Principles of Economics International Edition 8th Edition By Michael Melvin - Test Bank

Principles of Economics International Edition 8th Edition By Michael Melvin – Test Bank

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© 2011 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different
from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
Chapter 5—National Income Accounting
MULTIPLE CHOICE
1. To understand economic problems, policymakers need
a. population statistics.
b. financial statistics.
c. educational statistics.
d. business statistics.
e. real GDP statistics.
ANS: E PTS: 1 DIF: Easy REF: Ch 5, 1
OBJ: Ch 5, 1 TOP: National income TYP: Factual
2. National income accounting is
a. used by business firms to determine the level of profit during a given year.
b. used by accountants to figure household tax obligations.
c. a system of accounts designed to measure macroeconomic activity.
d. a system of measures that indicates when an economy is experiencing inflation.
e. a system of microeconomic measures that indicates equilibrium conditions for individual
markets.
ANS: C PTS: 1 DIF: Easy REF: Ch 5, 1
OBJ: Ch 5, 1 TOP: National income TYP: Factual
3. National income accounting can best be characterized as
a. a set of rules to summarize economic activity over a given period of time.
b. a system for comparing different political systems.
c. a microeconomic model used by the Federal Reserve.
d. a statistical measure of the income received by consumers as opposed to businesses.
e. a standardized economic report written by politicians.
ANS: A PTS: 1 DIF: Easy REF: Ch 5, 1
OBJ: Ch 5, 1 TOP: National income TYP: Interpretive
4. Gross domestic product constitutes
a. the total quantitative output in an economy.
b. the current market value of all goods and services produced in a given year.
c. the total spending in an economy.
d. the total monetary transactions in an economy.
e. the current market value of all final goods and services produced in a given year within a
country’s borders.
ANS: E PTS: 1 DIF: Easy REF: Ch 5, 1.a
OBJ: Ch 5, 1 TOP: GDP TYP: Factual
Chapter 5 2
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5. GDP does not include
a. vegetables grown and consumed by a nonfarm family.
b. the purchase of a new Porsche.
c. the sale of meat at the local grocery store.
d. the government purchase of an F-14 fighter plane.
e. payment to an accountant for preparation tax forms.
ANS: A PTS: 1 DIF: Medium REF: Ch 5, 1.a
OBJ: Ch 5, 1 TOP: GDP TYP: Interpretive
6. Intermediate goods and services
a. are not included in calculating GDP using the value-added method.
b. are goods and services produced in the last year but sold in this year.
c. are goods and services used as an input for the production of final goods and services.
d. are goods and services purchased for ultimate consumption.
e. are goods and services produced this year but not yet sold.
ANS: C PTS: 1 DIF: Easy REF: Ch 5, 1.a
OBJ: Ch 5, 1 TOP: GDP TYP: Interpretive
7. Value added can be determined by
a. summing the market values of all intermediate goods.
b. calculating the percentage change in GDP from one year to the next.
c. adding the income of all consumers during the year.
d. subtracting the cost of all inputs from the price of the product at each stage of production.
e. dividing GDP by the GDP price deflator.
ANS: D PTS: 1 DIF: Difficult REF: Ch 5, 1.a
OBJ: Ch 5, 1 TOP: Value added TYP: Interpretive
Figure 5-1
The Production of a Corvette
Production Stage Sales Value
Steal Co. sells the raw material $1,500
Motor Inc. sells the engine to GMC $2,350
Dealer buys car form GMC $19,700
Dealer sells car (retail) $36,000
8. According to Figure 5-1, the value added by the dealer is
a. $2,350.
b. $16,300.
c. $19,700.
d. $36,000.
e. $59,550.
ANS: B PTS: 1 DIF: Medium REF: Ch 5, 1.a
OBJ: Ch 5, 1 TOP: Value added TYP: Applied
Chapter 5 3
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9. According to Figure 5-1, the contribution to GDP from the production of this car is
a. $2,350.
b. $16,300.
c. $19,700.
d. $36,000.
e. $59,550.
ANS: D PTS: 1 DIF: Medium REF: Ch 5, 1.a
OBJ: Ch 5, 1 TOP: Value added TYP: Applied
10. Which of the following must add to GDP?
a. the sale of a used car to an auto dealership
b. bartering lawn care services for car washes
c. a father staying home to care for his child
d. the sale of an illegal cable box
e. payment for an SAT preparation class
ANS: E PTS: 1 DIF: Medium REF: Ch 5, 1.a
OBJ: Ch 5, 1 TOP: GDP TYP: Interpretive
11. A soft-drink bottling company supplies six-packs of orange soda to retailers for a price of $2 each. If
the components in each six-pack cost the bottling company $1.50, the value added to each six-pack by
the bottling company is
a. $2.00.
b. $1.50.
c. $1.25.
d. $1.00.
e. $0.50.
ANS: E PTS: 1 DIF: Medium REF: Ch 5, 1.a
OBJ: Ch 5, 1 TOP: Value added TYP: Applied
12. When calculating GDP, inventory levels are important to economists because
a. they measure the level of underemployment.
b. they provide information about workers’ attitudes.
c. we need to know them to fully understand foreign competition.
d. GDP cannot be calculated unless we know that inventories were double-counted.
e. we need to know them to calculate the total value of goods produced but not sold in a year.
ANS: E PTS: 1 DIF: Medium REF: Ch 5, 1.a
OBJ: Ch 5, 1 TOP: GDP TYP: Interpretive
13. What is the importance of not including intermediate goods when calculating GDP?
a. Avoiding single product counting
b. Restricting GDP to important goods
c. Keeping the consumer price index constant
d. Avoiding double counting
e. Restricting GDP to goods that can be priced
ANS: D PTS: 1 DIF: Easy REF: Ch 5, 1.a
OBJ: Ch 5, 2 TOP: GDP TYP: Interpretive
Chapter 5 4
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14. Gross domestic product
a. is the equivalent of gross national product.
b. is different from gross national product because GDP includes domestically owned
resources in foreign countries.
c. is different from gross national product in that GDP measures only output produced
domestically.
d. counts all income received by foreign citizens.
e. is gross national product plus domestic income from abroad.
ANS: C PTS: 1 DIF: Medium REF: Ch 5, 1.a
OBJ: Ch 5, 2 TOP: GDP TYP: Interpretive
15. GDP can be calculated as
a. output only.
b. expenditures only.
c. income only.
d. output and income only.
e. output, expenditures, and income.
ANS: E PTS: 1 DIF: Easy REF: Ch 5, 1.a
OBJ: Ch 5, 1 TOP: GDP TYP: Factual
16. Inventory can be defined as
a. the stock of capital outstanding.
b. the stock of unsold goods held by a firm.
c. the reservoir of inputs needed for production.
d. the system of accounts that uses double counting.
e. the characteristic that all successful inventions have.
ANS: B PTS: 1 DIF: Easy REF: Ch 5, 1.a
OBJ: Ch 5, 2 TOP: Inventory TYP: Factual
17. Looking at the 2008 U.S. GDP statistics, the fact that net exports were negative means that
a. imports were greater than exports up to 2008.
b. exports were greater than imports up to 2008.
c. imports were greater than exports in 2008.
d. exports were greater than imports in 2008.
e. exports were greater than imports since 2000.
ANS: C PTS: 1 DIF: Easy REF: Ch 5, 1.a
OBJ: Ch 5, 2 TOP: GDP TYP: Interpretive
18. Gross domestic product is the sum total of
a. consumption spending, investment spending, government purchases, and net exports.
b. the value of output produced at all stages of production, including intermediate goods.
c. consumption spending, saving, investment, and net exports.
d. consumption spending, saving, investment, government spending, taxes, and net exports.
e. the value of all monetary transactions in the economy.
ANS: A PTS: 1 DIF: Easy REF: Ch 5, 1.a
OBJ: Ch 5, 3 TOP: Expenditures approach TYP: Factual
Chapter 5 5
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19. Which of the following is true?
a. GDP = I + G + S + X
b. GDP  X = C + I + S
c. GDP = C + I + G  X
d. GDP = I + C + G + X
e. X + I = GDP  C + G
ANS: D PTS: 1 DIF: Easy REF: Ch 5, 1.a
OBJ: Ch 5, 3 TOP: Expenditures approach TYP: Factual
20. Consider GDP calculated as expenditures. GDP would increase if
a. imports decreased.
b. consumption decreased.
c. exports decreased.
d. investment decreased.
e. government spending decreased.
ANS: A PTS: 1 DIF: Medium REF: Ch 5, 1.a
OBJ: Ch 5, 3 TOP: Expenditures approach TYP: Interpretive
21. For a hypothetical economy in a given year, GDP equaled $1,190, consumption equaled $782,
government spending equaled $187, goods exported equaled $98, and goods imported equaled $157.
What was investment equal to?
a. $148
b. $34
c. $280
d. $910
e. Cannot be determined from the information given.
ANS: C PTS: 1 DIF: Difficult REF: Ch 5, 1.a
OBJ: Ch 5, 3 TOP: Expenditures approach TYP: Applied
Figure 5-2
GDP Expenditures
Consumption Spending $1,640
Gross Investment $550
Government Purchases $320
Total Exports $280
GDP $2,630
22. Net exports for the economy described in Figure 5-2 are
a. $280.
b. $160.
c. +$120.
d. +$160.
e. Cannot be determined with the information given.
ANS: C PTS: 1 DIF: Difficult REF: Ch 5, 1.a
OBJ: Ch 5, 3 TOP: Expenditures approach TYP: Applied
Chapter 5 6
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23. Total imports for the economy described in Figure 5-2 are
a. $0.
b. $60.
c. $120.
d. $160.
e. Cannot be determined with the information given.
ANS: D PTS: 1 DIF: Difficult REF: Ch 5, 1.a
OBJ: Ch 5, 3 TOP: Expenditures approach TYP: Applied
24. What is an indirect business tax?
a. A tax that is collected by businesses for a government agency
b. A foreign tax that hits the country indirectly
c. A foreign tax collected by the local government
d. A local tax intended to tax different goods from the ones that end up being taxed
e. A tax that affects only businesses that deal with indirect goods
ANS: A PTS: 1 DIF: Easy REF: Ch 5, 1.a
OBJ: Ch 5, 4 TOP: Income approach TYP: Factual
25. Sales, excise, and income taxes are common taxes. Which of these taxes is (are) considered indirect
business taxes?
a. Only excise and income taxes
b. Only income taxes
c. Only income and sales taxes
d. Only excise and sales taxes
e. Excise, sales, and income taxes are all forms of indirect business taxes.
ANS: D PTS: 1 DIF: Medium REF: Ch 5, 1.a
OBJ: Ch 5, 4 TOP: Income approach TYP: Factual
26. The difference between gross and net investment is known as
a. net national product.
b. net exports.
c. capital consumption allowance.
d. indirect business taxes.
e. national income.
ANS: C PTS: 1 DIF: Easy REF: Ch 5, 1.a
OBJ: Ch 5, 4 TOP: Income approach TYP: Factual
27. The largest component of the income approach to calculating GDP is
a. depreciation of capital goods.
b. profits earned by entrepreneurs.
c. interest income to capital owners.
d. wages and salaries.
e. rental income to owners of land.
ANS: D PTS: 1 DIF: Easy REF: Ch 5, 1.a
OBJ: Ch 5, 4 TOP: Income approach TYP: Interpretive
Chapter 5 7
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28. In national income accounting, C + I + G + X always equals
a. net national product.
b. rent, wages, interest, profit, capital consumption allowance, and indirect business taxes.
c. total payments received by the factors of production.
d. profit, rent, interest, wages, and the capital consumption allowance.
e. the value of final goods and services produced plus business taxes.
ANS: B PTS: 1 DIF: Medium REF: Ch 5, 1.b
OBJ: Ch 5, 4 TOP: Income approach TYP: Interpretive
29. The difference between GNP and NNP equals
a. a statistical discrepancy.
b. the capital consumption allowance.
c. the difference between government spending and transfer payments.
d. the difference between the value of exports and the value of imports.
e. the amount that inventory increases every year.
ANS: B PTS: 1 DIF: Medium REF: Ch 5, 1.b
OBJ: Ch 5, 4 TOP: Net national product TYP: Factual
30. NNP is equal to
a. GNP  X
b. C + net investment + G + X
c. C + I + G + X  taxes
d. NI + taxes + depreciation
e. PI + depreciation
ANS: B PTS: 1 DIF: Medium REF: Ch 5, 1.b
OBJ: Ch 5, 4 TOP: Net national product TYP: Factual
31. The production of a new machine to replace one that is worn out is
a. an increase in inventories.
b. part of gross investment.
c. a personal consumption expenditure.
d. not included in GNP.
e. not included in GDP.
ANS: B PTS: 1 DIF: Difficult REF: Ch 5, 1.b
OBJ: Ch 5, 4 TOP: Net national product TYP: Interpretive
32. In comparing GDP and GNP for any single year,
a. GDP will always be larger.
b. GNP will always be larger.
c. GNP will be larger if net factor income is positive.
d. GNP will be larger if capital consumption allowance is positive.
e. GDP will be large if the statistical discrepancy is larger.
ANS: C PTS: 1 DIF: Medium REF: Ch 5, 1.b
OBJ: Ch 5, 4 TOP: GNP TYP: Factual
Chapter 5 8
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33. National income is the sum of
a. personal income and personal tax payments.
b. proprietors’ income, rental income, compensation of employees, corporate profits, and
interest receipts net of indirect business taxes and the capital consumption allowance.
c. wages, transfer payments, interest paid to businesses, and tax revenue.
d. NNP and the capital consumption allowance.
e. consumption, investment, government spending, and net exports.
ANS: B PTS: 1 DIF: Medium REF: Ch 5, 1.b
OBJ: Ch 5, 4 TOP: National income TYP: Factual
34. Indirect business taxes are
a. included in DPI but excluded from NNP.
b. included in NNP but excluded from GNP.
c. included in all measures of national output.
d. included in national income (NI) but excluded from NNP.
e. excluded from national income (NI).
ANS: E PTS: 1 DIF: Medium REF: Ch 5, 1.b
OBJ: Ch 5, 4 TOP: National income TYP: Interpretive
Figure 5-3
GNP Data
(Includes net factor income from abroad)
Consumption Spending $2,420
Net Investment $470
Government Spending $350
Capital Consumption Allowance $55
Exports $740
Imports $600
35. Refer to Figure 5-3. Net exports equals
a. -$140.
b. -$740.
c. -$1,340.
d. $140.
e. $1,340
ANS: D PTS: 1 DIF: Medium REF: Ch 5, 1.b
OBJ: Ch 5, 4 TOP: GNP TYP: Applied
36. Refer to Figure 5-3. Gross investment equals
a. $470.
b. $375.
c. $160.
d. $525.
e. $60.
ANS: D PTS: 1 DIF: Medium REF: Ch 5, 1.b
OBJ: Ch 5, 4 TOP: GNP TYP: Applied
Chapter 5 9
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37. For the economy described in Figure 5-3, GNP equals
a. $3,435.
b. $3,490.
c. $3,380.
d. $4,635.
e. $4,690.
ANS: A PTS: 1 DIF: Difficult REF: Ch 5, 1.b
OBJ: Ch 5, 4 TOP: GNP TYP: Applied
38. For the economy described in Figure 5-3, NNP equals
a. $3,435.
b. $3,490.
c. $3,380.
d. $4,635.
e. $4,690.
ANS: C PTS: 1 DIF: Difficult REF: Ch 5, 1.b
OBJ: Ch 5, 4 TOP: GNP TYP: Applied
39. GNP is equal to
a. GDP plus net factor income from abroad or NNP plus capital consumption allowance.
b. NNP plus net factor income from abroad or GDP plus capital consumption allowance.
c. GDP plus capital consumption allowance or NNP minus the statistical discrepancy.
d. NNP plus capital consumption allowance or GDP minus the statistical discrepancy.
e. NI plus indirect business taxes or PI minus personal taxes.
ANS: A PTS: 1 DIF: Medium REF: Ch 5, 1.b
OBJ: Ch 5, 4 TOP: Personal income TYP: Factual
40. Personal income is equal to
a. national income plus business profits.
b. disposable personal income minus personal taxes.
c. national income minus transfer payments.
d. national income plus welfare benefits minus corporate retained earnings.
e. disposable personal income plus transfer payments.
ANS: D PTS: 1 DIF: Difficult REF: Ch 5, 1.b
OBJ: Ch 5, 4 TOP: Personal income TYP: Interpretive
41. The difference between personal income (PI) and disposable personal income (DPI) is
a. indirect business taxes.
b. personal tax payments.
c. social security benefits.
d. undistributed corporate income.
e. welfare benefits.
ANS: B PTS: 1 DIF: Easy REF: Ch 5, 1.b
OBJ: Ch 5, 4 TOP: Disposable income TYP: Factual
Chapter 5 10
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42. Which of the following national income accounts would be the smallest in any year?
a. NNP
b. NI
c. DPI
d. PI
e. GNP
ANS: C PTS: 1 DIF: Medium REF: Ch 5, 1.b
OBJ: Ch 5, 4 TOP: Disposable income TYP: Interpretive
43. All of the following are considered national income accounts except
a. DPI.
b. NNP.
c. CPI.
d. GNP.
e. NI.
ANS: C PTS: 1 DIF: Easy REF: Ch 5, 1.b
OBJ: Ch 5, 4 TOP: National income TYP: Factual
44. The GDP differs from the GNP because the GDP subtracts out
a. net exports.
b. net factor income from abroad.
c. investment.
d. government spending.
e. consumption.
ANS: B PTS: 1 DIF: Easy REF: Ch 5, 1.b
OBJ: Ch 5, 4 TOP: GNP TYP: Factual
45. Which of the following is correct with respect to current-dollar values?
a. They are real values.
b. They are nominal values.
c. They are the same as base-year values.
d. They are equivalent to constant-dollar values.
e. They are dollar values adjusted for price level increases.
ANS: B PTS: 1 DIF: Medium REF: Ch 5, 2.a
OBJ: Ch 5, 5 TOP: Nominal GDP TYP: Interpretive
46. Real GDP measures
a. personal income adjusted for taxes paid to the government.
b. national output adjusted for changes in the quality of products.
c. national output adjusted for price level changes.
d. nominal output adjusted for changes in national income because of economic booms.
e. national output adjusted for unemployment.
ANS: C PTS: 1 DIF: Easy REF: Ch 5, 2.a
OBJ: Ch 5, 5 TOP: Real GDP TYP: Factual
Chapter 5 11
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47. The market value of final goods and services is calculated as
a. price plus quantities of all intermediate goods.
b. quantities of all final goods.
c. quantity times price of all intermediate goods.
d. quantity times price of all final goods.
e. prices of all goods produced within a given year.
ANS: D PTS: 1 DIF: Easy REF: Ch 5, 2.a
OBJ: Ch 5, 5 TOP: Nominal GDP TYP: Factual
48. If the average price level decreased, which of the following would happen as a result of this change?
a. The CPI would decrease.
b. Real GDP would decrease.
c. Real GNP would decrease.
d. Real PI would decrease.
e. Nominal GDP would decrease.
ANS: A PTS: 1 DIF: Medium REF: Ch 5, 2.b
OBJ: Ch 5, 6 TOP: Price index TYP: Interpretive
49. What is a consumer price index?
a. A measure of the price at which consumers sell their resources
b. A measure of the average price level in an economy
c. A measure of the highest price at which consumers sell their resources
d. A measure of the average price at which consumers sell their resources
e. A measure of the average price dispersion of all final goods
ANS: B PTS: 1 DIF: Easy REF: Ch 5, 2.b
OBJ: Ch 5, 6 TOP: Price index TYP: Factual
50. In the context of price indexes, the term COLAs stands for
a. Community Operated Living Arrangements.
b. Cost of Operations in a Law Firm.
c. Cost of Operating for Lesser Adjustments.
d. Cost-of-Living Adjustments.
e. Cooperative Ordinance of Los Angeles.
ANS: D PTS: 1 DIF: Easy REF: Ch 5, 2.b
OBJ: Ch 5, 6 TOP: Price index TYP: Factual
51. A price index can be defined as
a. a categorization of goods according to their price.
b. a measure of the value of output in some base year compared to the value of output in a
particular year.
c. a measure of average price level in an economy.
d. a measure of the ratio of output in a particular year to the value of output in some base
year.
e. a catalogue of the prices of different products published by the Federal Reserve.
ANS: C PTS: 1 DIF: Difficult REF: Ch 5, 2.b
OBJ: Ch 5, 6 TOP: Price index TYP: Factual
Chapter 5 12
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52. The price index for the current year is 180. This means that, on average, prices in the current year are
a. $0.80 higher than prices in the base year.
b. $1.80 higher than prices in the base year.
c. 80 percent of prices in the base year.
d. 180 percent higher than prices in the base year.
e. 80 percent higher than prices in the base year.
ANS: E PTS: 1 DIF: Medium REF: Ch 5, 2.b
OBJ: Ch 5, 6 TOP: Price index TYP: Applied
53. The price index most commonly used in the United States is
a. the CPI.
b. the PPF price index.
c. the PPI.
d. the WPI.
e. the COLA.
ANS: A PTS: 1 DIF: Easy REF: Ch 5, 2.b
OBJ: Ch 5, 6 TOP: Price index TYP: Factual
54. COLAs are tied to
a. nominal GDP.
b. the implicit GDP deflator.
c. the PPI.
d. the CPI.
e. NI.
ANS: D PTS: 1 DIF: Medium REF: Ch 5, 2.b
OBJ: Ch 5, 6 TOP: Price index TYP: Interpretive
55. If the PPI increases, in the future we would expect to see
a. no change in the CPI.
b. an increase in the CPI.
c. a decrease in the CPI.
d. a decrease in COLAs.
e. an increase in real GDP.
ANS: B PTS: 1 DIF: Medium REF: Ch 5, 2.b
OBJ: Ch 5, 6 TOP: Price index TYP: Applied
56. The producer price index
a. is a weighted average of producer price changes.
b. fluctuates less than the GDP price index.
c. is currently referred to as the wholesale price index.
d. indicates the current price of final goods and services.
e. is our most accurate measure of total economic output.
ANS: A PTS: 1 DIF: Easy REF: Ch 5, 2.b
OBJ: Ch 5, 6 TOP: Price index TYP: Factual
Chapter 5 13
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57. Which of the following was generally true over the last 40 years?
a. The CPI and the GDPPI moved in the same direction with the PPI moving in the opposite
direction.
b. The CPI and the PPI moved in the same direction with the GDPPI moving in the opposite
direction.
c. The GDPPI and the PPI moved in the same direction with the CPI moving in the opposite
direction.
d. The CPI, the GDPPI, and the PPI moved in the same direction with somewhat more
volatile movements of PPI.
e. The CPI, the GDPPI, and the PPI moved in the same direction with somewhat more
volatile movements of CPI.
ANS: D PTS: 1 DIF: Medium REF: Ch 5, 2.b
OBJ: Ch 5, 6 TOP: Price Indexes TYP: Factual
58. If real GDP increased by 2% and nominal GDP increased by 4%, which of the following tool place?
a. Output increased and the price level increased.
b. Output increased and the price level decreased.
c. Output decreased and the price level increased.
d. Output decreased and the price level decreased.
e. Output increased and the price level remained unchanged.
ANS: A PTS: 1 DIF: Medium REF: Ch 5, 2.b
OBJ: Ch 5, 6 TOP: Nominal and Real GDP TYP: Applied
59. If real GDP increased by 3.5% and nominal GDP increased by 3.5%, which of the following tool
place?
a. Output increased and the price level increased.
b. Output increased and the price level decreased.
c. Output decreased and the price level increased.
d. Output decreased and the price level decreased.
e. Output increased and the price level remained unchanged.
ANS: E PTS: 1 DIF: Medium REF: Ch 5, 2.b
OBJ: Ch 5, 6 TOP: Nominal and Real GDP TYP: Applied
60. Which of the following statements is true?
a. Total expenditures > Total income > Total output value
b. Total expenditures > Total output value > Total income
c. Total output value > Total income > Total expenditures
d. Total income > Total expenditures > Total output value
e. Total expenditures = Total income = Total output value
ANS: E PTS: 1 DIF: Medium REF: Ch 5, 3
OBJ: Ch 5, 6 TOP: Flows of income and expenditures TYP: Factual
Chapter 5 14
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from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
61. The shadow economy is known by all of the following names except
a. the ghost economy.
b. the underground economy.
c. the parallel economy.
d. the informal economy.
e. the formal economy.
ANS: B PTS: 1 DIF: Medium REF: Ch 5, ES
OBJ: Ch 5, 6 TOP: Shadow economy TYP: Factual
62. Which of the following is a major force behind the size and growth of the shadow economy?
a. a decreasing burden of taxation
b. limited restrictions in the labor market
c. social security payments
d. inflation
e. social
ANS: C PTS: 1 DIF: Medium REF: Ch 5, ES
OBJ: Ch 5, 6 TOP: Shadow economy TYP: Factual
63. The consumer price index (CPI) market basket changes
a. every year.
b. every two years.
c. every five years.
d. every ten years.
e. every six months.
ANS: B PTS: 1 DIF: Easy REF: Ch 5, ES
OBJ: Ch 5, 6 TOP: Consumer price index TYP: Factual
TRUE/FALSE
1. National income accounting is a system of accounts that measures macroeconomic activity.
ANS: T PTS: 1 DIF: Easy REF: Ch 5, 1
OBJ: Ch 5, 1 TOP: National income TYP: Factual
2. National Income accounting measures the output of an entire economy as well as the flow between
sectors. In practice, it estimates the amount of economic activity that occurs during a given period of
time.
ANS: T PTS: 1 DIF: Easy REF: Ch 5, 1
OBJ: Ch 5, 1 TOP: National income TYP: Factual
3. The most common measure of a nation’s output and output growth is the consumer price index.
ANS: F PTS: 1 DIF: Easy REF: Ch 5, 1.a
OBJ: Ch 5, 1 TOP: GDP TYP: Factual
Chapter 5 15
© 2011 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different
from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
4. Because it involves the use of money, the sale of a used car for cash is counted as part of gross
domestic product.
ANS: F PTS: 1 DIF: Medium REF: Ch 5, 1.a
OBJ: Ch 5, 1 TOP: GDP TYP: Interpretive
5. The output produced by domestically owned firms in foreign locations is included in the U.S. GDP but
not in the U.S. GNP.
ANS: F PTS: 1 DIF: Difficult REF: Ch 5, 1.a
OBJ: Ch 5, 1 TOP: GDP TYP: Interpretive
6. The sale of live cattle to a slaughterhouse constitutes a final transaction that is counted as part of gross
domestic product.
ANS: F PTS: 1 DIF: Medium REF: Ch 5, 1.a
OBJ: Ch 5, 1 TOP: GDP TYP: Interpretive
7. Goods that are produced inside the U.S. borders add to the U.S. GDP but services that are provided
insider the U.S. borders do not.
ANS: F PTS: 1 DIF: Medium REF: Ch 5, 1.a
OBJ: Ch 5, 1 TOP: GDP TYP: Interpretive
8. If a fisherman buys fishing equipment for $1,500 to catch trout in the river and he sells his catch to a
nearby restaurant for $2,000 which the restaurant serves to its customers generating total revenue of
$4,260, the total value added of the fish sold at the restaurant is equal to $7,760.
ANS: F PTS: 1 DIF: Difficult REF: Ch 5, 1.a
OBJ: Ch 5, 1 TOP: Value added TYP: Applied
9. If a fisherman buys fishing equipment for $1,500 to catch trout in the river and he sells his catch to a
nearby restaurant for $2,000 which the restaurant serves to its customers generating total revenue of
$4,260, the value added by the fish restaurant amounts to $2,260.
ANS: T PTS: 1 DIF: Medium REF: Ch 5, 1.a
OBJ: Ch 5, 1 TOP: Value added TYP: Applied
10. Wheat produced in the U.S. but sold in Japan would not add to U.S. GDP.
ANS: F PTS: 1 DIF: Medium REF: Ch 5, 1.a
OBJ: Ch 5, 1 TOP: Value added TYP: Applied
11. By definition of GDP, total wage earnings and interest income must always equal consumption and
investment spending, government purchases, and net exports.
ANS: F PTS: 1 DIF: Medium REF: Ch 5, 1.a
OBJ: Ch 5, 1 TOP: GDP TYP: Factual
Chapter 5 16
© 2011 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different
from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
12. GDP can only be calculated according to two different approaches: GDP as output and GDP as
income.
ANS: F PTS: 1 DIF: Easy REF: Ch 5, 1.a
OBJ: Ch 5, 3 TOP: GDP TYP: Factual
13. The capital consumption allowance is equal to the estimated value of depreciation plus the value of
accidental damage to capital stock.
ANS: T PTS: 1 DIF: Easy REF: Ch 5, 1.a
OBJ: Ch 5, 4 TOP: Income approach TYP: Factual
14. GDP as income is equal to the sum of wages, interest rent, and profits, less net factor income from
abroad, plus capital consumption allowance and indirect business taxes.
ANS: T PTS: 1 DIF: Easy REF: Ch 5, 1.a
OBJ: Ch 5, 4 TOP: Income approach TYP: Factual
15. When using the income approach to GDP, one would exclude local and state government purchases.
ANS: T PTS: 1 DIF: Easy REF: Ch 5, 1.a
OBJ: Ch 5, 4 TOP: Income approach TYP: Factual
Figure 5-4
Excise Taxes Paid by Businesses $26
Gross Domestic Product $810
Sales Taxes Paid by Businesses $130
Capital Consumption Allowance $176
Imports $220
Receipts of Foreign Factor Income $46
Payments of Factor Income Abroad $51
Statistical Discrepancies $0
16. According to Figure 5-4, gross national product equals $805.
ANS: T PTS: 1 DIF: Medium REF: Ch 5, 1.b
OBJ: Ch 5, 4 TOP: Income approach TYP: Applied
17. According to Figure 5-4, net national product is $629.
ANS: T PTS: 1 DIF: Difficult REF: Ch 5, 1.b
OBJ: Ch 5, 4 TOP: Income approach TYP: Applied
18. According to Figure 5-4, national income is $499.
ANS: F PTS: 1 DIF: Difficult REF: Ch 5, 1.b
OBJ: Ch 5, 4 TOP: Income approach TYP: Applied
Chapter 5 17
© 2011 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different
from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
19. Net national product equals GDP plus net investment.
ANS: F PTS: 1 DIF: Easy REF: Ch 5, 1.b
OBJ: Ch 5, 4 TOP: Net national product TYP: Factual
20. If the prices of all goods and services never changed, nominal and real GDP would always be the
same.
ANS: T PTS: 1 DIF: Easy REF: Ch 5, 2.a
OBJ: Ch 5, 5 TOP: Real and Nominal GDP TYP: Factual
21. If there is a rise in nominal GDP over a given year, then we know that there is growth in actual output
of goods and services.
ANS: F PTS: 1 DIF: Easy REF: Ch 5, 2.a
OBJ: Ch 5, 5 TOP: Nominal GDP TYP: Interpretive
22. Nominal GDP must always exceed real GDP.
ANS: F PTS: 1 DIF: Medium REF: Ch 5, 2.a
OBJ: Ch 5, 5 TOP: Real GDP TYP: Interpretive
23. Assume nominal GDP for year 1 is $150 and nominal GDP for year 2 is $200. At the same time, real
GDP in year 1 equals $130, and in year 2, real GDP is $150. This implies that both the price level and
the actual quantities produced have risen from year 1 to year 2.
ANS: T PTS: 1 DIF: Medium REF: Ch 5, 2.a
OBJ: Ch 5, 5 TOP: Real GDP TYP: Applied
24. A base year is a year against which other years are measured.
ANS: T PTS: 1 DIF: Easy REF: Ch 5, 2.b
OBJ: Ch 5, 6 TOP: Price index TYP: Factual
25. CPI is a narrower measure of than the GDP price index.
ANS: T PTS: 1 DIF: Easy REF: Ch 5, 2.b
OBJ: Ch 5, 6 TOP: Price index TYP: Factual
26. In most industrialized countries, real GDP grew at a relatively slow pace in the late 1990s and grew
very quickly in the early 2000s.
ANS: F PTS: 1 DIF: Medium REF: Ch 5, 2.b
OBJ: Ch 5, 6 TOP: Real GDP TYP: Factual
27. Relative to the PPI, the consumer price index is a broader measure of prices in the U.S. economy.
ANS: F PTS: 1 DIF: Easy REF: Ch 5, 2.b
OBJ: Ch 5, 6 TOP: Price index TYP: Factual
Chapter 5 18
© 2011 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different
from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
28. CPI represents each household’s cost of living.
ANS: F PTS: 1 DIF: Medium REF: Ch 5, 2.b
OBJ: Ch 5, 6 TOP: Consumer price index TYP: Interpretive
29. Labor unions typically rely on the consumer price index when cost-of-living adjustments are
negotiated as part of wage contracts.
ANS: T PTS: 1 DIF: Easy REF: Ch 5, 2.b
OBJ: Ch 5, 6 TOP: Price index TYP: Interpretive
30. The circular flow diagram shows the different sectors in the economy are independent.
ANS: F PTS: 1 DIF: Easy REF: Ch 5, 3
OBJ: Ch 5, 6 TOP: Flows of income and expenditures TYP: Factual
31. Estimating the size of the underground economy is a relatively easy task for specialized economists.
ANS: F PTS: 1 DIF: Easy REF: Ch 5, ES
OBJ: Ch 5, 6 TOP: Shadow economy TYP: Interpretive
32. The consumer price index (CPI) represents the cost of a fixed market basket of goods purchased by a
hypothetical average household.
ANS: T PTS: 1 DIF: Easy REF: Ch 5, ES
OBJ: Ch 5, 6 TOP: Consumer price index TYP: Factual