Brief Principles of Macroeconomics International Edition 5th Edition by N. Gregory Mankiw - Test Bank

Brief Principles of Macroeconomics International Edition 5th Edition by N. Gregory Mankiw – Test Bank

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Chapter 5

Measuring a Nation’s Income

TRUE/FALSE

In years of economic contraction, firms throughout the economy increase their production of goods and services, employment rises, and jobs are easy to find.

ANS: F DIF: 1 REF: 23-0

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: Economic expansion MSC: Definitional

Macroeconomic statistics include GDP, the inflation rate, the unemployment rate, retail sales, and the trade deficit.

ANS: T DIF: 1 REF: 23-0

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: Macroeconomics MSC: Definitional

Macroeconomic statistics tell us about a particular household, firm, or market.

ANS: F DIF: 1 REF: 23-0

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: Macroeconomics MSC: Definitional

Macroeconomics is the study of the economy as a whole.

ANS: T DIF: 1 REF: 23-0

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: Macroeconomics MSC: Definitional

The goal of macroeconomics is to explain the economic changes that affect many households, firms, and markets simultaneously.

ANS: T DIF: 1 REF: 23-0

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: Macroeconomics MSC: Definitional

Microeconomics and macroeconomics are closely linked.

ANS: T DIF: 1 REF: 23-0

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: Microeconomics | Macroeconomics MSC: Definitional

The basic tools of supply and demand are as central to macroeconomic analysis as they are to microeconomic analysis.

ANS: T DIF: 1 REF: 23-0

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: Demand | Supply MSC: Definitional

GDP is the most closely watched economic statistic because it is thought to be the best single measure of a society’s economic well-being.

ANS: T DIF: 1 REF: 23-0

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: GDP MSC: Definitional

GDP can measure either the total income of everyone in the economy or the total expenditure on the economy’s output of goods and services, but GDP cannot measure both at the same time.

ANS: F DIF: 2 REF: 23-1

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: GDP MSC: Interpretive

For an economy as a whole, income must exceed expenditure.

ANS: F DIF: 1 REF: 23-1

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: Income | Expenditure MSC: Definitional

An economy’s income is the same as its expenditure because every transaction has a buyer and a seller.

ANS: T DIF: 1 REF: 23-1

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: Income | Expenditure MSC: Definitional

GDP is the market value of all final goods and services produced by a country’s citizens in a given period of time.

ANS: F DIF: 1 REF: 23-2

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: GDP MSC: Definitional

GDP adds together many different kinds of products into a single measure of the value of economic activity by using market prices.

ANS: T DIF: 1 REF: 23-2

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: GDP MSC: Definitional

U.S. GDP includes the market value of rental housing, but not the market value of owner-occupied housing.

ANS: F DIF: 2 REF: 23-2

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: GDP MSC: Interpretive

U.S. GDP excludes the production of most illegal goods.

ANS: T DIF: 2 REF: 23-2

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: GDP MSC: Interpretive

U.S. GDP includes estimates of the value of items that are produced and consumed at home, such as housework and car maintenance.

ANS: F DIF: 2 REF: 23-2

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: GDP MSC: Applicative

GDP includes only the value of final goods because the value of intermediate goods is already included in the prices of the final goods.

ANS: T DIF: 1 REF: 23-2

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: GDP | Intermediate goods MSC: Definitional

Additions to inventory subtract from GDP, and when the goods in inventory are later used or sold, the reductions in inventory add to GDP.

ANS: F DIF: 1 REF: 23-2

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: GDP | Inventory MSC: Definitional

While GDP includes tangible goods such as books and bug spray, it excludes intangible services such as the services provided by teachers and exterminators.

ANS: F DIF: 2 REF: 23-2

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: GDP MSC: Applicative

At a rummage sale, you buy two old books and an old rocking chair; your spending on these items is not included in current GDP.

ANS: T DIF: 2 REF: 23-2

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: GDP MSC: Applicative

When an American doctor opens a practice in Bermuda, his production there is part of U.S. GDP.

ANS: F DIF: 2 REF: 23-2

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: GDP MSC: Applicative

If the U.S. government reports that GDP in the third quarter was $12 trillion at an annual rate, then the amount of income and expenditure during quarter three was $3 trillion.

ANS: T DIF: 2 REF: 23-2

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: GDP MSC: Applicative

The government computes measures of income other than GDP because these other measures usually tell different stories about overall economic conditions.

ANS: F DIF: 2 REF: 23-2

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: GDP | Income MSC: Interpretive

Expenditures by households on education are included in the consumption component of GDP.

ANS: T DIF: 2 REF: 23-3

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: Consumption MSC: Interpretive

Most goods whose purchases are included in the investment component of GDP are used to produce other goods.

ANS: T DIF: 2 REF: 23-3

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: Investment MSC: Interpretive

New home construction is included in the consumption component of GDP.

ANS: F DIF: 2 REF: 23-3

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: Investment MSC: Interpretive

Changes in inventory are included in the investment component of GDP.

ANS: T DIF: 2 REF: 23-3

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: Investment MSC: Interpretive

The investment component of GDP refers to financial investment in stocks and bonds.

ANS: F DIF: 2 REF: 23-3

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: Investment MSC: Interpretive

The government purchases component of GDP includes salaries paid to soldiers but not Social Security benefits paid to the elderly.

ANS: T DIF: 2 REF: 23-3

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: Government purchases MSC: Interpretive

If the value of an economy’s imports exceeds the value of that economy’s exports, then net exports is a negative number.

ANS: T DIF: 2 REF: 23-3

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: Net exports MSC: Interpretive

If someone in the United States buys a surfboard produced in Australia, then that purchase is included in both the consumption component of U.S. GDP and the net exports component of U.S. GDP.

ANS: T DIF: 2 REF: 23-3

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: Consumption | Net exports MSC: Applicative

If consumption is $4000, exports are $300, government purchases are $1000, imports are $400, and investment is $800, then GDP is $5700.

ANS: T DIF: 2 REF: 23-3

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: GDP MSC: Applicative

If exports are $500, GDP is $8000, government purchases are $1200, imports are $700, and investment is $800, then consumption is $6200.

ANS: T DIF: 2 REF: 23-3

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: Consumption MSC: Applicative

If consumption is $1800, GDP is $4300, government purchases are $1000, imports are $700, and investment is $1200, then exports are $300.

ANS: F DIF: 2 REF: 23-3

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: Exports MSC: Applicative

U.S. GDP was almost $14 billion in 2007.

ANS: F DIF: 1 REF: 23-3

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: GDP MSC: Definitional

In 2007, government purchases was the largest component of U.S. GDP.

ANS: F DIF: 2 REF: 23-3

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: GDP MSC: Interpretive

If total spending rises from one year to the next, then the economy must be producing a larger output of goods and services.

ANS: F DIF: 2 REF: 23-4

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: GDP MSC: Interpretive

An increase in nominal U.S. GDP necessarily implies that the United States is producing a larger output of goods and services.

ANS: F DIF: 2 REF: 23-4

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: Nominal GDP MSC: Interpretive

Nominal GDP uses constant base-year prices to place a value on the economy’s production of goods and services, while real GDP uses current prices to place a value on the economy’s production of goods and services.

ANS: F DIF: 1 REF: 23-4

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: Nominal GDP | Real GDP MSC: Definitional

Real GDP evaluates current production using prices that are fixed at past levels and therefore shows how the economy’s overall production of goods and services changes over time.

ANS: T DIF: 1 REF: 23-4

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: Real GDP MSC: Definitional

The term real GDP refers to a country’s actual GDP as opposed to its estimated GDP.

ANS: F DIF: 2 REF: 23-4

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: Real GDP MSC: Interpretive

Changes in real GDP reflect only changes in the amounts being produced.

ANS: T DIF: 1 REF: 23-4

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: Real GDP MSC: Definitional

Real GDP is a better gauge of economic well-being than is nominal GDP.

ANS: T DIF: 1 REF: 23-4

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: Nominal GDP | Real GDP MSC: Definitional

Changes in the GDP deflator reflect only changes in the prices of goods and services.

ANS: T DIF: 2 REF: 23-4

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: GDP deflator MSC: Interpretive

If nominal GDP is $10,000 and real GDP is $8,000, then the GDP deflator is 125.

ANS: T DIF: 2 REF: 23-4

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: GDP deflator MSC: Applicative

If nominal GDP is $12,000 and the GDP deflator is 80, then real GDP is $15,000.

ANS: T DIF: 2 REF: 23-4

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: Real GDP MSC: Applicative

Economists use the term inflation to describe a situation in which the economy’s overall production level is rising.

ANS: F DIF: 1 REF: 23-4

NAT: Analytic LOC: Unemployment and inflation TOP: Inflation

MSC: Definitional

If the GDP deflator in 2006 was 160 and the GDP deflator in 2007 was 180, then the inflation rate in 2007 was 12.5%.

ANS: T DIF: 2 REF: 23-4

NAT: Analytic LOC: Unemployment and inflation TOP: Inflation rate

MSC: Applicative

If the GDP deflator in 2004 was 150 and the GDP deflator in 2005 was 120, then the inflation rate in 2005 was 25%.

ANS: F DIF: 2 REF: 23-4

NAT: Analytic LOC: Unemployment and inflation TOP: Inflation rate

MSC: Applicative

The GDP deflator can be used to take inflation out of nominal GDP.

ANS: T DIF: 1 REF: 23-4

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: GDP deflator MSC: Definitional

In 2004, the level of U.S. real GDP was close to four times its 1965 level.

ANS: T DIF: 1 REF: 23-4

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: Real GDP MSC: Definitional

The output of goods and services produced in the United States has grown on average 3.2 percent per year.

ANS: T DIF: 1 REF: 23-4

NAT: Analytic LOC: Productivity and growth TOP: Growth

MSC: Definitional

Periods during which real GDP rises are called recessions.

ANS: F DIF: 1 REF: 23-4

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: Recessions MSC: Definitional

Recessions are associated with lower incomes, rising unemployment, and falling profits.

ANS: T DIF: 1 REF: 23-4

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: Recessions MSC: Definitional

If real GDP is higher in one country than in another, then we can be sure that the standard of living is higher in the country with the higher real GDP.

ANS: F DIF: 2 REF: 23-5

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: Real GDP | Standard of living MSC: Interpretive

Real GDP per person tells us the income and expenditure of the average person in the economy.

ANS: T DIF: 1 REF: 23-5

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: Real GDP per person MSC: Definitional

GDP does not directly measure those things that make life worthwhile, but it does measure our ability to obtain many of the inputs into a worthwhile life.

ANS: T DIF: 1 REF: 23-5

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: GDP MSC: Definitional

GDP does not make adjustments for leisure time, environmental quality, or volunteer work.

ANS: T DIF: 2 REF: 23-5

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: GDP MSC: Interpretive

Other things equal, in countries with higher levels of real GDP per person, life expectancy and literacy rates are higher than in countries with lower levels of real GDP per person.

ANS: T DIF: 2 REF: 23-5

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: GDP MSC: Interpretive

SHORT ANSWER

GDP is defined as the market value of all final goods and services produced within a country in a given period of time. In spite of this definition, some production is left out of GDP. Explain why some final goods and services are not included.

ANS:

GDP excludes some products because they are so difficult to measure. These products include services performed by individuals for themselves and their families, and most goods that are produced and consumed at home and, therefore, never enter the marketplace. In addition, illegal products are not included in GDP even if they can be measured because, by society’s definition, they are bads, not goods.

DIF: 2 REF: 23-2 NAT: Analytic

LOC: The study of economics and definitions of economics TOP: GDP

MSC: Interpretive

Explain why it is the case that the value of intermediate goods produced and sold during the year is not included directly as part of GDP, but the value of intermediate goods produced and not sold is included directly as part of GDP.

ANS:

Intermediate goods produced and sold during the year are not included separately as part of GDP because the value of those goods is included in the value of the final goods produced from them. If the intermediate good is produced but not sold during the year, its value is included as inventory investment for the year in which it was produced. If inventory investment was not included as part of GDP, true production would be underestimated for the year the intermediate good went into inventory, and overestimated for the year the intermediate good is used or sold.

DIF: 2 REF: 23-2 NAT: Analytic

LOC: The study of economics and definitions of economics TOP: GDP | Intermediate goods

MSC: Interpretive

Since it is counted as investment, why doesn’t the purchase of earthmoving equipment from China by a U.S. corporation increase U.S. GDP?

ANS:

The purchase of foreign equipment is counted as investment, but GDP measures only the value of production within the geographic borders of the United States. In order to avoid including the value of the imported equipment, imports are subtracted from GDP. Hence, the value of the equipment in investment is canceled by subtracting its value as an import.

DIF: 2 REF: 23-3 NAT: Analytic

LOC: The study of economics and definitions of economics TOP: GDP | Investment | Imports

MSC: Applicative

Identify the immediate effect of each of the following events on U.S. GDP and its components.

a.	James receives a Social Security check.
b.	John buys an Italian sports car.
c.	Henry buys domestically produced tools for his construction company.

ANS:

a.	Since this is a transfer payment, there is no change to GDP or to any of its components.
b.	Consumption and imports will rise and cancel each other out so that there is no change in U.S. GDP.
c.	This increases the investment component of GDP and so increases GDP.

DIF: 2 REF: 23-3 NAT: Analytic

LOC: The study of economics and definitions of economics

TOP: GDP | Transfer payments | Net exports | Investment MSC: Applicative

Between 1929 and 1933, NNP measured in current prices fell from $96 billion to $48 billion. Over the same period, the relevant price index fell from 100 to 75.

a.	What was the percentage decline in nominal NNP from 1929 to1933?
b.	What was the percentage decline in real NNP from 1929 to 1933? Show your work.

ANS:

a.	NNP measured in current prices is nominal NNP. Nominal NNP fell from $96 billion to $48 billion, a decline of 50 percent.
b.	Real NNP is nominal NNP divided by the price index and multiplied by 100. Real NNP in 1929 was ($96 b/100) 100 = $96 b. Real NNP in 1933 was ($48 b/75) 100 = $64 b. Real NNP fell from $96 billion to $64 billion, a decline of 33 percent.

DIF: 2 REF: 23-4 NAT: Analytic

LOC: The study of economics and definitions of economics TOP: Nominal NNP | Real NNP

MSC: Applicative

You find that your paycheck for the year is higher this year than last. Does that mean that your real income has increased? Explain carefully.

ANS:

Real income is nominal income adjusted for general increase in prices. If my paycheck is higher this year than last, my nominal income has increased. Whether my real income has increased or not depends on what has happened since last year to the level of prices of things I buy with my income. If the percentage increase in prices is less than the percentage increase in my nominal income, then my real income has increased. Otherwise, my real income has not increased.

DIF: 2 REF: 23-4 NAT: Analytic

LOC: The study of economics and definitions of economics

TOP: Nominal income | Real income MSC: Interpretive

U.S. real GDP is substantially higher today than it was 60 years ago. What does this tell us, and what does it not tell us, about the well-being of U.S. residents?

ANS:

Since this is in real terms, it tells us that the U.S. is able to make a lot more stuff than in the past. Some of the increase in real GDP is probably due to an increase in population, so we could say more if we knew what had happened to real GDP per person. Supposing that there was also an increase in real GDP per person, we can say that the standard of living has risen. Material things are an important part of well-being. Having sufficient amounts of things such as food, shelter, and clothing are fundamental to well-being. Other things such as security, a safe environment, access to safe water, access to medical care, justice, and freedom also matter. However, many of these things are more easily obtained by being able to produce more using fewer resources. Countries with higher real GDP per person tend to have longer life spans, less discrimination towards women, less child labor, and a higher rate of literacy.

DIF: 2 REF: 23-5 NAT: Analytic

LOC: The study of economics and definitions of economics

TOP: Real GDP | Economic welfare MSC: Interpretive

Sec00 – Measuring a Nation’s Income

MULTIPLE CHOICE

Statistics that are of particular interest to macroeconomists

a.	are largely ignored by the media.
b.	are widely reported by the media.
c.	include the equilibrium prices of individual goods and services.
d.	tell us about a particular household, firm, or market.

ANS: B DIF: 2 REF: 23-0

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: Macroeconomics MSC: Interpretive

Macroeconomists study

a.	the decisions of households and firms.
b.	the interaction between households and firms.
c.	economy-wide phenomena.
d.	regulations on firms and unions.

ANS: C DIF: 1 REF: 23-0

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: Macroeconomics MSC: Definitional

Which of the following newspaper headlines is more closely related to what microeconomists study than to what macroeconomists study?

a.	Unemployment rate rises from 5 percent to 5.5 percent.
b.	Real GDP grows by 3.1 percent in the third quarter.
c.	Retail sales at stores show large gains.
d.	The price of oranges rises after an early frost.

ANS: D DIF: 2 REF: 23-0

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: Microeconomics | Macroeconomics MSC: Interpretive

Which of the following questions is more likely to be studied by a microeconomist than a macroeconomist?

a.	Why do prices in general rise by more in some countries than in others?
b.	Why do wages differ across industries?
c.	Why do production and income increase in some periods and not in others?
d.	How rapidly is GDP currently increasing?

ANS: B DIF: 2 REF: 23-0

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: Microeconomics | Macroeconomics MSC: Interpretive

Which of the following topics are more likely to be studied by a macroeconomist than by a microeconomist?

a.	the effect of taxes on the prices of airline tickets, the profitability of automobile-manufacturing firms, and employment trends in the food-service industry
b.	the price of beef, wage differences between genders, and antitrust laws
c.	how consumers maximize utility, and how prices are established in markets for agricultural products
d.	the percentage of the labor force that is out of work, and differences in average income from country to country

ANS: D DIF: 2 REF: 23-0

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: Microeconomics | Macroeconomics MSC: Interpretive

We would expect a macroeconomist, as opposed to a microeconomist, to be particularly interested in

a.	explaining how economic changes affect prices of particular goods.
b.	devising policies to deal with market failures such as externalities and market power.
c.	devising policies to promote low inflation.
d.	identifying those markets that are competitive and those that are not competitive.

ANS: C DIF: 2 REF: 23-0

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: Microeconomics | Macroeconomics MSC: Interpretive

Which of the following is not a question that macroeconomists address?

a.	Why is average income high in some countries while it is low in others?
b.	Why does the price of oil rise when war erupts in the Middle East?
c.	Why do production and employment expand in some years and contract in others?
d.	Why do prices rise rapidly in some periods of time while they are more stable in other periods?

ANS: B DIF: 2 REF: 23-0

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: Macroeconomics MSC: Interpretive

The basic tools of supply and demand are

a.	useful only in the analysis of economic behavior in individual markets.
b.	useful in analyzing the overall economy, but not in analyzing individual markets.
c.	central to microeconomic analysis, but seldom used in macroeconomic analysis.
d.	central to macroeconomic analysis as well as to microeconomic analysis.

ANS: D DIF: 1 REF: 23-0

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: Demand | Supply MSC: Definitional

Which of the following statistic is usually regarded as the best single measure of a society’s economic well-being?

a.	the unemployment rate
b.	the inflation rate
c.	gross domestic product
d.	the trade deficit

ANS: C DIF: 1 REF: 23-0

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: GDP MSC: Definitional

Sec01 – Measuring a Nation’s Income – The Economy’s Income and Expenditure

MULTIPLE CHOICE

Which of the following statements about GDP is correct?

a.	GDP measures two things at once: the total income of everyone in the economy and the unemployment rate of the economy’s labor force.
b.	Money continuously flows from households to government and then back to households, and GDP measures this flow of money.
c.	GDP is to a nation’s economy as household income is to a household.
d.	All of the above are correct.

ANS: C DIF: 2 REF: 23-1

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: GDP MSC: Interpretive

Gross domestic product measures two things at once:

a.	the total spending of everyone in the economy and the total saving of everyone in the economy.
b.	the total income of everyone in the economy and the total expenditure on the economy’s output of goods and services.
c.	the value of the economy’s output of goods and services for domestic citizens and the value of the economy’s output of goods and services for the rest of the world.
d.	the total income of households in the economy and the total profit of firms in the economy.

ANS: B DIF: 1 REF: 23-1

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: GDP MSC: Definitional

For an economy as a whole,

a.	wages must equal profit.
b.	consumption must equal saving.
c.	income must equal expenditure.
d.	the number of buyers must equal the number of sellers.

ANS: C DIF: 2 REF: 23-1

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: Income | Expenditure MSC: Interpretive

For an economy as a whole, income must equal expenditure because

a.	the number of firms is equal to the number of households in an economy.
b.	international law requires that income equal expenditure.
c.	every dollar of spending by some buyer is a dollar of income for some seller.
d.	every dollar of saving by some consumer is a dollar of spending by some other consumer.

ANS: C DIF: 2 REF: 23-1

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: Income | Expenditure MSC: Interpretive

If an economy’s GDP rises, then it must be the case that the economy’s

a.	income rises and saving falls.
b.	income and saving both rise.
c.	income rises and expenditure falls.
d.	income and expenditure both rise.

ANS: D DIF: 2 REF: 23-1

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: Income | Expenditure MSC: Interpretive

If an economy’s GDP falls, then it must be the case that the economy’s

a.	income falls and saving rises.
b.	income and saving both fall.
c.	income falls and expenditure rises.
d.	income and expenditure both fall.

ANS: D DIF: 2 REF: 23-1

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: Income | Expenditure MSC: Interpretive

Because every transaction has a buyer and a seller,

a.	GDP is more closely associated with an economy’s income than it is with an economy’s expenditure.
b.	every transaction contributes equally to an economy’s income and to its expenditure.
c.	the number of firms must be equal to the number of households in a simple circular-flow diagram.
d.	firms’ profits are necessarily zero in a simple circular-flow diagram.

ANS: B DIF: 2 REF: 23-1

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: Income | Expenditure MSC: Interpretive

Which of the following statements about GDP is correct?

a.	GDP measures two things at once: the total income of everyone in the economy and the total expenditure on the economy’s output of goods and services.
b.	Money continuously flows from households to firms and then back to households, and GDP measures this flow of money.
c.	GDP is generally regarded as the best single measure of a society’s economic well-being.
d.	All of the above are correct.

ANS: D DIF: 2 REF: 23-1

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: GDP MSC: Interpretive

In a simple circular-flow diagram, total income and total expenditure are

a.	never equal because total income always exceeds total expenditure.
b.	seldom equal because of the ongoing changes in an economy’s unemployment rate.
c.	equal only when one dollar is spent on goods for every dollar that is spent on services.
d.	always equal because every transaction has a buyer and a seller.

ANS: D DIF: 2 REF: 23-1

NAT: Analytic LOC: Understanding and applying economic models

TOP: Circular-flow diagram MSC: Interpretive

In a simple circular-flow diagram,

a.	households spend all of their income.
b.	all goods and services are bought by households.
c.	expenditures flow through the markets for goods and services, while income flows through the markets for the factors of production.
d.	All of the above are correct.

ANS: D DIF: 2 REF: 23-1

NAT: Analytic LOC: Understanding and applying economic models

TOP: Circular-flow diagram MSC: Interpretive

In a simple circular-flow diagram, firms use the money they get from a sale to

a.	pay wages to workers.
b.	pay rent to landlords.
c.	pay profit to the firms’ owners.
d.	All of the above are correct.

ANS: D DIF: 1 REF: 23-1

NAT: Analytic LOC: Understanding and applying economic models

TOP: Circular-flow diagram MSC: Definitional

In the actual economy, households

a.	spend all of their income.
b.	divide their income among spending, taxes, and saving.
c.	buy all goods and services produced in the economy.
d.	Both (a) and (c) are correct.

ANS: B DIF: 2 REF: 23-1

NAT: Analytic LOC: Understanding and applying economic models

TOP: Circular-flow diagram MSC: Interpretive

In the actual economy, goods and services are purchased by

a.	households, but not firms or the government.
b.	households and firms, but not the government.
c.	households and the government, but not firms.
d.	households, firms, and the government.

ANS: D DIF: 2 REF: 23-1

NAT: Analytic LOC: Understanding and applying economic models

TOP: Circular-flow diagram MSC: Interpretive

Sec02 – Measuring a Nation’s Income – The Measurement of Gross Domestic Product

MULTIPLE CHOICE

GDP is defined as

a.	the market value of all goods and services produced within a country in a given period of time.
b.	the market value of all goods and services produced by the citizens of a country, regardless of where they are living, in a given period of time.
c.	the market value of all final goods and services produced within a country in a given period of time.
d.	the market value of all final goods and services produced by the citizens of a country, regardless of where they are living, in a given period of time.

ANS: C DIF: 1 REF: 23-2

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: GDP MSC: Definitional

Gross domestic product is defined as

a.	the quantity of all final goods and services demanded within a country in a given period of time.
b.	the quantity of all final goods and services supplied within a country in a given period of time.
c.	the market value of all final goods and services produced within a country in a given period of time.
d.	Both (a) and (b) are correct.

ANS: C DIF: 1 REF: 23-2

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: GDP MSC: Definitional

To compute GDP, we

a.	add up the wages paid to all workers.
b.	add up the costs of producing all final goods and services.
c.	add up the market values of all final goods and services.
d.	take the difference between the market values of all final goods and services and the costs of producing those final goods and services.

ANS: C DIF: 2 REF: 23-2

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: GDP MSC: Interpretive

GDP adds together many different kinds of products into a single measure of the value of economic activity by using prices determined by

a.	banks.
b.	economists.
c.	the government.
d.	markets.

ANS: D DIF: 2 REF: 23-2

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: GDP MSC: Interpretive

In order to include many different goods and services in an aggregate measure, GDP is computed using, primarily,

a.	values of goods and services based on surveys of consumers.
b.	market prices.
c.	consumer and producer surpluses.
d.	costs of producing goods and services.

ANS: B DIF: 2 REF: 23-2

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: GDP MSC: Interpretive

Gross domestic product adds together many different kinds of goods and services into a single measure of the value of economic activity. To do this, GDP makes use of

a.	market prices.
b.	prices that government economists believe reflect the true value of goods and services to society.
c.	the assumption that quantities of goods and services produced are unchanged from year to year.
d.	the assumption that prices of goods and services are unchanged from year to year.

ANS: A DIF: 2 REF: 23-2

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: GDP MSC: Interpretive

In computing GDP, market prices are used to value final goods and services because

a.	market prices do not change much over time, so it is easy to make comparisons between years.
b.	market prices reflect the values of goods and services.
c.	if market prices are out of line with how people value goods, the government sets price ceilings and price floors.
d.	None of the above is correct; market prices are not used in computing GDP.

ANS: B DIF: 2 REF: 23-2

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: GDP MSC: Interpretive

If the price of a DVD player is three times the price of a CD player, then a DVD player contributes

a.	more than three times as much to GDP as does a CD player.
b.	less than three times as much to GDP as does a CD player.
c.	exactly three times as much to GDP as does a CD player.
d.	to GDP but a CD player does not contribute to GDP.

ANS: C DIF: 2 REF: 23-2

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: GDP MSC: Applicative

Which of the following is correct?

a.	The market value of rental housing services is included in GDP, but the market value of owner-occupied housing services is not.
b.	The market value of owner-occupied housing services is included in GDP, but the market value of rental housing services is not.
c.	The market values of both owner-occupied housing services and rental housing services are included in GDP.
d.	Neither the market value of owner-occupied housing services nor the market value of rental housing services is included in GDP.

ANS: C DIF: 2 REF: 23-2

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: GDP MSC: Interpretive

The value of the housing services provided by the economy’s owner-occupied houses is

a.	included in GDP, and the estimated rental values of the houses are used to place a value on these housing services.
b.	included in GDP, and the actual mortgage payments made on the houses are used to estimate the value of these rental services.
c.	excluded from GDP since these services are not sold in any market.
d.	excluded from GDP since the value of these housing services cannot be estimated with any degree of precision.

ANS: A DIF: 2 REF: 23-2

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: GDP MSC: Interpretive

Suppose an apartment complex converts to a condominium, so that the former renters are now owners of their housing units. Suppose further that a current estimate of the value of the condominium owners’ housing services is the same as the rent they previously paid. What happens to GDP as a result of this conversion?

a.	GDP necessarily increases.
b.	GDP necessarily decreases.
c.	GDP is unaffected because neither the rent nor the estimate of the value of housing services is included in GDP.
d.	GDP is unaffected because previously the rent payments were included in GDP and now the rent payments are replaced in GDP by the estimate of the value of housing services.

ANS: D DIF: 2 REF: 23-2

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: GDP MSC: Applicative

James owns two houses. He rents one house to the Johnson family for $10,000 per year. He lives in the other house. If he were to rent the house in which he lives, he could earn $12,000 per year in rent by doing so. How much do the housing services provided by the two houses contribute to GDP?

a.	$0
b.	$10,000
c.	$12,000
d.	$22,000

ANS: D DIF: 2 REF: 23-2

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: GDP MSC: Applicative

GDP excludes most items that are produced and sold illegally and most items that are produced and consumed at home because

a.	the quality of these items is not high enough to contribute value to GDP.
b.	measuring them is so difficult.
c.	the government wants to discourage the production and consumption of these items.
d.	these items are not reported on income tax forms.

ANS: B DIF: 2 REF: 23-2

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: GDP MSC: Interpretive

Estimates of the values of which of the following non-market goods or services are included in GDP?

a.	the value of unpaid housework
b.	the value of vegetables and other foods that people grow in their gardens
c.	the estimated rental value of owner-occupied homes
d.	All of the above are included in GDP.

ANS: C DIF: 2 REF: 23-2

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: GDP MSC: Applicative

Over the last few decades, Americans have chosen to cook less at home and eat more at restaurants. This change in behavior, by itself, has

a.	reduced measured GDP.
b.	not affected measured GDP.
c.	increased measured GDP only to the extent that the value of the restaurant meals exceeded the value of meals previously cooked at home.
d.	increased measured GDP by the full value of the restaurant meals.

ANS: D DIF: 2 REF: 23-2

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: GDP MSC: Applicative

Over time, people have come to rely more on market-produced goods and less on goods that they produce for themselves. For example, busy people with high incomes, rather than cleaning their own houses, hire people to clean their houses. By itself, this change has

a.	caused measured GDP to fall.
b.	not caused any change in measured GDP.
c.	caused measured GDP to rise.
d.	probably changed measured GDP, but in an uncertain direction; the direction of the change depends on the difference in the quality of the cleaning that has resulted.

ANS: C DIF: 2 REF: 23-2

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: GDP MSC: Applicative

Ralph pays someone to mow his lawn, while Mike mows his own lawn. Regarding these two practices, which of the following statements is correct?

a.	Only Ralph’s payments are included in GDP.
b.	Ralph’s payments as well as the estimated value of Mike’s mowing services are included in GDP.
c.	Neither Ralph’s payments nor the estimated value of Mike’s mowing services is included in GDP.
d.	Ralph’s payments are definitely included in GDP, while the estimated value of Mike’s mowing services is included in GDP only if Mike voluntarily provides his estimate of that value to the government.

ANS: A DIF: 2 REF: 23-2

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: GDP MSC: Applicative

If Susan switches from going to Speedy Lube for an oil change to changing the oil in her car herself, then GDP

a.	necessarily rises.
b.	necessarily falls.
c.	will be unaffected because the same service is produced in either case.
d.	will be unaffected because car maintenance is not included in GDP.

ANS: B DIF: 2 REF: 23-2

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: GDP MSC: Applicative

Which of the following is not included in GDP?

a.	carrots grown in your garden and eaten by your family
b.	carrots purchased at a farmer’s market and eaten by your family
c.	carrots purchased at a grocery store and eaten by your family
d.	More than one of the above is not included in GDP.

ANS: A DIF: 2 REF: 23-2

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: GDP MSC: Applicative

A professional gambler moves from a state where gambling is illegal to a state where gambling is legal. Most of his income was, and continues to be, from gambling. His move

a.	necessarily raises GDP.
b.	necessarily decreases GDP.
c.	doesn’t change GDP because gambling is never included in GDP.
d.	doesn’t change GDP because in either case his income is included.

ANS: A DIF: 2 REF: 23-2

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: GDP MSC: Applicative

If a state made a previously-illegal activity, such as gambling or prostitution, legal, then, other things equal, GDP

a.	necessarily decreases.
b.	necessarily increases.
c.	doesn’t change because both legal and illegal production are included in GDP.
d.	doesn’t change because these activities are never included in GDP.

ANS: B DIF: 2 REF: 23-2

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: GDP MSC: Applicative

Which of the following is included in GDP?

a.	medical marijuana purchased from a government-run pharmacy by a glaucoma patient
b.	recreational marijuana purchased from a drug dealer by a college student
c.	recreational marijuana produced and consumed by a man in his attic
d.	All of the above are included in GDP.

ANS: A DIF: 2 REF: 23-2

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: GDP MSC: Applicative

Marijuana is an illegal good and broccoli is a legal good. Which of the following statements is true?

a.	Darin grows and sells marijuana to Lisa. When Darin and Lisa get married, GDP falls.
b.	Darin grows and sells marijuana to Lisa. When Darin and Lisa get married, GDP rises.
c.	Darin grows and sells broccoli to Lisa. When Darin and Lisa get married, GDP falls.
d.	Darin grows and sells broccoli to Lisa. When Darin and Lisa get married, GDP rises.

ANS: C DIF: 2 REF: 23-2

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: GDP MSC: Applicative

Spots, Inc. produces ink and sells it to Write on Target, which makes pens. The ink produced by Spots, Inc. is called

a.	an inventory good.
b.	a transitory good.
c.	a preliminary good.
d.	an intermediate good.

ANS: D DIF: 1 REF: 23-2

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: Intermediate goods MSC: Definitional

Which of the following statements is correct?

a.	The value of intermediate goods is always included in GDP.
b.	The value of intermediate goods is included in GDP only if those goods were produced in the previous year.
c.	The value of intermediate goods is included in GDP only if those goods are added to firms’ inventories to be used or sold at a later date.
d.	The value of intermediate goods is never included in GDP.

ANS: C DIF: 2 REF: 23-2

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: GDP | Intermediate goods MSC: Interpretive

Grapes are

a.	always counted as an intermediate good.
b.	counted as an intermediate good only if they are used to produce another good, such as wine.
c.	counted as an intermediate good only if they are consumed.
d.	counted as an intermediate good, whether they are used to produce another good or consumed.

ANS: B DIF: 2 REF: 23-2

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: Intermediate goods MSC: Applicative

Gasoline is considered a final good if it is sold by a

a.	gasoline station to a bus company that operates a bus route between San Francisco and Los Angeles.
b.	pipeline operator to a gasoline station in San Francisco.
c.	gasoline station to a motorist in Los Angeles.
d.	All of the above are correct.

ANS: C DIF: 2 REF: 23-2

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: Intermediate goods MSC: Applicative

A steel company sells some steel to a bicycle company for $150. The bicycle company uses the steel to produce a bicycle, which it sells for $250. Taken together, these two transactions contribute

a.	$150 to GDP.
b.	$250 to GDP.
c.	between $250 and $400 to GDP, depending on the profit earned by the bicycle company when it sold the bicycle.
d.	$400 to GDP.

ANS: B DIF: 2 REF: 23-2

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: GDP | Intermediate goods MSC: Applicative

Al’s Aluminum Company sells $1 million worth of aluminum to Shiny Foil Company, which uses the aluminum to make aluminum foil. Shiny Foil Company sells $4 million worth of aluminum foil to households. The transactions just described contribute how much to GDP?

a.	$1 million
b.	$3 million
c.	$4 million
d.	$5 million

ANS: C DIF: 2 REF: 23-2

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: GDP | Intermediate goods MSC: Applicative

One bag of flour is sold for $1.00 to a bakery, which uses the flour to bake bread that is sold for $3.00 to consumers. A second bag of flour is sold to a consumer in a grocery store for $2.00. Taking these three transactions into account, what is the effect on GDP?

a.	GDP increases by $2.00.
b.	GDP increases by $3.00.
c.	GDP increases by $5.00.
d.	GDP increases by $6.00.

ANS: C DIF: 3 REF: 23-2

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: GDP | Intermediate goods MSC: Analytical

Suppose there are only two firms in an economy: Cowhide, Inc. produces leather and sells it to Couches, Inc., which produces and sells leather furniture. With each $1,000 of leather that it buys from Cowhide, Inc., Couches, Inc. produces a couch and sells it for $3,000. Neither firm had any inventory at the beginning of 2006. During that year, Cowhide produced enough leather for 20 couches. Couches, Inc. bought 80% of that leather for $16,000 and promised to buy the remaining 20% for $4,000 in 2007. Couches, Inc. produced 16 couches during 2006 and sold each one during that year for $3,000. What was the economy’s GDP for the 2006?

a.	$48,000
b.	$52,000
c.	$64,000
d.	$68,000

ANS: B DIF: 3 REF: 23-2

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: GDP | Intermediate goods MSC: Analytical

Suppose there are only two firms in an economy: Rolling Rawhide produces rawhide and sells it to Chewy Chomp, Inc., which uses the rawhide to produce and sell dog chews. With each $2 of rawhide that it buys from Rolling Rawhide, Chewy Chomp, Inc. produces a dog chew and sells it for $5. Neither firm had any inventory at the beginning of 2007. During that year, Rolling Rawhide produced enough rawhide for 1000 dog chews. Chewy Chomp, Inc. bought 75% of that rawhide for $1500 and promised to buy the remaining 25% for $500 in 2008. Chewy Chomp, Inc. produced 750 dog chews during 2007 and sold each one during that year for $5. What was the economy’s GDP for 2007?

a.	$3750
b.	$4250
c.	$5250
d.	$5750

ANS: B DIF: 3 REF: 23-2

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: GDP | Intermediate goods MSC: Analytical

In 2007, Corny Company grows and sells $2 million worth of corn to Tasty Cereal Company, which makes corn flakes. Tasty Cereal Company produces $6 million worth of corn flakes in 2007, with sales to households during the year of $4.5 million. The unsold $1.5 million worth of corn flakes remains in Tasty Cereal Company’s inventory at the end of 2007. The transactions just described contribute how much to GDP for 2007?

a.	$4.5 million
b.	$6 million
c.	$6.5 million
d.	$8 million

ANS: B DIF: 3 REF: 23-2

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: GDP | Intermediate goods MSC: Analytical

The total sales of all firms in the economy for a year

a.	equals GDP for the year.
b.	is larger than GDP for the year.
c.	is smaller than GDP for the year.
d.	Any of the above is possible.

ANS: B DIF: 3 REF: 23-2

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: GDP | Intermediate goods MSC: Analytical

Which of the following domestically produced items is not included in GDP?

a.	a bottle of shampoo
b.	a hairdryer
c.	a haircut
d.	All of the above are included in GDP.

ANS: D DIF: 2 REF: 23-2

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: GDP MSC: Applicative

Which of the following is not included in GDP?

a.	a can of bug spray
b.	the services of an exterminator
c.	the honey produced and sold by a beekeeper
d.	All of the above are included in GDP.

ANS: D DIF: 2 REF: 23-2

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: GDP MSC: Applicative

Gross domestic product includes all

a.	legal and illegal goods, but it excludes all legal and illegal services.
b.	legal and illegal goods and all legal and illegal services.
c.	legal goods and services, but it excludes illegal goods and services.
d.	legal and illegal goods and legal services, but it excludes illegal services.

ANS: C DIF: 2 REF: 23-2

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: GDP MSC: Interpretive

Transactions involving items produced in the past, such as the sale of a 5-year-old automobile by a used car dealership or the purchase of an antique rocking chair by a person at a yard sale, are

a.	included in current GDP because GDP measures the value of all goods and services sold in the current year.
b.	included in current GDP but valued at their original prices.
c.	not included in current GDP because GDP only measures the value of goods and services produced in the current year.
d.	not included in current GDP because these items have no current value.

ANS: C DIF: 2 REF: 23-2

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: GDP MSC: Applicative

Which of the following events would cause GDP for 2007 to increase?

a.	In February 2007, Amanda sells a 1996 Honda Accord to Isabella.
b.	In February 2007, Amanda buys a ticket to visit a zoo in Florida. She visits the zoo in April 2007.
c.	In December 2007, Isabella eats onions that she harvested from her backyard garden in October 2007.
d.	All of the above are correct.

ANS: B DIF: 2 REF: 23-2

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: GDP MSC: Applicative

Until recently, George lived in a home that was newly constructed in 2005. In 2005, he paid $200,000 for the brand new house. He sold the house in 2006 for $225,000. Which of the following statements is correct regarding the sale of the house?

a.	The 2006 sale increased 2006 GDP by $225,000 and had no effect on 2005 GDP.
b.	The 2006 sale increased 2006 GDP by $25,000 and had no effect on 2005 GDP.
c.	The 2006 sale increased 2006 GDP by $225,000; furthermore, the 2006 sale caused 2005 GDP to be revised upward by $25,000.
d.	The 2006 sale affected neither 2005 GDP nor 2006 GDP.

ANS: D DIF: 2 REF: 23-2

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: GDP MSC: Applicative

Tyler and Camille both live in Oklahoma. A new-car dealer in Oklahoma bought a new car from the manufacturer for $18,000 and sold it to Tyler for $22,000. Later that year, Tyler sold the car to Camille for $17,000. By how much did these transactions contribute to U.S. GDP for the year?

a.	$18,000
b.	$22,000
c.	$39,000
d.	$57,000

ANS: B DIF: 3 REF: 23-2

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: GDP MSC: Analytical

Consider two cars manufactured by Chevrolet in 2007. During 2007, Chevrolet sells one of the two cars to Sean for $24,000. Later in the same year, Sean sells the car to Kati for $19,000. The second automobile, with a market value of $30,000, is unsold at the end of 2007 and it remains in Chevrolet’s inventory. The transactions just described contribute how much to GDP for 2007?

a.	$24,000
b.	$43,000
c.	$54,000
d.	$73,000

ANS: C DIF: 3 REF: 23-2

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: GDP MSC: Analytical

Which of the following is included in U.S. GDP?

a.	the value of production by an American working in Morocco
b.	the value of production by a Moroccan working in the U.S.
c.	Both (a) and (b) are correct.
d.	Neither (a) nor (b) is correct.

ANS: B DIF: 2 REF: 23-2

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: GDP MSC: Applicative

Anna, a U.S. citizen, works only in Germany. The value she adds to production in Germany is included

a.	in both German GDP and U.S. GDP.
b.	in German GDP, but it is not included in U.S. GDP.
c.	in U.S. GDP, but it is not included in German GDP.
d.	in neither German GDP nor U.S. GDP.

ANS: B DIF: 2 REF: 23-2

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: GDP MSC: Applicative

An American company operates a fast food restaurant in Romania. Which of the following statements is accurate?

a.	The value of the goods and services produced by the restaurant is included in both Romanian GDP and U.S. GDP.
b.	One-half of the value of the goods and services produced by the restaurant is included in Romanian GDP, and the other one-half of the value is included in U.S. GDP.
c.	The value of the goods and services produced by the restaurant is included in Romanian GDP, but not in U.S. GDP.
d.	The value of the goods and services produced by the restaurant is included in U.S. GDP, but not in Romanian GDP.

ANS: C DIF: 2 REF: 23-2

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: GDP MSC: Applicative

Quality Motors is a Japanese-owned company that produces automobiles; all of its automobiles are produced in American plants. In 2007, Quality Motors produced $20 million worth of automobiles, with $12 million in sales to Americans, $6 million in sales to Canadians, and $2 million worth of automobiles added to Quality Motors’ inventory. The transactions just described contribute how much to U.S. GDP for 2007?

a.	$12 million
b.	$14 million
c.	$20 million
d.	$34 million

ANS: C DIF: 3 REF: 23-2

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: GDP MSC: Analytical

Which of the following items is included in U.S. GDP?

a.	goods produced by foreign citizens working in the United States
b.	the difference in the price of the sale of an existing home and its original purchase price
c.	known illegal activities
d.	None of the above is included in U.S. GDP.

ANS: A DIF: 2 REF: 23-2

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: GDP MSC: Interpretive

Which of the following items is included in U.S. GDP?

a.	final goods and services that are purchased by the U.S. federal government
b.	intermediate goods that are produced in the U.S. but that are unsold at the end of the GDP accounting period
c.	goods and services produced by foreign citizens working in the U.S.
d.	All of the above are included in U.S. GDP.

ANS: D DIF: 2 REF: 23-2

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: GDP MSC: Interpretive

Which of the following items is included in U.S. GDP?

a.	the estimated value of production accomplished at home, such as backyard production of fruits and vegetables
b.	the value of illegally-produced goods and services
c.	the value of cars and trucks produced in foreign countries and sold in the U.S.
d.	None of the above is included in U.S. GDP.

ANS: D DIF: 2 REF: 23-2

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: GDP MSC: Applicative

Which of the following is not included in U.S. GDP?

a.	unpaid cleaning and maintenance of houses
b.	services such as those provided by lawyers and hair stylists
c.	the estimated rental value of owner-occupied housing
d.	production of foreign citizens living in the United States

ANS: A DIF: 2 REF: 23-2

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: GDP MSC: Applicative

Which of the following values would be included in U.S. GDP for 2006?

a.	the rent that John, an American citizen, would have paid on his home in New York in 2006 had he not owned that home
b.	the rent that Sarah, an American citizen, paid on her apartment in San Francisco in 2006
c.	the value of the legal services provided by Carlos, an attorney and a Mexican citizen, who lived in Houston and practiced law there in 2006
d.	All of the above would be included in U.S. GDP for 2006.

ANS: D DIF: 2 REF: 23-2

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: GDP MSC: Applicative

Which of the following examples of production of goods and services would be included in U.S. GDP?

a.	Samantha, a Canadian citizen, grows sweet corn in Minnesota and sells it to a grocery store in Canada.
b.	Ian, an American citizen, grows peaches for his family in the back yard of their Atlanta home.
c.	Leo, an American citizen, grows marijuana in his Seattle home and sells it to his friends and neighbors.
d.	None of the above examples of production would be included in U.S. GDP.

ANS: A DIF: 2 REF: 23-2

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: GDP MSC: Applicative

Which of the following transactions adds to U.S. GDP for 2006?

a.	In 2006, Ashley sells a car that she bought in 2002 to William for $5,000.
b.	An American management consultant works in Mexico during the summer of 2006 and earns the equivalent of $30,000 during that time.
c.	When John and Jennifer were both single, they lived in separate apartments and each paid $750 in rent. John and Jennifer got married in 2006 and they bought a house that, according to reliable estimates, could be rented for $1,600 per month.
d.	None of the above transactions adds to U.S. GDP for 2006.

ANS: C DIF: 2 REF: 23-2

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: GDP MSC: Applicative

Which of the following transactions adds to U.S. GDP for 2006?

a.	In 2006, Marvin Windows manufactures 20 windows that will eventually be installed in an office building in Minneapolis. The windows remain in Marvin’s inventory at the end of 2006.
b.	An Irish marketing consultant works in Boston during the summer of 2006 and earns $30,000 during that time.
c.	When Tim and Tina were both single, they lived in separate apartments and each paid $750 in rent. Tim and Tina got married in 2006 and they bought a house that, according to reliable estimates, could be rented for $1,550 per month.
d.	All of the above transactions add to U.S. GDP for 2006.

ANS: D DIF: 2 REF: 23-2

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: GDP MSC: Applicative

The government of Wrexington, a country which has adopted American GDP accounting conventions, reported that GDP in quarter 3 was $12 billion at an annual rate. This means that the market value of all final goods and services produced within Wrexington in quarter 3 was

a.	$3 billion.
b.	$4 billion.
c.	$12 billion.
d.	$48 billion.

ANS: A DIF: 2 REF: 23-2

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: GDP MSC: Applicative

The government of Wrexington, a country which has adopted American GDP accounting conventions, has calculated that the seasonally-adjusted market value of all final goods and services produced within Wrexington in quarter 1 was $5 billion. The government will report that GDP in quarter 1 was

a.	$1.25 billion at an annual rate.
b.	$4 billion at an annual rate.
c.	$5 billion at an annual rate.
d.	$20 billion at an annual rate.

ANS: D DIF: 2 REF: 23-2

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: GDP MSC: Applicative

In a certain small country, the unit of currency is the huck. That country’s government recently announced that “GDP amounted to 400 million hucks in the quarter that just ended.” Assuming this country has adopted American GDP accounting conventions, this statement means that GDP,

a.	without seasonal adjustment, amounted to 100 million hucks in the quarter that just ended.
b.	with seasonal adjustment, amounted to 100 million hucks in the quarter that just ended.
c.	without seasonal adjustment, amounted to 400 million hucks in the quarter that just ended.
d.	with seasonal adjustment, amounted to 400 million hucks in the quarter that just ended.

ANS: B DIF: 2 REF: 23-2

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: GDP MSC: Applicative

In a certain small country, the unit of currency is the huck. That country’s government recently announced that “GDP amounted to 400 million hucks in the quarter that just ended.” Assuming this country has adopted American GDP accounting conventions, this statement means that GDP, after seasonal adjustment, actually amounted to

a.	100 million hucks in the quarter that just ended.
b.	100 million hucks over the last four quarters, including the one that just ended.
c.	400 million hucks in the quarter that just ended.
d.	400 million hucks over the last four quarters, including the one that just ended.

ANS: A DIF: 2 REF: 23-2

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: GDP MSC: Applicative

Suppose the government reports that U.S. GDP was about $13 trillion dollars in the most recent quarter. What is the correct interpretation of this number?

a.	This number reflects the actual value of final goods and services produced in that quarter.
b.	This number was obtained by taking the actual value of final goods and services produced in that quarter, then seasonally adjusting that value.
c.	This number was obtained by taking the actual value of final goods and services produced in that quarter, then multiplying that value by 4.
d.	This number was obtained by taking the actual value of final goods and services produced in that quarter, then seasonally adjusting that value and multiplying it by 4.

ANS: D DIF: 2 REF: 23-2

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: GDP MSC: Applicative

In the nation of Paolaland, quarterly GDP is always higher in the second quarter than in other quarters. In order to account systematically for this predictable second-quarter jump in GDP, Paolaland’s government statisticians will

a.	employ a statistical procedure called seasonal adjustment.
b.	report a four-quarter moving average of GDP rather than the one-quarter figure.
c.	report GNP rather than GDP.
d.	report personal income rather than GDP.

ANS: A DIF: 2 REF: 23-2

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: GDP MSC: Interpretive

The statistical discrepancy that regularly arises in national income accounting refers to the slight difference between

a.	personal income and personal disposable income.
b.	estimates of GDP and actual GDP.
c.	the income and expenditure approaches to the calculation of GDP.
d.	the quarterly and annual approaches to the calculation of GDP.

ANS: C DIF: 2 REF: 23-2

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: GDP MSC: Interpretive

Which government entity computes U.S. GDP every three months?

a.	the Council of Economic Advisers
b.	the Department of Commerce
c.	the Department of Treasury
d.	the Federal Reserve

ANS: B DIF: 1 REF: 23-2

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: U.S. Department of Commerce MSC: Definitional

Which of the following correctly orders U.S. income measures from largest to smallest?

a.	disposable personal income, gross national product, national income, net national product, personal income
b.	personal income, net national product, national income, gross national product, disposable personal income
c.	gross national product, net national product, national income, personal income, disposable personal income
d.	disposable personal income, personal income, national income, net national product, gross national product

ANS: C DIF: 2 REF: 23-2

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: Income MSC: Interpretive

U.S. GDP and U.S. GNP are related as follows:

a.	GNP = GDP + Value of exported goods – Value of imported goods.
b.	GNP = GDP – Value of exported goods + Value of imported goods.
c.	GNP = GDP + Income earned by foreigners in the U.S. – Income earned by U.S. citizens abroad.
d.	GNP = GDP – Income earned by foreigners in the U.S. + Income earned by U.S. citizens abroad.

ANS: D DIF: 2 REF: 23-2

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: GDP | GNP MSC: Interpretive

How does U.S. gross domestic product (GDP) differ from U.S. gross national product (GNP)?

a.	GNP = GDP – losses from depreciation
b.	GNP = GDP + income earned by U.S. citizens abroad – income that foreign citizens earned in the U.S.
c.	GNP = GDP + income earned by corporations
d.	GNP = GDP – depreciation – retained earnings

ANS: B DIF: 2 REF: 23-2

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: GDP | GNP MSC: Interpretive

Darla, a Canadian citizen, works only in the United States. The value of the output she produces is

a.	included in both U.S. GDP and U.S. GNP.
b.	included in U.S. GDP, but it is not included in U.S. GNP.
c.	included in U.S. GNP, but it is not included in U.S. GDP.
d.	included in neither U.S. GDP nor U.S. GNP.

ANS: B DIF: 2 REF: 23-2

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: GDP | GNP MSC: Applicative

Greg, a U.S. citizen, works only in Canada. The value of the output he produces is

a.	included in both U.S. GDP and U.S. GNP.
b.	included in U.S. GDP, but it is not included in U.S. GNP.
c.	included in U.S. GNP, but it is not included in U.S. GDP.
d.	included in neither U.S. GDP nor U.S. GNP.

ANS: C DIF: 2 REF: 23-2

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: GDP | GNP MSC: Applicative

An Italian company operates a pasta restaurant in the U.S. The value of the output produced by this pasta restaurant is included in

a.	U.S. GNP and Italian GNP.
b.	U.S. GNP and Italian GDP.
c.	U.S. GDP and Italian GNP.
d.	U.S. GDP and Italian GDP.

ANS: C DIF: 2 REF: 23-2

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: GDP | GNP MSC: Applicative

Gina, a U.S. citizen, works only in Germany. The value of Gina’s production is included in

a.	U.S. GDP and German GDP.
b.	U.S. GDP and German GNP.
c.	U.S. GNP and German GDP.
d.	U.S. GNP and German GNP.

ANS: C DIF: 2 REF: 23-2

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: GDP | GNP MSC: Applicative

Which of the following is not correct?

a.	GNP equals net national product plus losses from depreciation.
b.	For most countries, including the United States, GDP and GNP are nearly the same.
c.	GDP and GNP typically move in opposite directions.
d.	Personal income equals disposable personal income plus personal taxes plus certain nontax payments.

ANS: C DIF: 2 REF: 23-2

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: Income MSC: Interpretive

How is net national product (NNP) calculated?

a.	Saving is subtracted from the total income of a nation’s citizens.
b.	Saving is subtracted from the total income of a nation’s permanent residents.
c.	Depreciation losses are subtracted from the total income of a nation’s citizens.
d.	Depreciation losses are subtracted from the total income of a nation’s permanent residents.

ANS: D DIF: 2 REF: 23-2

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: NNP MSC: Interpretive

In the national income accounts, depreciation is called

a.	“consumption of fixed capital.”
b.	“negative investment.”
c.	“capital taxation.”
d.	“loss due to wear.”

ANS: A DIF: 1 REF: 23-2

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: Depreciation MSC: Definitional

Which of the following is an example of depreciation?

a.	falling stock prices
b.	the retirement of several employees
c.	computers becoming obsolete
d.	All of the above are examples of depreciation.

ANS: C DIF: 2 REF: 23-2

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: Depreciation MSC: Applicative

National income is defined as

a.	the total income of a nation’s permanent residents minus losses from depreciation.
b.	the income that households and noncorporate businesses receive.
c.	the total income earned by a nation’s permanent residents in the production of goods and services.
d.	the income that households and noncorporate businesses have left after satisfying all their obligations to the government.

ANS: C DIF: 1 REF: 23-2

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: National income MSC: Definitional

National income differs from net national product in that it includes business subsidies and excludes

a.	profits of corporations.
b.	indirect business taxes.
c.	retained earnings of corporations.
d.	depreciation.

ANS: B DIF: 2 REF: 23-2

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: National income | NNP MSC: Interpretive

The income that households and noncorporate businesses receive is called

a.	personal income.
b.	net national product.
c.	disposable personal income.
d.	national income.

ANS: A DIF: 1 REF: 23-2

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: Personal income MSC: Definitional

Unlike national income, personal income

a.	includes retained earnings, corporate income taxes and social insurance contributions, and excludes interest and transfer payments received by households from government.
b.	excludes retained earnings, corporate income taxes, social insurance contributions, and interest and transfer payments received by households from government.
c.	excludes retained earnings, corporate income taxes and social insurance contributions, and includes interest and transfer payments received by households from government.
d.	includes retained earnings, corporate income taxes, social insurance contributions, and interest and transfer payments received by households from government.

ANS: C DIF: 2 REF: 23-2

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: Personal income MSC: Interpretive

Retained earnings is income that

a.	households retain after paying taxes.
b.	businesses retain after paying taxes.
c.	corporations have earned but have not used to invest in plant, equipment, and inventories.
d.	corporations have earned but have not paid out to their owners.

ANS: D DIF: 1 REF: 23-2

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: Retained earnings MSC: Definitional

Disposable personal income is the income that

a.	households have left after paying taxes and non-tax payments to the government.
b.	businesses have left after paying taxes and non-tax payments to the government.
c.	households and noncorporate businesses have left after paying taxes and non-tax payments to the government.
d.	households and businesses have left after paying taxes and non-tax payments to the government.

ANS: C DIF: 1 REF: 23-2

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: Disposable personal income MSC: Definitional

Table 23-1

The table below contains data for the country of Wrexington for the year 2006.

GDP	$110
Income earned by citizens abroad	$5
Income foreigners earn here	$15
Losses from depreciation	$4
Indirect business taxes	$6
Business subsidies	$2
Statistical discrepancy	$0
Retained earnings	$5
Corporate income taxes	$6
Social insurance contributions	$10
Interest paid to households by government	$5
Transfer payments to households from government	$15
Personal taxes	$30
Nontax payments to government	$5

Refer to Table 23-1. The market value of all final goods and services produced within Wrexington in 2006 is

a.	$100.
b.	$110.
c.	$115.
d.	$130.

ANS: B DIF: 2 REF: 23-2

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: GDP MSC: Applicative

Refer to Table 23-1. Gross national product for Wrexington in 2006 is

a.	$100.
b.	$110.
c.	$115.
d.	$130.

ANS: A DIF: 2 REF: 23-2

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: GNP MSC: Applicative

Refer to Table 23-1. Net national product for Wrexington in 2006 is

a.	$96.
b.	$104.
c.	$106.
d.	$114.

ANS: A DIF: 2 REF: 23-2

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: NNP MSC: Applicative

Refer to Table 23-1. National income for Wrexington in 2006 is

a.	$88.
b.	$92.
c.	$100.
d.	$104.

ANS: B DIF: 2 REF: 23-2

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: National income MSC: Applicative

Refer to Table 23-1. Personal income for Wrexington in 2006 is

a.	$51.
b.	$91.
c.	$93.
d.	$133.

ANS: B DIF: 2 REF: 23-2

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: Personal income MSC: Applicative

Refer to Table 23-1. Disposable personal income for Wrexington in 2006 is

a.	$56.
b.	$66.
c.	$116.
d.	$126.

ANS: A DIF: 2 REF: 23-2

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: Disposable personal income MSC: Applicative

For monitoring fluctuations in the national economy, which measure of income is best?

a.	GDP
b.	GNP
c.	NNP
d.	It does not matter very much which measure we use.

ANS: D DIF: 2 REF: 23-2

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: Income MSC: Interpretive

Sec03 – Measuring a Nation’s Income – The Components of GDP

MULTIPLE CHOICE

In the equation Y = C + I + G + NX,

a.	Y represents the economy’s total expenditure.
b.	C represents household expenditures on services and durable goods.
c.	all of the variables are always positive numbers.
d.	All of the above are correct.

ANS: A DIF: 2 REF: 23-3

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: GDP MSC: Interpretive

GDP is equal to

a.	the market value of all final goods and services produced within a country in a given period of time.
b.	Y.
c.	C + I + G + NX.
d.	All of the above are correct.

ANS: D DIF: 2 REF: 23-3

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: GDP MSC: Interpretive

An identity is an equation that

a.	describes an equilibrium.
b.	pertains to macroeconomics, not to microeconomics.
c.	must be true because of how the variables in the equation are defined.
d.	involves final goods, not intermediate goods.

ANS: C DIF: 1 REF: 23-3

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: Identity MSC: Definitional

The consumption component of GDP includes spending on

a.	durable goods and nondurable goods, but not spending on services.
b.	durable goods and services, but not spending on nondurable goods.
c.	nondurable goods and services, but not spending on durable goods.
d.	durable goods, nondurable goods, and services.

ANS: D DIF: 2 REF: 23-3

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: Consumption MSC: Interpretive

Consumption consists of spending by households on goods and services, with the exception of

a.	purchase of intangible services.
b.	purchases of durable goods.
c.	purchases of new houses.
d.	spending on education.

ANS: C DIF: 2 REF: 23-3

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: Consumption MSC: Interpretive

Which of the following is not an example of a durable good?

a.	a refrigerator
b.	an automobile
c.	a business suit
d.	a furnace

ANS: C DIF: 2 REF: 23-3

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: Durable goods MSC: Applicative

Which of the following is not an example of a nondurable good?

a.	a loaf of bread
b.	a pair of jeans
c.	a microwave
d.	a pound of bacon

ANS: C DIF: 2 REF: 23-3

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: Nondurable goods MSC: Applicative

When economists refer to intangible items, they are referring to such things as

a.	illegal goods, and the value of such items is included in GDP.
b.	illegal goods, and the value of such items is excluded from GDP.
c.	consulting services and dental care, and the value of such items is included in GDP.
d.	consulting services and dental care, and the value of such items is excluded from GDP.

ANS: C DIF: 2 REF: 23-3

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: Services MSC: Applicative

Household spending on education is included in

a.	consumption, although it might be argued that it would fit better in investment.
b.	investment, although it might be argued that it would fit better in consumption.
c.	government spending, based on the fact that most higher-education students attend publicly-supported colleges and universities.
d.	None of the above is correct; in general, household spending on services is not included in any component of GDP.

ANS: A DIF: 2 REF: 23-3

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: Consumption MSC: Interpretive

Household spending on education is counted in which component or subcomponent of GDP?

a.	consumption of durable goods
b.	consumption of nondurable goods
c.	consumption of services
d.	investment

ANS: C DIF: 2 REF: 23-3

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: Consumption MSC: Interpretive

Which of the following is included in the consumption component of U.S. GDP?

a.	purchases of staplers, paper clips, and pens by U.S. business firms
b.	purchases of natural gas by U.S. households
c.	purchases of newly constructed homes by U.S. households
d.	All of the above are correct.

ANS: B DIF: 2 REF: 23-3

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: Consumption MSC: Applicative

If you buy a burger and fries at your favorite fast food restaurant,

a.	then neither GDP nor consumption will be affected because you would have eaten at home had you not bought the meal at the restaurant.
b.	then GDP will be higher, but consumption spending will be unchanged.
c.	then GDP will be unchanged, but consumption spending will be higher.
d.	then both GDP and consumption spending will be higher.

ANS: D DIF: 2 REF: 23-3

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: Consumption | GDP MSC: Applicative

For the purpose of calculating GDP, investment is spending on

a.	stocks, bonds, and other financial assets.
b.	real estate and financial assets such as stocks and bonds.
c.	capital equipment, inventories, and structures, including household purchases of new housing.
d.	capital equipment, inventories, and structures, excluding household purchases of new housing.

ANS: C DIF: 2 REF: 23-3

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: Investment MSC: Interpretive

What word do economists use to refer to the purchase of goods that will be used in the future to produce more goods and services?

a.	capital
b.	consumption
c.	investment
d.	costs

ANS: C DIF: 1 REF: 23-3

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: Investment MSC: Definitional

Which of the following is included in the investment component of GDP?

a.	households’ purchases of newly constructed homes
b.	net additions to firms’ inventories
c.	firms’ purchases of capital equipment
d.	All of the above are correct.

ANS: D DIF: 2 REF: 23-3

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: Investment MSC: Interpretive

Which of the following examples of household spending is categorized as investment rather than consumption?

a.	expenditures on durable goods such as automobiles and refrigerators
b.	expenditures on intangibles items such as medical care
c.	expenditures on new housing
d.	All of the above are correct.

ANS: C DIF: 2 REF: 23-3

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: Investment MSC: Applicative

Which of the following items is the one type of household expenditure that is categorized as investment rather than consumption?

a.	spending on education
b.	the purchase of stocks and bonds
c.	the purchase of a new house
d.	the purchase of durable goods such as stoves and washing machines

ANS: C DIF: 2 REF: 23-3

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: Investment MSC: Applicative

Consider two items that might be included in GDP: (1) the estimated rental value of owner-occupied housing and (2) purchases of newly-constructed homes. How are these two items accounted for when GDP is calculated?

a.	Both item (1) and item (2) are included in the consumption component of GDP.
b.	Item (1) is included in the consumption component of GDP, while item (2) is included in the investment component of GDP.
c.	Item (1) is included in the investment component of GDP, while item (2) is included in the consumption component of GDP.
d.	Only item (2) is included in GDP, and it is included in the investment component.

ANS: B DIF: 2 REF: 23-3

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: Consumption | Investment MSC: Applicative

A U.S. publisher purchases new computers that were manufactured in the U.S. This purchase by itself makes

a.	a positive contribution both to investment and to GDP.
b.	a positive contribution both to consumption and to GDP.
c.	a positive contribution to GDP, but it does not affect investment or consumption.
d.	a positive contribution to investment, but it does not affect GDP.

ANS: A DIF: 2 REF: 23-3

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: Investment | GDP MSC: Applicative

A Minnesota farmer buys a new tractor made in Iowa by a German company. As a result,

a.	U.S. investment and GDP increase, but German GDP is unaffected.
b.	U.S. investment and German GDP increase, but U.S. GDP is unaffected.
c.	U.S. investment, U.S. GDP, and German GDP are unaffected, because tractors are intermediate goods.
d.	U.S. investment, U.S. GDP, and German GDP all increase.

ANS: A DIF: 2 REF: 23-3

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: Investment | GDP MSC: Applicative

A wind farm in Iowa buys a large turbine generator from a Swedish-owned factory located in Connecticut that uses workers who live in Connecticut. As a result,

a.	U.S. investment, GDP, and GNP all increase by the same amount.
b.	U.S. investment increases, but GDP and GNP are unaffected by the purchase.
c.	U.S. investment and GDP increase by the same amount, but U.S. GNP increases by a smaller amount.
d.	U.S. investment and GNP increase by the same amount, but U.S. GDP increases by a smaller amount.

ANS: C DIF: 3 REF: 23-3

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: Investment | GDP | GNP MSC: Analytical

The value of goods added to a firm’s inventory in a certain year is treated as

a.	consumption, since the goods will be sold to consumers in another period.
b.	saving, since the goods are being saved until they are sold in another period.
c.	investment, since GDP aims to measure the value of the economy’s production that year.
d.	spending on durable goods, since the goods could not be inventoried unless they were durable.

ANS: C DIF: 2 REF: 23-3

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: Inventory MSC: Interpretive

Goods that go into inventory and are not sold during the current period are

a.	counted as intermediate goods and so are not included in current period GDP.
b.	counted in current period GDP only if the firm that produced them sells them to another firm.
c.	included in current period GDP as inventory investment.
d.	included in current period GDP as consumption.

ANS: C DIF: 2 REF: 23-3

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: Inventory MSC: Interpretive

During the current quarter, a firm produces consumer goods and adds some of those goods to its inventory rather than selling them. The value of the goods added to inventory is

a.	not included in the current quarter GDP.
b.	included in the current quarter GDP as investment.
c.	included in the current quarter GDP as consumption.
d.	included in the current quarter GDP as a statistical discrepancy.

ANS: B DIF: 2 REF: 23-3

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: Inventory MSC: Interpretive

During the third quarter of 2006, a firm produces consumer goods and adds some of those goods to its inventory. During the fourth quarter of 2006, the firm sells the goods at a retail outlet, with the result that the value of its inventory at the end of the fourth quarter is smaller than the value of its inventory at the end of the third quarter. These actions affect which component(s) of fourth-quarter GDP?

a.	These actions affect only consumption, and they affect consumption positively.
b.	These actions affect only investment, and they affect investment positively.
c.	These actions affect consumption positively and investment negatively.
d.	These actions affect both consumption and investment positively.

ANS: C DIF: 2 REF: 23-3

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: Consumption | Investment MSC: Applicative

A movie company makes 500,000 DVDs of one of its latest releases. It sells 300,000 of them before the end of the second quarter, and holds the others in its warehouse. How will the 200,000 unsold DVDs be treated in the GDP statistics?

a.	Since the DVDs eventually will be bought by consumers, they will be included as consumption in the second quarter.
b.	Since the DVDs were not purchased in the second quarter, they will be counted as an increase in third-quarter GDP.
c.	The DVDs will be counted as a change in inventory in the second quarter and so will be included in second-quarter GDP.
d.	The DVDs will be counted as a change in inventory in the second quarter, and when sold in the third quarter will raise third-quarter GDP.

ANS: C DIF: 2 REF: 23-3

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: Inventory | GDP MSC: Applicative

The local Chevrolet dealership has an increase in inventory of 25 cars in 2006. In 2007, it sells all 25 cars. Which of the following statements is correct?

a.	The value of the cars in inventory will be counted as part of 2006 GDP, and the value of the cars sold in 2007 will not increase 2007 GDP.
b.	The value of the cars in inventory will not affect 2006 GDP, and the value of the cars sold in 2007 will increase 2007 GDP.
c.	The value of the cars in inventory will be counted as part of 2006 GDP, and the value of the cars sold in 2007 will increase 2007 GDP.
d.	The value of the cars in inventory will not affect 2006 GDP, and the value of the cars sold in 2007 will not increase 2007 GDP.

ANS: A DIF: 2 REF: 23-3

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: Inventory | GDP MSC: Applicative

A good is produced by a firm in 2007, added to the firm’s inventory in 2007, and sold to a household in 2008. It follows that

a.	the value of the good is added to the investment category of 2007 GDP and added to the investment category of 2008 GDP.
b.	the value of the good is added to the investment category of 2007 GDP and subtracted from the investment category of 2008 GDP.
c.	the value of the good is subtracted from the investment category of 2007 GDP and added to the investment category of 2008 GDP.
d.	the value of the good is subtracted from the investment category of 2007 GDP and subtracted from the investment category of 2008 GDP.

ANS: B DIF: 2 REF: 23-3

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: Investment MSC: Applicative

A good is produced by a firm in 2007, added to the firm’s inventory in 2007, and sold to a household in 2008. As a result, on net,

a.	2007 GDP increased and 2008 GDP decreased.
b.	2007 GDP decreased and 2008 GDP increased.
c.	2007 GDP did not change and 2008 GDP increased.
d.	2007 GDP increased and 2008 GDP did not change.

ANS: D DIF: 2 REF: 23-3

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: GDP MSC: Applicative

A good is produced by a firm in 2007, added to the firm’s inventory in 2007, and sold to a household in 2008. It follows that

a.	the value of the good is added to the investment category of 2007 GDP, added to the consumption category of 2008 GDP, and subtracted from the investment category of 2008 GDP.
b.	the value of the good is added to the investment category of 2007 GDP, added to the consumption category of 2008 GDP, and not included in the investment category of 2008 GDP.
c.	the value of the good is added to the investment category of 2007 GDP, subtracted from the consumption category of 2008 GDP, and not included in the investment category of 2008 GDP.
d.	the value of the good is added to the investment category of 2007 GDP, subtracted from the consumption category of 2008 GDP, and added to the investment category of 2008 GDP.

ANS: A DIF: 3 REF: 23-3

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: Consumption | Investment MSC: Analytical

Which of the following items is included in GDP?

a.	the sale of stocks and bonds
b.	the sale of used goods
c.	the sale of services such as those performed by a doctor
d.	All of the above are included in GDP.

ANS: C DIF: 2 REF: 23-3

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: GDP MSC: Applicative

Government purchases include spending on goods and services by

a.	federal governments, but not by state or local governments.
b.	federal and state governments, but not by local governments.
c.	federal, state, and local governments.
d.	federal, state, and local governments, as well household spending by employees of those governments.

ANS: C DIF: 1 REF: 23-3

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: Government purchases MSC: Definitional

Which of the following items is counted as part of government purchases?

a.	The federal government pays the salary of a Navy officer.
b.	The state of Nevada pays a private firm to repair a Nevada state highway.
c.	The city of Las Vegas, Nevada pays a private firm to collect garbage in that city.
d.	All of the above are correct.

ANS: D DIF: 2 REF: 23-3

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: Government purchases MSC: Applicative

Recently, the U.S. national income accounts have switched to calling government purchases

a.	government spending and transfer payments.
b.	transfer payments and gross investment by government.
c.	government consumption expenditure and gross investment.
d.	government wages, salaries, and investment expenditure.

ANS: C DIF: 2 REF: 23-3

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: Government purchases MSC: Definitional

A transfer payment is

a.	a payment for moving expenses a worker receives when he or she is transferred by an employer to a new location.
b.	a payment that is automatically transferred from your bank account to pay a bill or some other obligation.
c.	a form of government spending that is not made in exchange for a currently produced good or service.
d.	the benefit that a person receives from an expenditure by government minus the taxes that were collected by government to fund that expenditure.

ANS: C DIF: 1 REF: 23-3

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: Transfer payments MSC: Definitional

Transfer payments

a.	are payments that flow from government to households.
b.	are not made in exchange for currently produced goods or services.
c.	alter household income, but they do not reflect the economy’s production.
d.	All of the above are correct.

ANS: D DIF: 2 REF: 23-3

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: Transfer payments MSC: Interpretive

A transfer payment is a payment made by

a.	consumers, but not in exchange for a tangible product.
b.	firms, but not in exchange for capital equipment.
c.	foreigners, but not in exchange for a domestically-produced good or service.
d.	government, but not in exchange for a currently produced good or service.

ANS: D DIF: 2 REF: 23-3

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: Transfer payments MSC: Interpretive

Transfer payments are

a.	included in GDP because they represent income to individuals.
b.	included in GDP because they eventually will be spent on consumption.
c.	not included in GDP because they are not payments for currently produced goods or services.
d.	not included in GDP because taxes will have to be raised to pay for them.

ANS: C DIF: 2 REF: 23-3

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: Transfer payments MSC: Interpretive

Which of the following represents a transfer payment?

a.	You transfer $1,000 from your bank account to a mutual fund.
b.	The government sends your grandfather his Social Security check.
c.	The bank transfers $10 in quarterly interest to your savings account.
d.	Your employer automatically transfers $100 each month from your wages to a non-taxable medical spending account.

ANS: B DIF: 2 REF: 23-3

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: Transfer payments MSC: Applicative

Social Security payments are

a.	included in GDP because they represent payments for work performed in the past.
b.	included in GDP because they represent potential consumption.
c.	excluded from GDP because they are not private pensions.
d.	excluded from GDP because they do not reflect the economy’s production.

ANS: D DIF: 2 REF: 23-3

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: Transfer payments MSC: Applicative

Unemployment compensation is

a.	part of GDP because it represents income.
b.	part of GDP because the recipients must have worked in the past to qualify.
c.	not part of GDP because it is a transfer payment.
d.	not part of GDP because the payments reduce business profits.

ANS: C DIF: 2 REF: 23-3

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: Transfer payments MSC: Applicative

To encourage formation of small businesses, the government could provide subsidies; these subsidies

a.	would be included in GDP because they are part of government purchases.
b.	would be included in GDP because they are part of investment expenditures.
c.	would not be included in GDP because they are transfer payments.
d.	would not be included in GDP because the government raises taxes to pay for them.

ANS: C DIF: 2 REF: 23-3

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: Transfer payments MSC: Applicative

After the terrorist attacks on September 11, 2001, governments within the United States raised expenditures to increase security at airports. These purchases of goods and services are

a.	not included in GDP since they do not represent production.
b.	not included in GDP since the government collects taxes to pay for them.
c.	included in GDP since government expenditures on goods and services are included in GDP.
d.	included in GDP only to the extent that the federal government, rather than state or local governments, paid for them.

ANS: C DIF: 2 REF: 23-3

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: Government purchases MSC: Applicative

Which of the following items is counted as part of government purchases?

a.	The federal government pays $2,000 in Social Security benefits to a retired person.
b.	The city of Des Moines, Iowa pays $10,000 to a tree-trimming firm to trim trees along city boulevards.
c.	The state of Iowa pays $1,000 to help a low-income family pay its medical bills.
d.	All of the above are correct.

ANS: B DIF: 2 REF: 23-3

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: Government purchases MSC: Applicative

The U.S. government pays an economist at the U.S. Department of Commerce $50,000 in salary in 2006. The economist then retires. In 2007, the government pays him $30,000 in retirement benefits. Which of the following is correct?

a.	The 2006 payment is included in 2006 GDP as government purchases, and the 2007 payment is included in 2007 GDP as government purchases.
b.	The 2006 payment is included in 2006 GDP as government purchases, but the 2007 payment is not included in 2007 GDP.
c.	The 2006 payment is included in 2006 GDP as government purchases, and the 2007 payment is included in 2007 GDP as government transfer payments.
d.	The 2006 payment is included in 2006 GDP as government purchases, and the 2007 payment is allocated to previous years’ GDP according to the amount of work performed by the economist each year.

ANS: B DIF: 2 REF: 23-3

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: Government purchases MSC: Applicative

Consider the following three items of spending by the government: (1) the federal government pays a $500 unemployment benefit to an unemployed person; (2) the federal government makes a $2,000 salary payment to a Navy lieutenant; (3) the city of Bozeman, Montana makes a $10,000 payment to ABC Lighting Company for street lights in Bozeman. Which of these payments contributes directly to government purchases in the national income accounts?

a.	only item (1)
b.	only item (2)
c.	only items (1) and (2)
d.	only items (2) and (3)

ANS: D DIF: 2 REF: 23-3

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: Government purchases MSC: Applicative

Which of the following subcomponents of GDP can be either positive or negative?

a.	inventory investment
b.	exports
c.	government purchases
d.	All of the above are correct.

ANS: A DIF: 2 REF: 23-3

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: GDP MSC: Interpretive

Net exports equal

a.	exports plus imports.
b.	exports minus imports.
c.	imports minus exports.
d.	GDP minus imports.

ANS: B DIF: 1 REF: 23-3

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: Net exports MSC: Definitional

Which of the following components or subcomponents of GDP can be either positive or negative?

a.	consumers’ spending on durable goods
b.	firms’ spending on capital equipment
c.	net exports
d.	All of the above are correct.

ANS: C DIF: 2 REF: 23-3

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: GDP MSC: Interpretive

If net exports is a negative number for a particular year, then

a.	the value of firms’ inventories declined over the course of the year.
b.	consumption exceeded the sum of investment and government purchases during the year.
c.	the value of goods sold to foreigners exceeded the value of foreign goods purchased during the year.
d.	the value of foreign goods purchased exceeded the value of goods sold to foreigners during the year.

ANS: D DIF: 2 REF: 23-3

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: Net exports MSC: Interpretive

If a U.S. citizen buys a television made in Korea by a Korean firm, then

a.	U.S. net exports decrease and U.S. GDP decreases.
b.	U.S. net exports are unaffected and U.S. GDP decreases.
c.	U.S. net exports are unaffected and U.S. GDP is unaffected.
d.	U.S. net exports decrease and U.S. GDP is unaffected.

ANS: D DIF: 2 REF: 23-3

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: Net exports | GDP MSC: Applicative

A German citizen buys an automobile produced in the United States by a Japanese company. As a result,

a.	U.S. net exports increase, U.S. GDP is unaffected, Japanese GNP increases, German net exports decrease, and German GNP and GDP are unaffected.
b.	U.S. net exports and GDP increase, Japanese GNP increases, German net exports decrease, and German GNP is unaffected, and German GDP decreases.
c.	U.S. net exports and GDP increase, Japanese GNP increases, German net exports decrease, and German GNP and GDP are unaffected.
d.	U.S. net exports and GDP are unaffected, Japanese GNP increases, and German net exports, GNP, and GDP decrease.

ANS: C DIF: 3 REF: 23-3

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: Net exports | GDP | GNP MSC: Analytical

If a U.S. citizen buys a dress made in Nepal by a Nepalese firm, then

a.	U.S. consumption increases, U.S. net exports decrease, and U.S. GDP decreases.
b.	U.S. consumption increases, U.S. net exports decrease, and U.S. GDP is unaffected.
c.	U.S. consumption decreases, U.S. net exports increase, and U.S. GDP increases.
d.	U.S. consumption decreases, U.S. net exports increase, and U.S. GDP is unaffected.

ANS: B DIF: 3 REF: 23-3

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: Consumption | Net exports | GDP MSC: Analytical

When an American household purchases a bottle of Italian wine for $100,

a.	U.S. consumption does not change, U.S. net exports decrease by $100, and U.S. GDP decreases by $100.
b.	U.S. consumption does not change, U.S. net exports increase by $100, and U.S. GDP increases by $100.
c.	U.S. consumption increases by $100, U.S. net exports decrease by $100, and U.S. GDP does not change.
d.	U.S. consumption increases by $100, U.S. net exports do not change, and U.S. GDP increases by $100.

ANS: C DIF: 3 REF: 23-3

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: Consumption | Net exports | GDP MSC: Analytical

When an Egyptian firm purchases a cement mixer from Slovakia,

a.	Egyptian investment does not change, Egyptian net exports decrease, Egyptian GDP decreases, Slovakian net exports increase, and Slovakian GDP increases.
b.	Egyptian investment increases, Egyptian net exports decrease, Egyptian GDP is unaffected, Slovakian net exports increase, and Slovakian GDP increases.
c.	Egyptian investment decreases, Egyptian net exports increase, Egyptian GDP is unaffected, Slovakian net exports decrease, and Slovakian GDP decreases.
d.	Egyptian investment increases, Egyptian net exports do not change, Egyptian GDP increases, Slovakian net exports do not change, and Slovakian GDP is unaffected.

ANS: B DIF: 3 REF: 23-3

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: Investment | Net exports | GDP MSC: Analytical

The U.S. Air Force pays a Turkish citizen $30,000 to work on a U.S. base in Turkey. As a result,

a.	U.S. government purchases increase by $30,000; U.S. net exports decrease by $30,000; and U.S. GDP is unaffected.
b.	U.S. government purchases increase by $30,000; U.S. net exports are unaffected; and U.S. GDP increases by $30,000.
c.	U.S. government purchases, net exports, and GDP are unaffected.
d.	U.S. government purchases are unaffected; U.S. net exports decrease by $30,000; and U.S. GDP decreases by $30,000.

ANS: A DIF: 3 REF: 23-3

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: Government purchases | Net exports | GDP MSC: Analytical

An Iowan receives a Social Security check for $500, which he uses to purchase a $480 television made in Japan by a Japanese firm and a $20 dinner at a local restaurant. As a result, U.S. GDP

a.	does not change.
b.	increases by $20.
c.	increases by $520.
d.	increases by $1000.

ANS: B DIF: 3 REF: 23-3

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: GDP MSC: Analytical

An American soldier stationed in California receives a paycheck from the federal government for $500, which she uses to purchase a $300 stereo made in Korea by a Korean firm and $200 worth of groceries produced in California. As a result, U.S. GDP increases by

a.	$200.
b.	$500.
c.	$700.
d.	$1000.

ANS: C DIF: 3 REF: 23-3

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: GDP MSC: Analytical

In the economy of Wrexington in 2008, consumption was $1000, exports were $100, government purchases were $450, imports were $150, and investment was $350. What was Wrexington’s GDP in 2008?

a.	$1750
b.	$1850
c.	$1900
d.	$2050

ANS: A DIF: 2 REF: 23-3

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: GDP MSC: Applicative

In the economy of Wrexington in 2008, consumption was $5000, exports were $100, government purchases were $900, imports were $200, and investment was $1000. What was Wrexington’s GDP in 2008?

a.	$6700
b.	$6800
c.	$7000
d.	$7200

ANS: B DIF: 2 REF: 23-3

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: GDP MSC: Applicative

In the economy of Wrexington in 2008, exports were $200, GDP was $2000, government purchases were $300, imports were $130, and investment was $400. What was Wrexington’s consumption in 2008?

a.	$970
b.	$1230
c.	$1370
d.	$1630

ANS: B DIF: 2 REF: 23-3

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: Consumption MSC: Applicative

In the economy of Wrexington in 2008, exports were $500, GDP was $6400, government purchases were $1500, imports were $600, and investment was $2000. What was Wrexington’s consumption in 2008?

a.	$1800
b.	$2800
c.	$3000
d.	$4000

ANS: C DIF: 2 REF: 23-3

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: Consumption MSC: Applicative

In the economy of Wrexington in 2008, consumption was $6000, exports were $1000, GDP was $10,000, government purchases were $2000, and imports were $600. What was Wrexington’s investment in 2008?

a.	$1400
b.	$1600
c.	$2400
d.	$3600

ANS: B DIF: 2 REF: 23-3

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: Investment MSC: Applicative

In the economy of Wrexington in 2008, consumption was $3000, exports were $200, GDP was $8000, government purchases were $1000, and imports were $600. What was Wrexington’s investment in 2008?

a.	$3200
b.	$3600
c.	$3800
d.	$4400

ANS: D DIF: 2 REF: 23-3

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: Investment MSC: Applicative

In the economy of Wrexington in 2008, consumption was $3000, exports were $400, GDP was $5000, imports were $600, and investment was $1100. What were Wrexington’s government purchases in 2008?

a.	$300
b.	$500
c.	$700
d.	$1100

ANS: D DIF: 2 REF: 23-3

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: Government purchases MSC: Applicative

In the economy of Wrexington in 2008, consumption was $4000, exports were $800, GDP was $9500, imports were $200, and investment was $1000. What were Wrexington’s government purchases in 2008?

a.	$3700
b.	$3900
c.	$5100
d.	$5500

ANS: B DIF: 2 REF: 23-3

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: Government purchases MSC: Applicative

In the economy of Wrexington in 2008, consumption was $200, exports were $50, GDP was $325, government purchases were $100, imports were $125, and investment was $100. What were Wrexington’s net exports in 2008?

a.	-$75
b.	-$50
c.	$50
d.	$75

ANS: A DIF: 2 REF: 23-3

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: Net exports MSC: Applicative

In the economy of Wrexington in 2008, consumption was $800, GDP was $2000, government purchases were $400, and investment was $600. What were Wrexington’s net exports in 2008?

a.	-$200
b.	$200
c.	$1800
d.	Net exports cannot be calculated from the information given.

ANS: B DIF: 2 REF: 23-3

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: Net exports MSC: Applicative

In the economy of Wrexington in 2008, consumption was $1000, GDP was $1950, government purchases were $500, and investment was $700. What were Wrexington’s net exports in 2008?

a.	-$250
b.	$250
c.	$2200
d.	Net exports cannot be calculated from the information given.

ANS: A DIF: 2 REF: 23-3

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: Net exports MSC: Applicative

In the economy of Wrexington in 2008, consumption was $5300, GDP was $8800, government purchases were $1800, imports were $500, and investment was $2000. What were Wrexington’s exports in 2008?

a.	-$800
b.	-$300
c.	$200
d.	$300

ANS: C DIF: 2 REF: 23-3

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: Exports MSC: Applicative

In the economy of Wrexington in 2008, consumption was $3000, GDP was $5500, government purchases were $1000, imports were $2000, and investment was $1000. What were Wrexington’s exports in 2008?

a.	-$1500
b.	$500
c.	$1500
d.	$2500

ANS: D DIF: 2 REF: 23-3

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: Exports MSC: Applicative

In the economy of Wrexington in 2008, consumption was $2000, exports were $800, GDP was $4800, government purchases were $840, and investment was $1400. What were Wrexington’s imports in 2008?

a.	-$560
b.	-$240
c.	$240
d.	$560

ANS: C DIF: 2 REF: 23-3

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: Imports MSC: Applicative

In the economy of Wrexington in 2008, consumption was $500, exports were $200, GDP was $1200, government purchases were $250, and investment was $300. What were Wrexington’s imports in 2008?

a.	-$150
b.	-$50
c.	$50
d.	$150

ANS: C DIF: 2 REF: 23-3

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: Imports MSC: Applicative

In the economy of Wrexington in 2008, consumption was one-half of GDP, government purchases were $2000 more than investment, investment was one-sixth of GDP, and the value of imports exceeded the value of exports by $500. What was Wrexington’s GDP in 2008?

a.	$3000
b.	$4500
c.	$9000
d.	$15,000

ANS: C DIF: 3 REF: 23-3

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: GDP MSC: Analytical

In the economy of Wrexington in 2008, consumption was 60% of GDP, government purchases were $212, imports were $67 and 67% of the value of exports, investment was one-half of the value of consumption. What was Wrexington’s GDP in 2008?

a.	$1450
b.	$1790
c.	$2455
d.	$2790

ANS: C DIF: 3 REF: 23-3

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: GDP MSC: Analytical

Table 23-2

The table below contains data for the country of Wrexington for the year 2008.

Household purchases of durable goods	$1293
Household purchases of nondurable goods	$1717
Household purchases of services	$301
Household purchases of new housing	$704
Purchases of capital equipment	$310
Inventory changes	$374
Purchases of new structures	$611
Depreciation	$117
Salaries of government workers	$1422
Government expenditures on public works	$553
Transfer payments	$777
Foreign purchases of domestically produced goods	$88
Domestic purchases of foreign goods	$120

Refer to Table 23-2. What was Wrexington’s GDP in 2008?

a.	$6359
b.	$7136
c.	$7253
d.	$8147

ANS: C DIF: 3 REF: 23-3

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: GDP MSC: Analytical

Refer to Table 23-2. What was Wrexington’s consumption in 2008?

a.	$2018
b.	$3010
c.	$3311
d.	$4015

ANS: C DIF: 3 REF: 23-3

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: Consumption MSC: Analytical

Refer to Table 23-2. What was Wrexington’s investment in 2008?

a.	$1178
b.	$1295
c.	$1882
d.	$1999

ANS: D DIF: 3 REF: 23-3

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: Investment MSC: Analytical

Refer to Table 23-2. What were Wrexington’s government purchases in 2008?

a.	$553
b.	$1198
c.	$1975
d.	$2752

ANS: C DIF: 3 REF: 23-3

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: Government purchases MSC: Analytical

Refer to Table 23-2. What were Wrexington’s exports in 2008?

a.	-$32
b.	$32
c.	$88
d.	$120

ANS: C DIF: 3 REF: 23-3

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: Exports MSC: Analytical

Refer to Table 23-2. What were Wrexington’s imports in 2008?

a.	-$32
b.	$32
c.	$88
d.	$120

ANS: D DIF: 3 REF: 23-3

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: Imports MSC: Analytical

Refer to Table 23-2. What were Wrexington’s net exports in 2008?

a.	-$32
b.	$32
c.	$88
d.	$120

ANS: A DIF: 3 REF: 23-3

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: Net exports MSC: Analytical

Table 23-3

The table below contains data for the country of Wrexington for the year 2008.

Total income	$5731
Household purchases of durable goods	$1108
Household purchases of nondurable goods	$702
Household purchases of non-education services	$203
Household purchases of education services	$302
Household purchases of new housing	$816
Purchases of capital equipment	$333
Inventory changes	$75
Purchases of new structures	$267
Depreciation	$401
Local government spending on goods and services	$236
State government spending on goods and services	$419
Federal government spending on goods and services	$1182
Transfer payments	$707
Foreign purchases of domestically produced goods	$217
Domestic purchases of foreign goods	$129

Refer to Table 23-3. What was Wrexington’s GDP in 2008?

a.	$4623
b.	$5731
c.	$6037
d.	$6839

ANS: B DIF: 3 REF: 23-3

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: GDP MSC: Analytical

Refer to Table 23-3. What was Wrexington’s consumption in 2008?

a.	$1810
b.	$2013
c.	$2315
d.	$3131

ANS: C DIF: 3 REF: 23-3

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: Consumption MSC: Analytical

Refer to Table 23-3. What was Wrexington’s investment in 2008?

a.	$675
b.	$1090
c.	$1491
d.	$1793

ANS: C DIF: 3 REF: 23-3

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: Investment MSC: Analytical

Refer to Table 23-3. What were Wrexington’s government purchases in 2008?

a.	$1130
b.	$1601
c.	$1837
d.	$2544

ANS: C DIF: 3 REF: 23-3

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: Government purchases MSC: Analytical

Refer to Table 23-3. What were Wrexington’s net exports in 2008?

a.	-$217
b.	-$88
c.	$88
d.	$217

ANS: C DIF: 3 REF: 23-3

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: Net exports MSC: Analytical

In 2007, U.S. GDP was almost

a.	$10 trillion.
b.	$14 trillion.
c.	$46 trillion.
d.	$302 trillion.

ANS: B DIF: 1 REF: 23-3

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: GDP MSC: Definitional

In 2007, GDP per person in the United States was almost

a.	$10,000.
b.	$14,000.
c.	$32,000.
d.	$46,000.

ANS: D DIF: 1 REF: 23-3

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: GDP per person MSC: Definitional

In the United States in 2007, consumption represented approximately

a.	5 percent of GDP.
b.	15 percent of GDP.
c.	19 percent of GDP.
d.	70 percent of GDP.

ANS: D DIF: 1 REF: 23-3

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: Consumption MSC: Definitional

In the United States in 2007, purchases of capital equipment, inventories, and structures represented approximately

a.	5 percent of GDP.
b.	15 percent of GDP.
c.	19 percent of GDP.
d.	70 percent of GDP.

ANS: B DIF: 1 REF: 23-3

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: Investment MSC: Definitional

In the United States in 2007, government purchases of goods and services were

a.	larger than consumption, but smaller than investment.
b.	larger than investment, but smaller than consumption.
c.	smaller than both consumption and investment.
d.	larger than both consumption and investment.

ANS: B DIF: 1 REF: 23-3

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: Government purchases MSC: Definitional

In 2007, U.S. net exports were

a.	positive and about 2 percent the size of GDP.
b.	positive and about 5 percent the size of GDP.
c.	negative and about 2 percent the size of GDP.
d.	negative and about 5 percent the size of GDP.

ANS: D DIF: 1 REF: 23-3

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: Net exports MSC: Definitional

Sec04 – Measuring a Nation’s Income – Real versus Nominal GDP

MULTIPLE CHOICE

If total spending rises from one year to the next, then

a.	the economy must be producing a larger output of goods and services.
b.	goods and services must be selling at higher prices.
c.	either the economy must be producing a larger output of goods and services, or goods and services must be selling at higher prices, or both.
d.	employment or productivity must be rising.

ANS: C DIF: 1 REF: 23-4

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: Nominal GDP MSC: Definitional

If total spending rises from one year to the next, then which of the following could not be true?

a.	the economy is producing a smaller output of goods and services, and goods and services are selling at higher prices
b.	the economy is producing a larger output of goods and services, and goods and services are selling at lower prices
c.	the economy is producing a larger output of goods and services, and goods and services are selling at higher prices
d.	the economy is producing a smaller output of goods and services, and goods and services are selling at lower prices

ANS: D DIF: 2 REF: 23-4

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: Nominal GDP MSC: Interpretive

When studying changes in the economy over time, economists want a measure of the total quantity of goods and services the economy is producing that is not affected by changes in the prices of those goods and services. In other words, economists want to study

a.	nominal GDP.
b.	real GDP.
c.	the GDP deflator.
d.	GNP.

ANS: B DIF: 1 REF: 23-4

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: Real GDP MSC: Definitional

Real GDP is the yearly production of final goods and services valued at

a.	current prices.
b.	constant prices.
c.	expected future prices.
d.	the ratio of current prices to constant prices.

ANS: B DIF: 1 REF: 23-4

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: Real GDP MSC: Definitional

Which of the following statements about GDP is correct?

a.	Nominal GDP values production at current prices, whereas real GDP values production at constant prices.
b.	Nominal GDP values production at constant prices, whereas real GDP values production at current prices.
c.	Nominal GDP values production at market prices, whereas real GDP values production at the cost of the resources used in the production process.
d.	Nominal GDP consistently underestimates the value of production, whereas real GDP consistently overestimates the value of production.

ANS: A DIF: 2 REF: 23-4

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: Nominal GDP | Real GDP MSC: Interpretive

Which of the following is correct?

a.	Nominal GDP measures base-year production using base-year prices, whereas real GDP measures current production using current prices.
b.	Nominal GDP measures current production using base-year prices, whereas real GDP measures current production using current prices.
c.	Nominal GDP measures current production using current prices, whereas real GDP measures base-year production using base-year prices.
d.	Nominal GDP measures current production using current prices, whereas real GDP measures current production using base-year prices.

ANS: D DIF: 2 REF: 23-4

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: Nominal GDP | Real GDP MSC: Interpretive

Which of the following is correct?

a.	Nominal GDP never equals real GDP.
b.	Nominal GDP always equals real GDP.
c.	Nominal GDP equals real GDP in the base year.
d.	Nominal GDP equals real GDP in all years but the base year.

ANS: C DIF: 2 REF: 23-4

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: Nominal GDP | Real GDP MSC: Interpretive

Changes in nominal GDP reflect

a.	only changes in prices.
b.	only changes in the amounts being produced.
c.	both changes in prices and changes in the amounts being produced.
d.	neither changes in prices nor changes in the amounts being produced.

ANS: C DIF: 2 REF: 23-4

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: Nominal GDP MSC: Interpretive

Changes in real GDP reflect

a.	only changes in prices.
b.	only changes in the amounts being produced.
c.	both changes in prices and changes in the amounts being produced.
d.	neither changes in prices nor changes in the amounts being produced.

ANS: B DIF: 2 REF: 23-4

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: Real GDP MSC: Interpretive

Which of the following statements about nominal GDP and real GDP is correct?

a.	Nominal GDP is a better gauge of economic well-being than is real GDP.
b.	Real GDP is a better gauge of economic well-being than is nominal GDP.
c.	Real GDP and nominal GDP are equally good measures of economic well-being.
d.	Nominal GDP reflects the economy’s ability to satisfy people’s needs and desires, but Real GDP does not.

ANS: B DIF: 2 REF: 23-4

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: Nominal GDP | Real GDP MSC: Interpretive

When economists talk about growth in the economy, they measure that growth as the

a.	absolute change in nominal GDP from one period to another.
b.	percentage change in nominal GDP from one period to another.
c.	absolute change in real GDP from one period to another.
d.	percentage change in real GDP from one period to another.

ANS: D DIF: 1 REF: 23-4

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: Economic growth MSC: Definitional

The GDP deflator is the ratio of

a.	real GDP to nominal GDP multiplied by 100.
b.	real GDP to the inflation rate multiplied by 100.
c.	nominal GDP to real GDP multiplied by 100.
d.	nominal GDP to the inflation rate multiplied by 100.

ANS: C DIF: 1 REF: 23-4

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: GDP deflator MSC: Definitional

Changes in the GDP deflator reflect

a.	only changes in prices.
b.	only changes in the amounts being produced.
c.	both changes in prices and changes in the amounts being produced.
d.	neither changes in prices nor changes in the amounts being produced.

ANS: A DIF: 2 REF: 23-4

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: GDP deflator MSC: Interpretive

The GDP deflator for years subsequent to the base year measures the change in

a.	nominal GDP from the base year that cannot be attributable to a change in real GDP.
b.	real GDP from the base year that cannot be attributable to a change in nominal GDP.
c.	nominal GDP from the base year that cannot be attributable to a change in prices.
d.	real GDP from the base year that cannot be attributable to a change in prices.

ANS: A DIF: 1 REF: 23-4

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: GDP deflator MSC: Definitional

In the base year, the GDP deflator is always

a.	-1.
b.	0.
c.	1.
d.	100.

ANS: D DIF: 1 REF: 23-4

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: GDP deflator MSC: Definitional

The term economists use to describe a situation in which the economy’s overall price level is rising is

a.	growth.
b.	inflation.
c.	recession.
d.	expansion.

ANS: B DIF: 1 REF: 23-4

NAT: Analytic LOC: Unemployment and inflation TOP: Inflation

MSC: Definitional

The inflation rate is the

a.	absolute change in real GDP from one period to another.
b.	percentage change in real GDP from one period to another.
c.	absolute change in the price level from one period to another.
d.	percentage change in the price level from one period to another.

ANS: D DIF: 1 REF: 23-4

NAT: Analytic LOC: Unemployment and inflation TOP: Inflation

MSC: Definitional

The inflation rate in year 2 equals

a.	.
b.	.
c.	.
d.	.

ANS: A DIF: 1 REF: 23-4

NAT: Analytic LOC: Unemployment and inflation TOP: Inflation

MSC: Definitional

If real GDP doubles and the GDP deflator doubles, then nominal GDP

a.	remains constant.
b.	doubles.
c.	triples.
d.	quadruples.

ANS: D DIF: 2 REF: 23-4

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: Nominal GDP MSC: Applicative

If nominal GDP doubles and the GDP deflator doubles, then real GDP

a.	remains constant.
b.	doubles.
c.	triples.
d.	quadruples.

ANS: A DIF: 2 REF: 23-4

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: Real GDP MSC: Applicative

In the economy of Wrexington in 2008, real GDP was $5 trillion and the GDP deflator was 200. What was Wrexington’s nominal GDP in 2008?

a.	$2.5 trillion
b.	$10 trillion
c.	$40 trillion
d.	$100 trillion

ANS: B DIF: 2 REF: 23-4

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: Nominal GDP MSC: Applicative

In the economy of Wrexington in 2008, real GDP was $25 billion and the GDP deflator was 68. What was Wrexington’s nominal GDP in 2008?

a.	$2.72 billion
b.	$17 billion
c.	$36.8 billion
d.	$43 billion

ANS: B DIF: 2 REF: 23-4

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: Nominal GDP MSC: Applicative

In the economy of Wrexington in 2008, nominal GDP was $18 billion and the GDP deflator was 120. What was Wrexington’s real GDP in 2008?

a.	$6.7 billion
b.	$15 billion
c.	$21.6 billion
d.	$38 billion

ANS: B DIF: 2 REF: 23-4

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: Real GDP MSC: Applicative

In the economy of Wrexington in 2008, nominal GDP was $20 billion and the GDP deflator was 50. What was Wrexington’s real GDP in 2008?

a.	$2.5 billion
b.	$10 billion
c.	$40 billion
d.	$100 billion

ANS: C DIF: 2 REF: 23-4

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: Real GDP MSC: Applicative

In the economy of Wrexington in 2008, nominal GDP was $10 trillion and real GDP was $4 trillion. What was Wrexington’s GDP deflator in 2008?

a.	25
b.	40
c.	250
d.	400

ANS: C DIF: 2 REF: 23-4

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: GDP deflator MSC: Applicative

In the economy of Wrexington in 2008, nominal GDP was $28 trillion and real GDP was $32 trillion. What was Wrexington’s GDP deflator in 2008?

a.	87.5
b.	114.3
c.	400
d.	896

ANS: A DIF: 2 REF: 23-4

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: GDP deflator MSC: Applicative

If nominal GDP is $10 trillion and real GDP is $8 trillion, then the GDP deflator is

a.	80, and this indicates that the price level has decreased by 20 percent since the base year.
b.	80, and this indicates that the price level has increased by 80 percent since the base year.
c.	125, and this indicates that the price level has increased by 25 percent since the base year.
d.	125, and this indicates that the price level has increased by 125 percent since the base year.

ANS: C DIF: 2 REF: 23-4

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: GDP deflator | Inflation rate MSC: Applicative

If nominal GDP is $8 trillion and real GDP is $10 trillion, then the GDP deflator is

a.	80, and this indicates that the price level has decreased by 20 percent since the base year.
b.	80, and this indicates that the price level has increased by 80 percent since the base year.
c.	125, and this indicates that the price level has increased by 25 percent since the base year.
d.	125, and this indicates that the price level has increased by 125 percent since the base year.

ANS: A DIF: 2 REF: 23-4

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: GDP deflator | Inflation rate MSC: Applicative

Suppose an economy’s production consists only of corn and soybeans. In 2005, 20 bushels of corn are sold at $4 per bushel and 10 bushels of soybeans are sold at $2 per bushel. In 2004, the price of corn was $2 per bushel and the price of soybeans was $1 per bushel. Using 2004 as the base year, it follows that, for 2005,

a.	nominal GDP is $50, real GDP is $100, and the GDP deflator is 50.
b.	nominal GDP is $50, real GDP is $100, and the GDP deflator is 200.
c.	nominal GDP is $100, real GDP is $50, and the GDP deflator is 50.
d.	nominal GDP is $100, real GDP is $50, and the GDP deflator is 200.

ANS: D DIF: 2 REF: 23-4

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: Nominal GDP | Real GDP | GDP deflator MSC: Applicative

Suppose an economy produces only eggs and ham. In 2005, 100 dozen eggs are sold at $3 per dozen and 50 pounds of ham are sold at $4 per pound. In 2004, the base year, eggs sold at $1.50 per dozen and ham sold at $5 per pound. For 2005,

a.	nominal GDP is $400, real GDP is $500, and the GDP deflator is 80.
b.	nominal GDP is $400, real GDP is $500, and the GDP deflator is 125.
c.	nominal GDP is $500, real GDP is $400, and the GDP deflator is 80.
d.	nominal GDP is $500, real GDP is $400, and the GDP deflator is 125.

ANS: D DIF: 2 REF: 23-4

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: Nominal GDP | Real GDP | GDP deflator MSC: Applicative

Suppose an economy produces only cranberries and maple syrup. In 2006, 50 units of cranberries are sold at $20 per unit and 100 units of maple syrup are sold at $8 per unit. In 2005, the base year, the price of cranberries was $10 per unit and the price of maple syrup was $15 per unit. For 2006,

a.	nominal GDP is $1800, real GDP is $2000, and the GDP deflator is 90.
b.	nominal GDP is $1800, real GDP is $2000, and the GDP deflator is 111.1.
c.	nominal GDP is $2000, real GDP is $1800, and the GDP deflator is 90.
d.	nominal GDP is $2000, real GDP is $1800, and the GDP deflator is 111.1.

ANS: A DIF: 2 REF: 23-4

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: Nominal GDP | Real GDP | GDP deflator MSC: Applicative

Suppose an economy produces only cheese and fish. In 2008, 20 units of cheese are sold at $5 each and 8 units of fish are sold at $50 each. In 2007, the base year, the price of cheese was $10 per unit and the price of fish was $75 per unit. For 2008,

a.	nominal GDP is $500, real GDP is $800, and the GDP deflator is 62.5.
b.	nominal GDP is $500, real GDP is $800, and the GDP deflator is 160.
c.	nominal GDP is $800, real GDP is $500, and the GDP deflator is 62.5.
d.	nominal GDP is $800, real GDP is $500, and the GDP deflator is 160.

ANS: A DIF: 2 REF: 23-4

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: Nominal GDP | Real GDP | GDP deflator MSC: Applicative

A country reported nominal GDP of $100 billion in 2008 and $75 billion in 2007. It also reported a GDP deflator of 125 in 2008 and 120 in 2007. Between 2007 and 2008,

a.	real output and the price level both rose.
b.	real output rose and the price level fell.
c.	real output fell and the price level rose.
d.	real output and the price level both fell.

ANS: A DIF: 2 REF: 23-4

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: Real GDP | Price level MSC: Applicative

A country reported nominal GDP of $200 billion in 2008 and $180 billion in 2007. It also reported a GDP deflator of 125 in 2008 and 105 in 2007. Between 2007 and 2008,

a.	real output and the price level both rose.
b.	real output rose and the price level fell.
c.	real output fell and the price level rose.
d.	real output and the price level both fell.

ANS: C DIF: 2 REF: 23-4

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: Real GDP | Price level MSC: Applicative

A country reported a nominal GDP of $115 billion in 2008 and $125 billion in 2007. It also reported a GDP deflator of 85 in 2008 and 100 in 2007. Between 2007 and 2008,

a.	real output and the price level both rose.
b.	real output rose and the price level fell.
c.	real output fell and the price level rose.
d.	real output and the price level both fell.

ANS: B DIF: 2 REF: 23-4

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: Real GDP | Price level MSC: Applicative

A country reported a nominal GDP of $85 billion in 2008 and $100 billion in 2007. It also reported a GDP deflator of 100 in 2008 and 105 in 2007. Between 2007 and 2008,

a.	real output and the price level both rose.
b.	real output rose and the price level fell.
c.	real output fell and the price level rose.
d.	real output and the price level both fell.

ANS: D DIF: 2 REF: 23-4

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: Real GDP | Price level MSC: Applicative

Table 23-4

The table below contains data for the country of Dachsland, which produces only pretzels and books. The base year is 2005.

Year	Price of Pretzels	Quantity of Pretzels	Price of Books	Quantity of Books
2005	$4.00	90	$1.50	150
2006	$4.00	100	$2.00	180
2007	$5.00	120	$2.50	200
2008	$6.00	150	$3.50	200

Refer to Table 23-4. In 2005, Dachsland’s

a.	nominal GDP was greater than real GDP, and the GDP deflator was greater than 100.
b.	nominal GDP was equal to real GDP, and the GDP deflator was equal to 1.
c.	nominal GDP was less than real GDP, and the GDP deflator was less than 100.
d.	nominal GDP was equal to real GDP, and the GDP deflator was equal to 100.

ANS: D DIF: 2 REF: 23-4

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: Nominal GDP | Real GDP | GDP deflator MSC: Applicative

Refer to Table 23-4. In 2006, Dachsland’s

a.	nominal GDP was $585, real GDP was $660, and the GDP deflator was 88.6.
b.	nominal GDP was $585, real GDP was $670, and the GDP deflator was 87.3.
c.	nominal GDP was $760, real GDP was $660, and the GDP deflator was 115.2.
d.	nominal GDP was $760, real GDP was $670, and the GDP deflator was 113.4.

ANS: D DIF: 2 REF: 23-4

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: Nominal GDP | Real GDP | GDP deflator MSC: Applicative

Refer to Table 23-4. In 2007, Dachsland’s

a.	nominal GDP was $585, real GDP was $780, and the GDP deflator was 75.
b.	nominal GDP was $585, real GDP was $825, and the GDP deflator was 70.9.
c.	nominal GDP was $1100, real GDP was $780, and the GDP deflator was 141.0.
d.	nominal GDP was $1100, real GDP was $825, and the GDP deflator was 133.3.

ANS: C DIF: 2 REF: 23-4

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: Nominal GDP | Real GDP | GDP deflator MSC: Applicative

Refer to Table 23-4. In 2008, Dachsland’s

a.	nominal GDP was $585, real GDP was $900, and the GDP deflator was 65.
b.	nominal GDP was $585, real GDP was $1065, and the GDP deflator was 54.9.
c.	nominal GDP was $1600, real GDP was $900, and the GDP deflator was 177.8.
d.	nominal GDP was $1600, real GDP was $1065, and the GDP deflator was 150.2.

ANS: C DIF: 2 REF: 23-4

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: Nominal GDP | Real GDP | GDP deflator MSC: Applicative

Refer to Table 23-4. Dachsland’s real GDP was

a.	$585 in 2006, $585 in 2007, and $585 in 2008.
b.	$660 in 2006, $825 in 2007, and $1065 in 2008.
c.	$670 in 2006, $780 in 2007, and $900 in 2008.
d.	$760 in 2006, $1100 in 2007, and $1600 in 2008.

ANS: C DIF: 2 REF: 23-4

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: Real GDP MSC: Applicative

Refer to Table 23-4. Dachsland’s output grew

a.	29.9% from 2005 to 2006.
b.	33.3% from 2006 to 2007.
c.	24.3% from 2006 to 2007.
d.	15.4% from 2007 to 2008.

ANS: D DIF: 3 REF: 23-4

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: Real GDP MSC: Analytical

Refer to Table 23-4. Dachsland’s inflation rate from 2006 to 2007 was

a.	16.4%.
b.	24.3%.
c.	41.0%.
d.	44.7%.

ANS: B DIF: 2 REF: 23-4

NAT: Analytic LOC: Unemployment and inflation TOP: Inflation rate

MSC: Applicative

Refer to Table 23-4. Dachsland’s inflation rate from 2007 to 2008 was

a.	15.4%.
b.	26.1%.
c.	45.5%.
d.	77.8%.

ANS: B DIF: 2 REF: 23-4

NAT: Analytic LOC: Unemployment and inflation TOP: Inflation rate

MSC: Applicative

Table 23-5

The table below contains data for the country of Batterland, which produces only waffles and pancakes. The base year is 2006.

Year	Price of Waffles	Quantity of Waffles	Price of Pancakes	Quantity of Pancakes
2005	$2	100	$1	100
2006	$2	120	$2	150
2007	$3	150	$3	200
2008	$4	180	$3	220

Refer to Table 23-5. In 2005, Batterland’s nominal GDP was

a.	$300.
b.	$390.
c.	$400.
d.	$540.

ANS: A DIF: 2 REF: 23-4

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: Nominal GDP MSC: Applicative

Refer to Table 23-5. In 2006, Batterland’s nominal GDP was

a.	$100.
b.	$390.
c.	$400.
d.	$540.

ANS: D DIF: 2 REF: 23-4

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: Nominal GDP MSC: Applicative

Refer to Table 23-5. In 2005, Batterland’s real GDP was

a.	$300.
b.	$390.
c.	$400.
d.	$540.

ANS: C DIF: 2 REF: 23-4

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: Real GDP MSC: Applicative

Refer to Table 23-5. In 2006, Batterland’s real GDP was

a.	$100.
b.	$390.
c.	$400.
d.	$540.

ANS: D DIF: 2 REF: 23-4

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: Real GDP MSC: Applicative

Refer to Table 23-5. In 2007, Batterland’s real GDP was

a.	$540.
b.	$700.
c.	$810.
d.	$1050.

ANS: B DIF: 2 REF: 23-4

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: Real GDP MSC: Applicative

Refer to Table 23-5. In 2008, Batterland’s real GDP was

a.	$540.
b.	$800.
c.	$930.
d.	$1380.

ANS: B DIF: 2 REF: 23-4

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: Real GDP MSC: Applicative

Refer to Table 23-5. In 2005, Batterland’s GDP deflator was

a.	75.
b.	100.
c.	133.3.
d.	This cannot be calculated from the information given.

ANS: A DIF: 2 REF: 23-4

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: GDP deflator MSC: Applicative

Refer to Table 23-5. In 2006, Batterland’s GDP deflator was

a.	1.
b.	100.
c.	138.5.
d.	540.

ANS: B DIF: 2 REF: 23-4

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: GDP deflator MSC: Applicative

Refer to Table 23-5. In 2007, Batterland’s GDP deflator was

a.	66.7.
b.	100.
c.	129.6.
d.	150.

ANS: D DIF: 2 REF: 23-4

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: GDP deflator MSC: Applicative

Refer to Table 23-5. In 2008, Batterland’s GDP deflator was

a.	58.0.
b.	100.
c.	148.1.
d.	172.5.

ANS: D DIF: 2 REF: 23-4

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: GDP deflator MSC: Applicative

Refer to Table 23-5. From 2007 to 2008, Batterland’s output grew

a.	14.3%.
b.	31.4%.
c.	48.1%.
d.	155.6%.

ANS: A DIF: 3 REF: 23-4

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: Real GDP MSC: Analytical

Refer to Table 23-5. Batterland’s inflation rate from 2005 to 2006 was

a.	-25%.
b.	25%.
c.	33.3%.
d.	100%.

ANS: C DIF: 2 REF: 23-4

NAT: Analytic LOC: Unemployment and inflation TOP: Inflation rate

MSC: Applicative

Refer to Table 23-5. Batterland’s inflation rate from 2007 to 2008 was

a.	15%.
b.	22.5%.
c.	33.3%.
d.	72.5%.

ANS: A DIF: 2 REF: 23-4

NAT: Analytic LOC: Unemployment and inflation TOP: Inflation rate

MSC: Applicative

Table 23-6

The table below contains data for the country of Togogo. The base year is 1974.

Year	Nominal GDP	GDP Deflator
1974	$2000	100
1975	$3000	120
1976	$3750	150
1977	$6000	200

Refer to Table 23-6. Which of the following is not correct?

a.	This economy experienced growth from 1974 to 1975.
b.	This economy experienced growth from 1975 to 1976.
c.	This economy experienced growth from 1976 to 1977.
d.	This economy experienced inflation from 1974 to 1975, from 1975 to 1976, and from 1976 to 1977.

ANS: B DIF: 3 REF: 23-4

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: Real GDP | Inflation MSC: Analytical

Refer to Table 23-6. From 1975 to 1976,

a.	inflation was 25% and output did not grow.
b.	inflation was 25% and output grew.
c.	inflation was 50% and output did not grow.
d.	inflation was 50% and output grew.

ANS: A DIF: 3 REF: 23-4

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: Real GDP | Inflation rate MSC: Analytical

Refer to Table 23-6. From 1976 to 1977,

a.	inflation was 33.3% and output grew at a rate of 20%.
b.	inflation was 33.3% and output grew at a rate of 60%.
c.	inflation was 50% and output grew at a rate of 20%.
d.	inflation was 50% and output grew at a rate of 60%.

ANS: A DIF: 3 REF: 23-4

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: Real GDP | Inflation rate MSC: Analytical

Which of the following is not a correct statement about the growth of real GDP in the U.S. economy?

a.	Real GDP in 2004 was almost four times its 1965 level.
b.	Growth was steady between 1965 and 2004.
c.	Continued growth in real GDP enables the typical American to enjoy greater economic prosperity than his or her parents and grandparents did.
d.	The output of goods and services produced grew on average about 3.2 percent per year between 1965 and 2004.

ANS: B DIF: 1 REF: 23-4

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: Real GDP MSC: Definitional

A recession has traditionally been defined as a period during which

a.	nominal GDP declines for two consecutive quarters.
b.	nominal GDP declines for four consecutive quarters.
c.	real GDP declines for two consecutive quarters.
d.	real GDP declines for four consecutive quarters.

ANS: C DIF: 2 REF: 23-4

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: Recession MSC: Interpretive

Recessions are not associated with which of the following?

a.	increased bankruptcies
b.	falling profits
c.	falling incomes
d.	falling unemployment

ANS: D DIF: 1 REF: 23-4

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: Recession MSC: Definitional

A recession is always associated with

a.	the end of a war.
b.	slowly growing real GDP.
c.	rising inflation.
d.	declining real GDP.

ANS: D DIF: 2 REF: 23-4

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: Recession MSC: Interpretive

Sec05 – Measuring a Nation’s Income – Is GDP a Good Measure of Economic Well-Being?

MULTIPLE CHOICE

GDP per person tells us the income and expenditure of the

a.	richest person in the economy.
b.	poorest person in the economy.
c.	average person in the economy.
d.	entire economy.

ANS: C DIF: 1 REF: 23-5

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: GDP per person MSC: Definitional

GDP is used as the basic measure of a society’s economic well-being. A better measure of the economic well-being of individuals in society is

a.	saving per person.
b.	GDP per person.
c.	government expenditures per person.
d.	investment per business firm.

ANS: B DIF: 2 REF: 23-5

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: GDP per person MSC: Interpretive

Many things that society values, such as good health, high-quality education, enjoyable recreation opportunities, and desirable moral attributes of the population, are not measured as part of GDP. It follows that

a.	GDP is not a useful measure of society’s welfare.
b.	GDP is still a useful measure of society’s welfare because providing these other attributes is the responsibility of government.
c.	GDP is still a useful measure of society’s welfare because it measures a nation’s ability to purchase the inputs that can be used to help produce the things that contribute to welfare.
d.	GDP is still the best measure of society’s welfare because these other values cannot actually be measured.

ANS: C DIF: 2 REF: 23-5

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: Economic welfare MSC: Interpretive

GDP does not reflect

a.	the value of leisure.
b.	the value of goods and services produced at home.
c.	the quality of the environment.
d.	All of the above are correct.

ANS: D DIF: 2 REF: 23-5

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: GDP MSC: Interpretive

GDP is not a perfect measure of well-being; for example,

a.	GDP incorporates a large number of non-market goods and services that are of little value to society.
b.	GDP places too much emphasis on the value of leisure.
c.	GDP fails to account for the quality of the environment.
d.	All of the above are correct.

ANS: C DIF: 2 REF: 23-5

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: Economic welfare MSC: Interpretive

GDP is not a perfect measure of well-being; for example,

a.	GDP excludes the value of volunteer work.
b.	GDP does not address the distribution of income.
c.	GDP does not address environmental quality.
d.	All of the above are correct.

ANS: D DIF: 2 REF: 23-5

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: Economic welfare MSC: Interpretive

Suppose the government passes a law eliminating holidays and, as a result, the production of goods and services increases because people work more days per year (and thus enjoy less leisure per year). Based on this scenario, which of the following statements is correct?

a.	GDP would definitely increase, despite the fact that GDP includes leisure.
b.	GDP would definitely increase because GDP excludes leisure.
c.	GDP could either increase or decrease because GDP includes leisure.
d.	GDP could either increase or decrease because GDP excludes leisure.

ANS: B DIF: 2 REF: 23-5

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: GDP MSC: Applicative

Suppose the government eliminates all environmental regulations and, as a result, the production of goods and services increases, but there is considerably more pollution. Based on this scenario, which of the following statements is correct?

a.	GDP would definitely increase, despite the fact that GDP includes environmental quality.
b.	GDP would definitely decrease because GDP includes environmental quality.
c.	GDP would definitely increase because GDP excludes environmental quality.
d.	GDP could either increase or decrease because GDP excludes environmental quality.

ANS: C DIF: 2 REF: 23-5

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: GDP MSC: Applicative

Suppose that twenty-five years ago a country had nominal GDP of $1,000, a GDP deflator of 200, and a population of 100. Today it has nominal GDP of $3,000, a GDP deflator of 400, and population of 150. What happened to the real GDP per person?

a.	It more than doubled.
b.	It increased, but it less than doubled.
c.	It was unchanged.
d.	It decreased.

ANS: C DIF: 2 REF: 23-5

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: Real GDP per person MSC: Applicative

During a presidential campaign, the incumbent argues that he should be reelected because nominal GDP grew by 12 percent during his 4-year term in office. You know that population grew by 4 percent over the period and that the GDP deflator increased by 6 percent during the past 4 years. You should conclude that real GDP per person

a.	grew by more than 12 percent.
b.	grew, but by less than 12 percent.
c.	was unchanged.
d.	decreased.

ANS: B DIF: 3 REF: 23-5

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: GDP per person MSC: Analytical

Suppose that over the last twenty-five years a country’s nominal GDP grew to three times its former size. In the meantime, population grew by 40 percent and prices rose by 100 percent. What happened to real GDP per person?

a.	It more than doubled.
b.	It increased, but it less than doubled.
c.	It was unchanged.
d.	It decreased.

ANS: B DIF: 3 REF: 23-5

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: Real GDP per person MSC: Analytical

The information below was reported by the World Bank. On the basis of this information, which list below contains the correct ordering of GDP per person from highest to lowest?

Country	Nominal GDP in 2000	Population in 2000
Japan	$4,800,000 million	127 million
Switzerland	$240,000 million	7.2 million
United States	$9,800,000 million	280 million

a.	Japan, Switzerland, United States
b.	Japan, United States, Switzerland
c.	Switzerland, United States, Japan
d.	United States, Japan, Switzerland

ANS: B DIF: 2 REF: 23-5

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: GDP per person MSC: Applicative

The information below was reported by the World Bank. On the basis of this information, which list below contains the correct ordering of GDP per person from highest to lowest?

Country	Nominal GDP in 2000	Population in 2000
Kenya	$10,400 million	30.1 million
Tanzania	$9,000 million	33.7 million
Zimbabwe	$7,200 million	12.6 million

a.	Kenya, Tanzania, Zimbabwe
b.	Tanzania, Kenya, Zimbabwe
c.	Zimbabwe, Kenya, Tanzania
d.	Zimbabwe, Tanzania, Kenya

ANS: C DIF: 2 REF: 23-5

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: GDP per person MSC: Applicative

International data on GDP and socioeconomic variables

a.	are inconclusive about the relationship between GDP and the economic well-being of citizens.
b.	suggest that poor nations actually might enjoy a higher standard of living than do rich nations.
c.	leave no doubt that a nation’s GDP is closely associated with its citizens’ standard of living.
d.	indicate that there are few real differences in living standards around the world, in spite of the large differences in GDP between nations.

ANS: C DIF: 2 REF: 23-5

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: Economic welfare MSC: Interpretive

International studies of the relationship between GDP per person and quality of life measures such as life expectancy and literacy rates show that larger GDP per person is associated with

a.	longer life expectancy and a lower percentage of the population that is literate.
b.	longer life expectancy and a higher percentage of the population that is literate.
c.	very nearly the same life expectancy and a lower percentage of the population that is literate.
d.	very nearly the same life expectancy and a higher percentage of the population that is literate.

ANS: B DIF: 2 REF: 23-5

NAT: Analytic LOC: The study of economics and definitions of economics

TOP: Economic welfare MSC: Interpretive

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Brief Principles of Macroeconomics International Edition 5th Edition by N. Gregory Mankiw - Test Bank

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