into real variables and an assumption that capital does not depreciate is imposed.
• D) all nominal variables are converted into real variables and assumptions that set both real depreciation expense and indirect taxes equal to zero are imposed.
• E) none of the above.

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Definitions:

Expense Recognition

The accounting principle dictating that expenses are recorded when incurred, not necessarily when paid.

Financial Capital Maintenance

A concept where profit is only recognized if the financial amount of a company's net assets at the end of the period exceeds the financial amount at the beginning, excluding any distributions to, or contributions from, owners during the period.

Net Income

The amount of earnings left over after all expenses, including taxes and cost of goods sold, have been subtracted from total revenue, indicating the financial success or profitability of a company over a specified period.

Extraordinary Items

Events and transactions that are distinguished by their unusual nature and by the infrequency of their occurrence, significantly impacting a company's financial position.