Principles of Macroeconomics A Streamlined Approach Robert Frank 3e - Test Bank

Principles of Macroeconomics A Streamlined Approach Robert Frank 3e – Test Bank

Instant Download – Complete Test Bank With Answers

Sample Questions Are Posted Below

File: Chapter 013 Measuring Economic Activity: GDP, Unemployment, and Inflation

Multiple Choice

The most commonly used measure of an economy’s output is:
the rate of employment.
the rate of inflation.
gross domestic product.
the Dow Jones stock market index

Answer: C

Difficulty: 01 Easy

Section: Gross Domestic Product: Measuring the Nation’s Output

AACSB: Reflective Thinking

Blooms: Remember

Learning Objective: 13-01

Feedback: The gross domestic product is the only statistic listed that measures an economy’s output.

Gross domestic product (GDP) equals the ______ of final ______ produced within a country during a given period of time.
market value; goods
market value; services
market value; goods and services
quantity; goods and services

Answer: C

Difficulty: 01 Easy

Section: Gross Domestic Product: Measuring the Nation’s Output

AACSB: Reflective Thinking

Blooms: Remember

Learning Objective: 13-01

Feedback: The gross domestic product is measured in dollars, which is the market value of the goods and services produced.

The market value of final goods and services produced within a country during a period of time is called:
guaranteed direct prices.
general domestic productivity.
government documented production.
gross domestic product.

Answer: D

Difficulty: 01 Easy

Section: Gross Domestic Product: Measuring the Nation’s Output

AACSB: Reflective Thinking

Blooms: Remember

Learning Objective: 13-01

Feedback: This is the definition of “gross domestic product.”

GDP is a measure of an economy’s:
A. domestic price level.
B. level of unemployment.
C. total output.
D. domestic productivity.

Answer: C

Difficulty: 01 Easy

Section: Gross Domestic Product: Measuring the Nation’s Output

AACSB: Reflective Thinking

Blooms: Remember

Learning Objective: 13-01

Feedback: GDP measures the market value of final goods and services produced in an economy in a given period. Thus, it measures an economy’s total output.

______ is/are the market value of final goods and services produced within a country during a given period of time.
GDP
Consumption
Value added
Transfer payments

Answer: A

Difficulty: 01 Easy

Section: Gross Domestic Product: Measuring the Nation’s Output

AACSB: Reflective Thinking

Blooms: Remember

Learning Objective: 13-01

Feedback: This is the definition of “gross domestic product.”

When economists use market values to aggregate output, they sum the:
number of items produced.
quantity of items produced.
price times the quantity of each item produced.
inputs of each item produced.

Answer: C

Difficulty: 01 Easy

Section: Gross Domestic Product: Measuring the Nation’s Output

AACSB: Reflective Thinking

Blooms: Remember

Learning Objective: 13-01

Feedback: The gross domestic product sums the market values of all goods and services produced which requires multiplying the quantities of each item with their respective price, and adding up these sums.

If total output is calculated by adding up the market value of goods and services produced, then more expensive items:
receive the same weight as cheaper items.
receive a greater weight than cheaper items.
receive a smaller weight than cheaper items.
are double counted.

Answer: B

Difficulty: 01 Easy

Section: Gross Domestic Product: Measuring the Nation’s Output

AACSB: Reflective Thinking

Blooms: Remember

Learning Objective: 13-01

Feedback: More expensive items have greater influence in GDP calculations than inexpensive items because the expensive items indicate a higher market value.

If an economy produces 3 million oranges that sell for $0.25 each and 100,000 cars that sell for $25,000 each, then when the market value of total output is calculated:
oranges receive a greater weight than cars.
oranges receive the same weight as cars.
oranges receive a smaller weight than cars.
the market value of oranges is excluded.

Answer: C

Difficulty: 02 Medium

Section: Gross Domestic Product: Measuring the Nation’s Output

AACSB: Reflective Thinking

Blooms: Understand

Learning Objective: 13-01

Feedback: The market value of the oranges is $750,000 and the market value of cars is $2.5 billion, so the contribution of cars to the GDP is much larger than the contribution of oranges.

Suppose that the total production of an economy consists of 4 oranges and 10 candy bars, each orange sells for $0.25, and each candy bar sells for $0.50. What is the market value of production in this economy?
$0.75
$1.00
$5.00
$6.00

Answer: D

Difficulty: 02 Medium

Section: Gross Domestic Product: Measuring the Nation’s Output

AACSB: Reflective Thinking

Blooms: Understand

Learning Objective: 13-01

Feedback: The market value is $6.00, because 4 oranges contributed $1.00 and 10 candy bars contributed $5.00.

Suppose that the total production of an economy consists of 10 oranges and 5 candy bars, each orange sells for $0.20, and each candy bar sells for $1.00. What is the market value of production in this economy?
$1.20
$2.00
$5.00
$7.00

Answer: D

Difficulty: 02 Medium

Section: Gross Domestic Product: Measuring the Nation’s Output

AACSB: Reflective Thinking

Blooms: Understand

Learning Objective: 13-01

Feedback: The market value is $7.00, because 10 oranges contributed $2.00 and 5 candy bars contributed $5.00.

Suppose that the total production of an economy consists of 10 oranges and 5 candy bars, each orange sells for $0.20, and each candy bar sells for $1.00. Which expression of the output of this economy is most consistent with the concept of GDP?
This economy produces two-thirds oranges and one-third candy bars.
This economy produces food valued at $1.20.
This economy produces 15 food items.
This economy produces $7.00 worth of food.

Answer: D

Difficulty: 02 Medium

Section: Gross Domestic Product: Measuring the Nation’s Output

AACSB: Analytic

Blooms: Understand

Learning Objective: 13-01

Feedback: The market value is $7.00, because 10 oranges contributed $2.00 and 5 candy bars contributed $5.00.

A drawback of using market values to aggregate the quantities of goods and services produced in an economy is that:
higher-priced items count more.
GDP increases when not all goods are produced in greater quantities.
market prices generally reflect the economic benefit consumers expect to receive from an item.
not all economically valuable goods and services are bought and sold in markets.

Answer: D

Difficulty: 02 Medium

Section: Gross Domestic Product: Measuring the Nation’s Output

AACSB: Reflective Thinking

Blooms: Understand

Learning Objective: 13-01

Feedback: Products that are not exchanged in markets, like mowing your own lawn, are not valued easily. Thus, it’s difficult to properly gauge their contribution to GDP.

The value of unpaid work by a homemaker ______ included in GDP and the value of housekeeping services sold in a market ______ included in GDP.
is; is not
is; is
is not; is not
is not; is

Answer: D

Difficulty: 01 Easy

Section: Gross Domestic Product: Measuring the Nation’s Output

AACSB: Reflective Thinking

Blooms: Remember

Learning Objective: 13-01

Feedback: Only goods and services traded in regular markets are counted in GDP.

Which of the following activities is most likely to be counted in GDP?
Fran volunteers at the local veteran’s hospital twice a month.
Stu gave $5 to a homeless man he met in the park.
Gail buys paper and crayons to donate to poor children in need of school supplies.
Bud works hard five hours each week to make sure that his lawn always looks nice.

Answer: C

Difficulty: 02 Medium

Section: Gross Domestic Product: Measuring the Nation’s Output

AACSB: Reflective Thinking

Blooms: Understand

Learning Objective: 13-01

Feedback: Gifts and charity are not counted in GDP because nothing was directly produced. These transactions are called “transfer payments.” However, when an individual buys items in a market, such as paper and crayons, their value is always included in GDP regardless of whether the person uses them herself or donates them to others.

The value of unpaid childcare services provided by a stay-at-home dad ______ included in GDP; the value of daycare services purchased from a licensed childcare provider ______ included in GDP.
is; is not
is; is
is not; is not
is not; is

Answer: D

Difficulty: 01 Easy

Section: Gross Domestic Product: Measuring the Nation’s Output

AACSB: Reflective Thinking

Blooms: Remember

Learning Objective: 13-01

Feedback: Only goods and services traded in regular markets are counted in GDP.

The greater demand for paid childcare services as women’s labor force participation increases represents primarily:
a decrease in economic activity.
a switch from market to non-market production.
a switch from non-market to market production.
a decrease in GDP.

Answer: C

Difficulty: 01 Easy

Section: Gross Domestic Product: Measuring the Nation’s Output

AACSB: Reflective Thinking

Blooms: Remember

Learning Objective: 13-01

Feedback: While the amount of child care needed and provided would remain the same, the change from care coming mostly from stay at home parents to paid childcare providers represent a a switch from non-market to market production.

Goods and services provided by state and local governments are:
included in GDP at market prices.
included in GDP at cost.
excluded from GDP because they are not sold in markets.
excluded from GDP because they are publicly provided.

Answer: B

Difficulty: 01 Easy

Section: Gross Domestic Product: Measuring the Nation’s Output

AACSB: Reflective Thinking

Blooms: Remember

Learning Objective: 13-01

Feedback: State and local government services, like police services, are typically not sold. But they are productive activities, so economists include them in GDP at the cost of production.

Educational services provided by public schools are:
included in GDP at market prices.
included in GDP at cost.
excluded from GDP because they are not sold in markets.
excluded from GDP because they are intermediate goods.

Answer: B

Difficulty: 02 Medium

Section: Gross Domestic Product: Measuring the Nation’s Output

AACSB: Reflective Thinking

Blooms: Understand

Learning Objective: 13-01

Feedback: Because public educational services are typically not sold in a market, but they are productive activities, economists include the output in GDP at the cost of production.

National defense services provided by the military are:
included in GDP at market prices.
included in GDP at cost.
excluded from GDP because they are not sold in markets.
excluded from GDP because they are intermediate goods.

Answer: B

Difficulty: 02 Medium

Section: Gross Domestic Product: Measuring the Nation’s Output

AACSB: Reflective Thinking

Blooms: Understand

Learning Objective: 13-01

Feedback: Because military services are typically not sold in a market, but they are productive activities, economists include the output in GDP at the cost of production.

Final goods and services are ______ production and ______ counted in GDP.
the end products of; are
the end products of; are not
used up in the process of; are
used up in the process of; are not

Answer: A

Difficulty: 01 Easy

Section: Gross Domestic Product: Measuring the Nation’s Output

AACSB: Reflective Thinking

Blooms: Remember

Learning Objective: 13-01

Feedback: Goods and services are added to GDP when they are sold to their final buyer. Intermediate transactions are not counted in GDP.

Intermediate goods and services are ______ production and ______ counted in GDP.
the end products of; are
the end products of; are not
used up in the process of; are
used up in the process of; are not

Answer: D

Difficulty: 01 Easy

Section: Gross Domestic Product: Measuring the Nation’s Output

AACSB: Reflective Thinking

Blooms: Remember

Learning Objective: 13-01

Feedback: Intermediate goods, like the windows in a car, are sold to the carmaker but not the ultimate car buyer. Thus, the intermediate sale is not included in GDP.

Which of the following would be classified as a final good?
A. New computer software sold to a computer manufacturer for installation in new computers
B. The services provided by lawyers to a computer manufacturer
C. Computer chips sold to a computer manufacturer for installation in new computers
D. A new computer sold to a business firm.

Answer: D

Difficulty: 02 Medium

Section: Gross Domestic Product: Measuring the Nation’s Output

AACSB: Reflective Thinking

Blooms: Understand

Learning Objective: 13-01

Feedback: A final good is one sold to its ultimate user, which can be an individual, a business or a government entity.

Which of the following is not classified as a final good?
A. New clothing purchased by a college student
B. Fresh vegetables purchased by a restaurant
C. A new car purchased by a family
D. A new machine purchased by a business

Answer: B

Difficulty: 02 Medium

Section: Gross Domestic Product: Measuring the Nation’s Output

AACSB: Reflective Thinking

Blooms: Understand

Learning Objective: 13-01

Feedback: Fresh vegetables purchased by a restaurant are intermediate goods because they are inputs to the final good, a restaurant meal.

The value of intermediate goods is excluded from the measurement of GDP in order to:
A. adjust for inflation.
B. avoid double counting.
C. index economic activity.
D. measure GDP in constant prices.

Answer: B

Difficulty: 02 Medium

Section: Gross Domestic Product: Measuring the Nation’s Output

AACSB: Reflective Thinking

Blooms: Understand

Learning Objective: 13-01

Feedback: GDP measures the market value of goods and services sold to their final user as a means of avoiding double counting.

Goods and services that are consumed by the ultimate user are called ______ goods and services.
intermediate
final
value added
nominal

Answer: B

Difficulty: 01 Easy

Section: Gross Domestic Product: Measuring the Nation’s Output

AACSB: Reflective Thinking

Blooms: Remember

Learning Objective: 13-01

Feedback: This is the definition of “final” goods.

Goods and services that are used up in the production of other goods and services are called ______ goods and services.
intermediate
final
value added
nominal

Answer: A

Difficulty: 01 Easy

Section: Gross Domestic Product: Measuring the Nation’s Output

AACSB: Reflective Thinking

Blooms: Remember

Learning Objective: 13-01

Feedback: This is the definition of “intermediate” goods.

If an automobile manufacturer pays $200 for a car windshield, $400 for four car tires, $100 for a car CD player, and sells cars made with these parts for $20,000, then each car the automobile manufacturer sells contributes how much to GDP?
$19,300
$20,000
$20,200
$20,700

Answer: B

Difficulty: 02 Medium

Section: Gross Domestic Product: Measuring the Nation’s Output

AACSB: Reflective Thinking

Blooms: Understand

Learning Objective: 13-01

Feedback: Just the value of the final good, the $20,000 car, is included in GDP.

28 If a pizza maker pays $1 for tomatoes, $1 for cheese, $2 for sausage, and sells the pizza made with these ingredients for $7, then each pizza sold contributes how much to GDP?

Answer: C

Difficulty: 02 Medium

Section: Gross Domestic Product: Measuring the Nation’s Output

AACSB: Reflective Thinking

Blooms: Understand

Learning Objective: 13-01

Feedback: Just the value of the final good, the $7 pizza, is included in GDP.

If Bountiful Orchard grows $100,000 worth of peaches, sells $50,000 worth of peaches to consumers and uses to rest to make jam that is sold to consumers for $100,000, Bountiful Orchard’s contribution to GDP is:
$50,000.
$100,000.
$150,000.
$200,000.

Answer: C

Difficulty: 03 Hard

Section: Gross Domestic Product: Measuring the Nation’s Output

AACSB: Analytic

Blooms: Apply

Learning Objective: 13-01

Feedback: Bountiful Orchard sold two final goods, peaches worth $50,000 and jam worth $100,000, to the ultimate buyer for $150,000.

If the Citrus Growers Association grows $1 million worth of oranges, sells $500,000 worth of oranges to consumers, uses the rest to make orange juice that is sold to consumers for $3 million, Citrus Grower’s contribution to GDP is:
$500,000.
$1,000,000.
$3,500,000.
$4,000,000.

Answer: C

Difficulty: 03 Hard

Section: Gross Domestic Product: Measuring the Nation’s Output

AACSB: Analytic

Blooms: Apply

Learning Objective: 13-01

Feedback: Citrus Growers Association sold two final goods, oranges and orange juice, to the ultimate buyer for $3,500,000.

Which of the following is an example of an intermediate good?
A new car sold to a family
A metal-stamping machine used to produce cars sold to an automaker
A new CD player sold to an automaker for installation in a car
A new CD player sold to a teenager

Answer: C

Difficulty: 02 Medium

Section: Gross Domestic Product: Measuring the Nation’s Output

AACSB: Reflective Thinking

Blooms: Understand

Learning Objective: 13-01

Feedback: The new CD player is an intermediate good because it is a component part of the final good, the car.

Which of the following is NOT a capital good?
A. Batteries purchased by a car manufacturer to install in new cars
B. Machines purchased by a car manufacturer to measure metal thicknesses
C. A new house purchased by a family
D. A new apartment building purchased by a corporation

Answer: A

Difficulty: 02 Medium

Section: Gross Domestic Product: Measuring the Nation’s Output

AACSB: Reflective Thinking

Blooms: Understand

Learning Objective: 13-01

Feedback: Batteries purchased by a car manufacturer to be installed in new cars are considered intermediate goods because the batteries are used up in the production of final goods. Capital goods are not used up during the production process, but are instead long-lived

Which of the following is an example of a capital good?
A new car sold to a family
A metal-stamping machine used to produce cars sold to an automaker
A new CD player sold to an automaker for installation in a car
A new CD player sold to a teenager

Answer: B

Difficulty: 02 Medium

Section: Gross Domestic Product: Measuring the Nation’s Output

AACSB: Reflective Thinking

Blooms: Understand

Learning Objective: 13-01

Feedback: A metal-stamping machine is a capital good because it is used in the production of other goods.

Long-lived goods used for producing other goods and services are called:
consumption goods.
non-market goods.
value-added goods.
capital goods.

Answer: D

Difficulty: 01 Easy

Section: Gross Domestic Product: Measuring the Nation’s Output

AACSB: Reflective Thinking

Blooms: Remember

Learning Objective: 13-01

Feedback: This is the definition of “capital goods.”

Capital goods are
long-lived goods used for producing other goods and services.
the end products of production.
publicly provided.
excluded from GDP.

Answer: A

Difficulty: 01 Easy

Section: Gross Domestic Product: Measuring the Nation’s Output

AACSB: Reflective Thinking

Blooms: Remember

Learning Objective: 13-01

Feedback: Capital goods are long-lived goods used for producing other goods and services.

Factories and machines are examples of:
consumption goods.
non-market goods.
value-added goods.
capital goods.

Answer: D

Difficulty: 01 Easy

Section: Gross Domestic Product: Measuring the Nation’s Output

AACSB: Reflective Thinking

Blooms: Remember

Learning Objective: 13-01

Feedback: Factories and machines are built for the purpose of producing other goods, which means they are capital goods.

Capital goods are treated as ______ goods and, therefore, are ______ GDP.
final; included in
final; excluded from
intermediate; included in
intermediate; excluded from

Answer: A

Difficulty: 01 Easy

Section: Gross Domestic Product: Measuring the Nation’s Output

AACSB: Reflective Thinking

Blooms: Remember

Learning Objective: 13-01

Feedback: Capital goods are produced for specific business use, thus they are considered final goods and included in the GDP.

The value added by any firm equals the firm’s ______ from selling the product minus _______.
revenue; labor expenses
revenue; the cost of inputs purchased from other firms
profits; labor expenses
profits; the cost of inputs purchased from other firms

Answer: B

Difficulty: 01 Easy

Section: Gross Domestic Product: Measuring the Nation’s Output

AACSB: Reflective Thinking

Blooms: Remember

Learning Objective: 13-01

Feedback: Value added is computed by subtracting the cost of inputs purchased from other firms from revenue received by the sale.

A firm’s revenue from selling its product minus the cost of inputs purchased from other firms is called:
profits.
investment.
value added.
production costs.

Answer: C

Difficulty: 01 Easy

Section: Gross Domestic Product: Measuring the Nation’s Output

AACSB: Reflective Thinking

Blooms: Remember

Learning Objective: 13-01

Feedback: A firm’s revenue from selling its product minus the cost of inputs purchased from other firms is called value added.

The sum of the value added by all firms equals total:
profits.
spending on capital goods.
investment spending.
value of final goods and services.

Answer: D

Difficulty: 01 Easy

Section: Gross Domestic Product: Measuring the Nation’s Output

AACSB: Reflective Thinking

Blooms: Remember

Learning Objective: 13-01

Feedback: The value added by each firm represents the portion of the value of the final good or service that the firm creates in its stage of production. Summing the value added by all firms in the economy yields the total value of final goods and services, or GDP.

GDP equals the value added by producers of:
intermediate goods and services only.
final goods and services only.
intermediate goods and services, as well as final goods and services.
intermediate and final goods only.

Answer: C

Difficulty: 02 Medium

Section: Gross Domestic Product: Measuring the Nation’s Output

AACSB: Reflective Thinking

Blooms: Understand

Learning Objective: 13-01

Feedback: Each stage of production adds value. In this case, GDP is the sum of value added by producers of intermediate goods and services, and producers of final goods and services.

The value of final goods and services equals:
total business profits.
the sum of the value added by all firms.
total business spending.
the sum of revenues from all sales.

Answer: B

Difficulty: 01 Easy

Section: Gross Domestic Product: Measuring the Nation’s Output

AACSB: Reflective Thinking

Blooms: Remember

Learning Objective: 13-01

Feedback: Each firm adds value. In this case, GDP is the sum of value added by all firms in the production chain.

Summing the value added of all firms yields the value of final goods and services produced because both measures:
A. exclude the value of capital goods.
B. exclude the value of intermediate goods and services.
C. use constant prices.
D. are adjusted for population growth.

Answer: B

Difficulty: 02 Medium

Section: Gross Domestic Product: Measuring the Nation’s Output

AACSB: Reflective Thinking

Blooms: Understand

Learning Objective: 13-01

Feedback: Using the production-side approach to calculating GDP, only the value of final goods and services are summed, similarly, the value-added approach only sums up the additional final value created at each stage of production.

One way to avoid counting the prices of intermediate goods multiple times in computing the value of GDP is to:
A. sum the value added of only producers of final goods and services.
B. sum the value added of only producers of intermediate goods and services.
C. sum the value added of producers of both intermediate and final goods and services.
D. subtract the value added of producers of intermediate goods and services from the value added of producers of final goods and services.

Answer: C

Difficulty: 01 EasyMedium

Section: Gross Domestic Product: Measuring the Nation’s Output

AACSB: Reflective Thinking

Blooms: Remember

Learning Objective: 13-01

Feedback: Value added calculations have already subtracted out the prices of intermediate goods, so over counting does not occur. Note that when using the value added approach, both the value added from producers of intermediate and final goods and services are included.

45. Suppose a jar of orange marmalade that is ultimately sold to a customer at The Corner Store is produced by the following production process:

What is the value added of Citrus Growers Inc.?

$0.00
$0.50
$0.75
$1.75

Answer: C

Difficulty: 03 Hard

Section: Gross Domestic Product: Measuring the Nation’s Output

AACSB: Analytic

Blooms: Apply

Learning Objective: 13-01

Feedback: Value added is computed by subtracting the cost of purchased inputs from the revenues. So value added is $0.75 – 0 = $0.75.

Suppose a jar of orange marmalade that is ultimately sold to a customer at The Corner Store is produced by the following production process:

What is the value added of Florida Jam Company?

$0.50
$0.75
$1.25
$2.00

Answer: C

Difficulty: 03 Hard

Section: Gross Domestic Product: Measuring the Nation’s Output

AACSB: Analytic

Blooms: Apply

Learning Objective: 13-01

Feedback: Value added is computed by subtracting the cost of purchased inputs from the revenues. So value added is $2.00 – 0.75 = $1.25.

Suppose a jar of orange marmalade that is ultimately sold to a customer at The Corner Store is produced by the following production process:

What is the value added of The Corner Store?

$0.50
$1.75
$2.00
$2.50

Answer: A

Difficulty: 03 Hard

Section: Gross Domestic Product: Measuring the Nation’s Output

AACSB: Analytic

Blooms: Apply

Learning Objective: 13-01

Feedback: The value added of the Corner Store is computed by subtracting the cost of purchased inputs from the revenues. So value added is $2.50 – 2.00 = $0.50.

Suppose a jar of orange marmalade that is ultimately sold to a customer at The Corner Store is produced by the following production process:

What is the sum of the value added of all the firms?

$2.50
$2.75
$4.50
$5.25

Answer: A

Difficulty: 03 Hard

Section: Gross Domestic Product: Measuring the Nation’s Output

AACSB: Analytic

Blooms: Apply

Learning Objective: 13-01

Feedback: The sum of value added for all firms is the same as the price of the final product. In this case, it is $2.50.

Suppose a jar of DeLux popcorn that is ultimately sold to a customer at Friendly Groceries is produced by the following production process:

What is the value added of Fulton Family Farm?

$0.00
$0.50
$1.50
$2.50

Answer: B

03 Hard

Section: Gross Domestic Product: Measuring the Nation’s Output

AACSB: Analytic

Blooms: Apply

Learning Objective: 13-01

Feedback: The value added of the Fulton Family Farm is computed by subtracting the cost of purchased inputs from the revenues. So value added is $0.50 – 0.00 = $0.50.

Suppose a jar of DeLux popcorn that is ultimately sold to a customer at Friendly Groceries is produced by the following production process:

What is the value added of DeLux Popcorn Co.?

$0.50
$1.50
$2.00
$2.50

Answer: C

03 Hard

Section: Gross Domestic Product: Measuring the Nation’s Output

AACSB: Analytic

Blooms: Apply

Learning Objective: 13-01

Feedback: The value added of the DeLux Popcorn Co. is computed by subtracting the cost of purchased inputs from the revenues. So value added is $2.50 – $0.50 = $2.00.

Suppose a jar of DeLux popcorn that is ultimately sold to a customer at Friendly Groceries is produced by the following production process:

What is the value added of Friendly Groceries?

$1.50
$2.50
$3.50
$4.00

Answer: A

03 Hard

Section: Gross Domestic Product: Measuring the Nation’s Output

AACSB: Analytic

Blooms: Apply

Learning Objective: 13-01

Feedback: The value added of the Friendly Groceries is computed by subtracting the cost of purchased inputs from the revenues. So value added is $4.00 – 2.50 = $1.50.

Suppose a jar of DeLux popcorn that is ultimately sold to a customer at Friendly Groceries is produced by the following production process:

What is the sum of the value added of all of the firms?

$3.00
$4.00
$6.50
$7.00

Answer: B

Difficulty: Hard

Section: Gross Domestic Product: Measuring the Nation’s Output

AACSB: Analytic

Blooms: Apply

Learning Objective: 13-01

Feedback: The sum of value added for all firms is $0.50 + $2.00 + $1.50 = $4.00.

When the production process extends over more than one year, the value of the final product is:
included in GDP for the year in which production began.
included in GDP for the year in which production was completed.
allocated to GDP in each year according to the value added in that year.
allocated equally to GDP in each year.

Answer: C

Difficulty: 01 Easy

Section: Gross Domestic Product: Measuring the Nation’s Output

AACSB: Reflective Thinking

Blooms: Remember

Learning Objective: 13-01

Feedback: GDP is conventionally an annual measure. However, when production takes longer than a year, the price of the final product is divided into the amount of value added each year for national accounting purposes.

Suppose a jar of orange marmalade that is ultimately sold to a customer at The Corner Store is produced by the following production process:

If the oranges were grown and the jam produced in the year 2015, but the marmalade was sold at The Corner Store in the year 2016, what is the contribution of these transactions to GDP in the year 2015?

$1.25
$2.00
$2.50
$2.75

Answer: B

Difficulty: 03 Hard

Section: Gross Domestic Product: Measuring the Nation’s Output

AACSB: Analytic

Blooms: Apply

Learning Objective: 13-01

Feedback: The value added of Citrus Growers Inc. and Florida Jam Company occurred in 2015, so their value added, $0.75 plus $1.25 (= $2.00 – $0.75), are both included in 2015’s GDP.

Suppose a jar of orange marmalade that is ultimately sold to a customer at The Corner Store is produced by the following production process:

$0.00
$0.50
$2.00
$2.50

Answer: B

Difficulty: 03 Hard

Section: Gross Domestic Product: Measuring the Nation’s Output

AACSB: Analytic

Blooms: Apply

Learning Objective: 13-01

Feedback: Only the value added of the Corner Store, $0.50 (= $2.50 – $2.00), is included in 2016 GDP because the other stages of production occurred in 2015.

Suppose a jar of DeLux popcorn that is ultimately sold to a customer at Friendly Groceries is produced by the following production process:

If the corn was grown and the jar of popcorn produced in the year 2015, but the jar was sold at Friendly Groceries in the year 2016, what is the contribution of these transactions to GDP in the year 2015?

$0.50
$2.00
$2.50
$3.00

Answer: C

Difficulty: 03 Hard

Section: Gross Domestic Product: Measuring the Nation’s Output

AACSB: Analytic

Blooms: Apply

Learning Objective: 13-01

Feedback: Only the value added of Fulton Family Farm and DeLux Popcorn Co., $0.50 plus $2.00 are included in 2015 GDP because the other stage of production occurred in 2016.

Suppose a jar of DeLux popcorn that is ultimately sold to a customer at Friendly Groceries is produced by the following production process:

$0.00
$0.50
$1.50
$4.00

Answer: C

Difficulty: 03 Hard

Section: Gross Domestic Product: Measuring the Nation’s Output

AACSB: Analytic

Blooms: Apply

Learning Objective: 13-01

Feedback: Only the value added of Friendly Groceries, $1.50 (= $4.00 – $2.50), is included in 2016 GDP because the other stages of production occurred in 2015.

Which of the following transactions would be included in the GDP of the United States?
Coca Cola produces soft drinks in England.
Honda produces cars in Ohio.
McDonalds sells hamburgers in Russia.
Ford Motor Company produces cars in Mexico.

Answer: B

Difficulty: 02 Medium

Section: Gross Domestic Product: Measuring the Nation’s Output

AACSB: Reflective Thinking

Blooms: Understand

Learning Objective: 13-01

Feedback: GDP only includes production that occurs within the United States.

Which of the following would be included in the GDP of the United States?
Boeing builds a plane in Seattle that is sold to Air Canada.
Chrysler produces a car in Germany that is sold in Michigan.
Nestle produces a candy bar in Switzerland that is sold in San Francisco.
Planet Hollywood serves customers in a restaurant in Hong Kong.

Answer: A

Difficulty: 02 Medium

Section: Gross Domestic Product: Measuring the Nation’s Output

AACSB: Reflective Thinking

Blooms: Understand

Learning Objective: 13-01

Feedback: GDP only includes production that occurs within the United States.

In 2015, Janice Quinn sells a five-year-old car to Used Car, Inc. for $6,000. In the same year, Used Car, Inc. resells the car to Hilda Goner for $6,500. What is the contribution of these transactions to GDP in the year 2015?
$0
$500
$6,000
$12,500

Answer: B

Difficulty: 03 Hard

Section: Gross Domestic Product: Measuring the Nation’s Output

AACSB: Analytic

Blooms: Apply

Learning Objective: 13-01

Feedback: Used Car, Inc. added $500 value to the transaction for the service to facilitate car sales, which is the difference in the price of buying the used car versus the price of selling the same car to a new owner.

In 2015, Pete Rich purchases a 1642 painting by Rembrandt for $20 million. He also pays a one percent commission to the auction house that sold the painting. What is the contribution of these transactions to GDP in the year 2015?
$0
$200,000
$2 million
$20.2 million

Answer: B

Difficulty: 03 Hard

Section: Gross Domestic Product: Measuring the Nation’s Output

AACSB: Analytic

Blooms: Apply

Learning Objective: 13-01

Feedback: The auction house added $200,000 value to the transaction for their service to facilitate the sale of this painting, which is the difference in the price of buying the painting versus the price of selling the same painting to the new owner.

The four categories of final users of GDP are:
businesses, firms, governments, and the foreign sector.
households, the Federal Reserve, governments, and the foreign sector.
businesses, corporations, firms, and farms.
households, firms, governments, and the foreign sector.

Answer: D

Difficulty: 01 Easy

Section: Different Methods for Measuring GDP

AACSB: Reflective Thinking

Blooms: Remember

Learning Objective: 13-02

Feedback: All final buyers of goods and services, which make up GDP, come from households, firms, governments or the foreign sector.

The market value of all domestically produced final goods and services are also equal to the total amount spent by ______________ less spending on imported goods and services.
households and firms
households, firms, and governments
households, firms, and the foreign sector
households, firms, governments, and the foreign sector

Answer: D

Difficulty: 01 Easy

Section: Different Methods for Measuring GDP

AACSB: Reflective Thinking

Blooms: Remember

Learning Objective: 13-02

Feedback: All final buyers of goods and services, which make up GDP, come from households, firms, governments or the foreign sector.

Total spending on final goods and services in an economy must equal total:
profits.
production value.
revenues from all transactions.
investment.

Answer: B

Difficulty: 02 Medium

Section: Different Methods for Measuring GDP

AACSB: Reflective Thinking

Blooms: Understand

Learning Objective: 13-02

Feedback: Total spending on final goods and services must equal the value of producing those same goods and services because any good or service produced will also be purchased by some economic agent..

The total market value of production in an economy must equal total:
profits.
revenues from all transactions.
consumption.
spending on final goods and services.

Answer: D

Difficulty: 02 Medium

Section: Different Methods for Measuring GDP

AACSB: Reflective Thinking

Blooms: Understand

Learning Objective: 13-02

The four components of aggregate expenditures are:
consumption, imports, government spending, and net exports.
consumption, interest payments, government spending, and net exports.
consumer durables, investment, government spending, and net exports.
consumption, investment, government spending, and net exports.

Answer: D

Difficulty: 01 Easy

Section: Different Methods for Measuring GDP

AACSB: Reflective Thinking

Blooms: Remember

Learning Objective: 13-02

Feedback: All final buyers of goods and services, which make up GDP, come from households (consumption), firms (investment), governments (government spending) or the foreign sector (net exports).

Consumption expenditures include spending by households on:
exports.
inventories.
residential housing.
services.

Answer: D

Difficulty: 01 Easy

Section: Different Methods for Measuring GDP

AACSB: Reflective Thinking

Blooms: Remember

Learning Objective: 13-02

Feedback: Households buy goods and services. They also buy residential housing, but for national income accounting purposes this spending is considered investment.

Consumption spending includes spending on:
durables, nondurables, and services.
stocks, bonds, and other financial instruments.
capital goods, residential housing, and changes in inventories.
goods and services by federal, state, and local governments.

Answer: A

Difficulty: 01 Easy

Section: Different Methods for Measuring GDP

AACSB: Reflective Thinking

Blooms: Remember

Learning Objective: 13-02

Feedback: Households buy goods (both durable and nondurable) and services. They also buy residential housing, but for national income accounting purposes this spending is considered investment.

The largest expenditure component of U.S. GDP is:
consumption.
investment.
government purchases.
exports.

Answer: A

Difficulty: 01 Easy

Section: Different Methods for Measuring GDP

AACSB: Reflective Thinking

Blooms: Remember

Learning Objective: 13-02

Feedback: Household consumption accounts for the majority of U.S. GDP spending, where the consumer drives the economy.

Which of the following would increase the consumption component of U.S. GDP?
You purchase a bottle of California wine.
A person in Paris purchases a bottle of California wine.
A restaurant in Denver purchases a bottle of California wine to include on its wine list.
The U.S. government buys a bottle of California wine to serve at a state dinner in the White House.

Answer: A

Difficulty: 02 Medium

Section: Different Methods for Measuring GDP

AACSB: Reflective Thinking

Blooms: Understand

Learning Objective: 13-02

Feedback: For national income accounting purposes, consumption is only done by households.

Spending on durable goods, nondurable goods, and services is included in:
consumption expenditures.
investment.
government purchases.
net exports.

Answer: A

Difficulty: 01 Easy

Section: Different Methods for Measuring GDP

AACSB: Reflective Thinking

Blooms: Remember

Learning Objective: 13-02

Feedback: Spending on durable goods, nondurable goods, and services is included in consumption expeditures.

Which of the following would increase the consumption component of U.S. GDP?
You purchase a vacation at Disney World in Florida.
A business purchases Disney World vacations as rewards for the firm’s best salespeople.
Disney World purchases tires for the monorail from a firm in Ohio.
A French man purchases a vacation at a Disney theme park in France.

Answer: A

Difficulty: 02 Medium

Section: Different Methods for Measuring GDP

AACSB: Reflective Thinking

Blooms: Understand

Learning Objective: 13-02

Feedback: For national income accounting purposes, consumption is only done by households.

Which of the following expenditures would increase the consumption component of U.S. GDP?
A. You buy a new house.
B. You buy a pizza.
C. You buy 1,000 shares of stock.
D. You buy a used book about finance.

Answer: B

Difficulty: 02 Medium

Section: Different Methods for Measuring GDP

AACSB: Reflective Thinking

Blooms: Understand

Learning Objective: 13-02

Feedback: The pizza is the only answer that qualifies as consumption. Buying a new house is considered investment in national accounting; buying share of stock is considered saving; and buying a used book does not count in GDP, because it was counted when the book was new.

Which of the following expenditures would increase the investment component of U.S. GDP?
A. You purchase a new house.
B. You purchase a new car.
C. You purchase 1,000 shares of stock.
D. You pay a commission to your stock broker for selling some stocks that you owned.

Answer: A

Difficulty: 02 Medium

Section: Different Methods for Measuring GDP

AACSB: Reflective Thinking

Blooms: Understand

Learning Objective: 13-02

Feedback: Purchasing a new house to be occupied by the buyer is considered “investment” for national income accounting purposes.

Investment spending includes spending on:
consumer durable goods.
new capital goods.
services.
stocks and bonds.

Answer: B

Difficulty: 01 Easy

Section: Different Methods for Measuring GDP

AACSB: Reflective Thinking

Blooms: Remember

Learning Objective: 13-02

Feedback: New capital goods is the only answer that qualifies as “investment.” Consumer durable goods and services are both consumption items, and stocks and bonds are considered to be savings.

Spending on new capital goods, new homes, and the addition of unsold goods to company inventories is included in:
consumption expenditures.
investment spending.
government purchases.
service spending.

Answer: B

Difficulty: 01 Easy

Section: Different Methods for Measuring GDP

AACSB: Reflective Thinking

Blooms: Remember

Learning Objective: 13-02

Feedback: Spending on new capital goods, new homes, and the addition of unsold goods to company inventories is included in investment spending.

Investment spending includes spending on:
durables, nondurables, and services.
stocks, bonds, and other financial instruments.
capital goods, residential housing, and changes in inventories.
goods and services by federal, state, and local governments.

Answer: C

Difficulty: 01 Easy

Section: Different Methods for Measuring GDP

AACSB: Reflective Thinking

Blooms: Remember

Learning Objective: 13-02

Feedback: Spending on new capital goods, new homes, and the addition of unsold goods to company inventories is included in investment spending.

The value of goods produced, but unsold, in the current period is:
excluded from GDP.
counted in GDP as inventory investment.
counted in GDP as consumption spending.
allocated to GDP in future periods when the goods are sold.

Answer: B

Difficulty: 01 Easy

Section: Different Methods for Measuring GDP

AACSB: Reflective Thinking

Blooms: Remember

Learning Objective: 13-02

Feedback: Inventory is a subtle addition to investment. Sometimes it is an intentional buildup of inventory and sometimes it is the unintentional additions to inventory due to lagging sales.

Which of the following would increase the investment component of U.S. GDP?
You purchase a new clothes washing machine produced in the U.S.
You purchase a new clothes washing machine produced in France.
A laundry in Seattle purchases a new clothes-washing machine produced in the U.S.
A laundry in Mexico purchases a new clothes-washing machine produced in the U.S.

Answer: C

Difficulty: 02 Medium

Section: Different Methods for Measuring GDP

AACSB: Reflective Thinking

Blooms: Understand

Learning Objective: 13-02

Feedback: Investment must be done by domestic businesses except for owner-occupied new housing.

Changes in business inventories are:
classified as consumption expenditures.
classified as investment expenditures.
classified as government purchases.
excluded from GDP.

Answer: B

Difficulty: 01 Easy

Section: Different Methods for Measuring GDP

AACSB: Reflective Thinking

Blooms: Remember

Learning Objective: 13-02

Feedback: Additions and subtractions from inventories are considered investment. Sometimes these additions and subtractions are intentional and sometimes they are unintended.

Which of the following would increase the investment component of U.S. GDP?
You purchase a vacation at Disney World in Florida.
You purchase shares of Disney stock.
Disney World purchases tires for the monorail from a firm in Ohio.
A French man purchases a vacation at a Disney theme park in France.

Answer: C

Difficulty: 02 Medium

Section: Different Methods for Measuring GDP

AACSB: Reflective Thinking

Blooms: Understand

Learning Objective: 13-02

Feedback: Investment must be done by domestic businesses except for owner-occupied new housing.

If business inventories equal $40 billion at the beginning of the year and $55 billion at the end of the year, then, assuming no other changes, GDP must have:
decreased by $15 billion.
increased by $15 billion.
increased by $40 billion.
increased by $55 billion.

Answer: B

Difficulty: 03 Hard

Section: Different Methods for Measuring GDP

AACSB: Analytic

Blooms: Apply

Learning Objective: 13-02

Feedback: The difference between end-of-year inventories and beginning-year inventories is counted as change in (inventory) investment.

Government purchases include all of the following except:
social security benefits paid by the federal government.
the construction of a new court house built by a county government.
the salary paid to an elementary school teacher employed by a local public school district.
the purchase of new military hardware by the U.S. Army.

Answer: A

Difficulty: 02 Medium

Section: Different Methods for Measuring GDP

AACSB: Reflective Thinking

Blooms: Understand

Learning Objective: 13-02

Feedback: Social Security is a transfer payment, which means nothing was produced in exchange for the payment.

Which of the following would increase the government purchases component of U.S. GDP?
The U.S. federal government pays $3 billion in pensions to government workers.
The U.S. federal government pays $3 billion in interest on the national debt.
The U.S. federal government pays $3 billion in salaries to soldiers in the military.
The U.S. federal government pays $3 billion in interest to foreign holders of U.S. government bonds.

Answer: C

Difficulty: 02 Medium

Section: Different Methods for Measuring GDP

AACSB: Reflective Thinking

Blooms: Understand

Learning Objective: 13-02

Feedback: Salaries of government workers are considered to be government purchases, while pensions to government workers are considered transfer payments.

Government purchases include spending by federal, state, and local governments on:
consumer durables, nondurables, and services.
stocks, bonds, and other financial instruments.
capital goods, residential housing, and changes in inventories.
final goods and services.

Answer: D

Difficulty: 01 Easy

Section: Different Methods for Measuring GDP

AACSB: Reflective Thinking

Blooms: Remember

Learning Objective: 13-02

Feedback: For government expenditure to be added to GDP, they must be purchases of final goods and services.

The government purchases component of GDP includes:
purchases of final goods and services.
interest payments on government debt.
transfer payments.
payments made to social security recipients.

Answer: A

Difficulty: 02 Medium

Section: Different Methods for Measuring GDP

AACSB: Reflective Thinking

Blooms: Understand

Learning Objective: 13-02

Feedback: For government expenditure to be added to GDP, they must be purchases of final goods and services.

Net exports equal:
the value added of exports.
exports plus imports.
exports minus imports.
exports minus depreciation.

Answer: C

Difficulty: 01 Easy

Section: Different Methods for Measuring GDP

AACSB: Reflective Thinking

Blooms: Remember

Learning Objective: 13-02

Feedback: Net exports equal exports minus imports.

Which of the expenditure components of GDP can be negative?
consumption spending on durables.
government purchases of goods and services.
consumption spending on services.
net exports.

Answer: D

Difficulty: 02 Medium

Section: Different Methods for Measuring GDP

AACSB: Reflective Thinking

Blooms: Understand

Learning Objective: 13-02

Feedback: Net exports and inventory investments are the only components of GDP that can be negative. Net exports is negative when imports exceed exports.

Which of the following would increase the net export component of U.S. GDP?
A bottle of California wine is purchased in London.
A car produced in Japan is purchased in California.
A bottle of French wine is purchased in New York.
A car produced in Michigan is purchased in Louisiana.

Answer: A

Difficulty: 02 Medium

Section: Different Methods for Measuring GDP

AACSB: Reflective Thinking

Blooms: Understand

Learning Objective: 13-02

Feedback: For something to qualify as an export, it has to be sold outside the country where it was made.

In which of the following situations would GDP not change?
As domestic consumers buy fewer tobacco products, tobacco manufacturers instead sell their products, at the same price, to foreign buyers.
Domestic consumers begin to buy less imported wine, and instead spend just as much money on domestically produced wine.
Without reducing the number of automobiles sold, domestic automobile producers decide to reduce the number of automobiles they produce, rather than producing cars that would end up as unsold inventory.
More and more domestic consumers opt to build a new home, rather than spending the same money on an already existing home.

Answer: A

Difficulty: 02 Medium

Section: Different Methods for Measuring GDP

AACSB: Reflective Thinking

Blooms: Understand

Learning Objective: 13-02

Feedback: When domestically produced goods go out of the country as exports opposed to being sold within the country, there is no effect on GDP.

Given the following data for the economy, compute the value of GDP.

Government purchases of goods and services	10
Consumption Expenditures	70
Exports	5
Imports	12
Change in inventories	–7
Construction of new homes and apartments	15
Sales of existing homes and apartments	22
Government payments to retirees	17
Business fixed investment	9

Answer: C

Difficulty: 03 Hard

Section: Different Methods for Measuring GDP

AACSB: Analytic

Blooms: Analyze

Learning Objective: 13-02

Feedback: Using the Expenditure Approach to computing GDP, C = 70, I = (-7 + 15 + 9) = 17, G = (10), and Xn = (5 – 12) = -7. Adding the components, GDP = 70 + 17 + 10 – 7 = 90. Note that neither transfer payments such as payments to retirees nor the sales of existing goods are included in GDP.

The following table provides data for an economy in a certain year. _

Given the data in the table, compute the investment component of GDP.

A. 300
400
800
900

Answer: D

Difficulty: 03 Hard

Section: Different Methods for Measuring GDP

AACSB: Analytic

Blooms: Analyze

Learning Objective: 13-02

Feedback: The investment component of GDP is 900. This is made up of: Construction of new homes and apartments (500), Business fixed investment (300) and the difference between End-of-year inventory (600) and Beginning-of-year inventory (500).

The following table provides data for an economy in a certain year.

Given the data in the table, how much did households spend on nondurables and services?

A. 300
700
1,000
1,300

Answer: B

Difficulty: 03 Hard

Section: Different Methods for Measuring GDP

AACSB: Analytic

Blooms: Analyze

Learning Objective: 13-02

Feedback: Households spent 700 on nondurables and services. This is the difference between total consumption (1,000) and household purchases on durable goods (300).

The following table provides data for an economy in a certain year.

Given the data in the table, compute the government purchases component of GDP.

A. 200
500
700
900

Answer: C

Difficulty: 03 Hard

Section: Different Methods for Measuring GDP

AACSB: Analytic

Blooms: Analyze

Learning Objective: 13-02

Feedback: Government purchases accounted for 700. Remember, government payments to retirees are considered to be transfer payments.

The following table provides data for an economy in a certain year.

Given the data in the table, compute the value of GDP.

A. 2,400
2,500
2,600
2,700

Answer: B

Difficulty: 03 Hard

Section: Different Methods for Measuring GDP

AACSB: Analytic

Blooms: Analyze

Learning Objective: 13-02

Feedback: Using the Expenditure Approach to computing GDP, C = 1,000, I = (500 + 100 + 300) = 900, G = (700), and Xn = (500 – 600) = -100. Adding the components, GDP = 1,000 + 900 + 700 – 100 = 2,500. Note that neither transfer payments such as payments to retirees nor the sales of existing goods are included in GDP. Also, the household purchases of durable goods are already included in consumption expenditures (C) and can therefore not be included again.

The following table provides data for an economy in a certain year.

Given the data in the table, compute the investment component of GDP.

A. 30
40
60
70

Answer: D

Difficulty: 03 Hard

Section: Different Methods for Measuring GDP

AACSB: Analytic

Blooms: Apply

Learning Objective: 13-02

Feedback: The investment component of GDP was 70. This was made up of: Construction of new homes and apartments (30), Business fixed investment (30) and the difference between End-of-year inventory (20) and Beginning-of-year inventory (10).

The following table provides data for an economy in a certain year.

Given the data in the table, how much did households spend on nondurables and services?

A. 20
30
50
70

Answer: B

Difficulty: 03 Hard

Section: Different Methods for Measuring GDP

AACSB: Analytic

Blooms: Apply

Learning Objective: 13-02

Feedback: Households spent 30 on nondurables. This is the difference between total consumption (50) and household purchases on durable goods (20).

The following table provides data for an economy in a certain year.

Given the data in the table, compute the government purchases component of GDP.

A. 10
20
30
40

Answer: B

Difficulty: 03 Hard

Section: Different Methods for Measuring GDP

AACSB: Analytic

Blooms: Apply

Learning Objective: 13-02

Feedback: Government purchases accounted for 20. Remember, government payments to retirees are considered to be transfer payments.

The following table provides data for an economy in a certain year.

Given the data in the table, compute the value of GDP.

A. 130
140
150
160

Answer: C

Difficulty: 03 Hard

Section: Different Methods for Measuring GDP

AACSB: Analytic

Blooms: Apply

Learning Objective: 13-02

Feedback: Using the Expenditure Approach to computing GDP, C = 50, I = (30 + 10 + 30) = 70, G = (20), and Xn = (50 – 40) = 10. Adding the components, GDP = 50 + 70 + 20 + 10 = 150. Note that neither transfer payments such as payments to retirees nor the sales of existing goods are included in GDP. Also, the household purchases of durable goods are already included in consumption expenditures (C) and can therefore not be included again.

An economy produces only 1,000,000 computers valued at $2,000 each. Of these, 200,000 are sold to consumers, 300,000 are sold to businesses, 300,000 are sold to the government, and 100,000 are sold abroad. No computers are imported. At the end of the year, the computer manufacturers hold the unsold computers in inventory. What is the value of GDP?
$0.9 billion
$1.0 billion
$1.8 billion
$2.0 billion

Answer: D

Difficulty: 03 Hard

Section: Different Methods for Measuring GDP

AACSB: Analytic

Blooms: Apply

Learning Objective: 13-02

Feedback: Since all of the computers are sold domestically or held in inventory, and because no computers are imported, the value of GDP is the number of computers times their market value. That is 1,000,000 × $2,000 = $2,000,000,000, or $2 billion.

An economy produces only 1,000,000 computers valued at $2,000 each. Of these, 200,000 are sold to consumers, 300,000 are sold to businesses, 300,000 are sold to the government, and 100,000 are sold abroad. No computers are imported. At the end of the year, the computer manufacturers hold the unsold computers in inventory. What is the value of the investment component of GDP?
$0.3 billion
$0.4 billion
$0.6 billion
$0.8 billion

Answer: D

Difficulty: 03 Hard

Section: Different Methods for Measuring GDP

AACSB: Analytic

Blooms: Apply

Learning Objective: 13-02

Feedback: Investment is the value of computers sold to business and the net change in inventory. In this case, 300,000 computers are sold to business and 100,000 computers are unsold and added to inventory, so 400,000 × $2,000 = $0.8 billion goes into investment.

An economy produces only 500,000 tables valued at $100 each. Of these, 100,000 are sold to consumers, 200,000 are sold to businesses, 100,000 are sold to the government, and 50,000 are sold abroad. No tables are imported. At the end of the year, the table manufacturers hold the unsold tables in inventory. What is the value of GDP?
$5 million
$40 million
$45 million
$50 million

Answer: D

Difficulty: 03 Hard

Section: Different Methods for Measuring GDP

AACSB: Analytic

Blooms: Apply

Learning Objective: 13-02

Feedback: Since all the tables are sold domestically or held in inventory, and because no tables are imported, the value of GDP is the number of tables times their market value. That is 500,000× $100 = $50,000,000, or $50 million.

An economy produces only 500,000 tables valued at $100 each. Of these, 100,000 are sold to consumers, 200,000 are sold to businesses, 100,000 are sold to the government, and 50,000 are sold abroad. No tables are imported. At the end of the year, the table manufacturers hold the unsold tables in inventory. What is the value of the investment component of GDP?
$2 billion
$10 million
$20 million
$25 million

Answer: D

Difficulty: 03 Hard

Section: Different Methods for Measuring GDP

AACSB: Analytic

Blooms: Apply

Learning Objective: 13-02

Feedback: Investment is the value of tables sold to business and the net change in inventory. In this case, 200,000 tables are sold to business and 50,000 tables are unsold and added to inventory, so 250,000× $100 = $25 million goes into investment.

An economy produces 1,000,000 computers valued at $2,000 each. Households purchase 200,000 computers, of which 100,000 are imported. Businesses purchase 300,000 domestically produced computers, the government purchases 300,000 domestically produced computers, and 100,000 domestically produced computers are sold abroad. At the end of the year, the computer manufacturers hold the unsold computers in inventory. What is the value of GDP?
$0.9 billion
$1.0 billion
$1.8 billion
$2.0 billion

Answer: D

Difficulty: 03 Hard

Section: Different Methods for Measuring GDP

AACSB: Analytic

Blooms: Apply

Learning Objective: 13-02

Feedback: In this problem imports equal exports, or net exports equals zero, so all domestically produced computers are either sold domestically or added to inventory. Thus, GDP is 1,000,000 computers times $2,000 each or $2.0 billion.

An economy produces 1,000,000 computers valued at $2,000 each. Households purchase 200,000 computers, of which 100,000 are imported. Businesses purchase 300,000 domestically produced computers, the government purchases 300,000 domestically produced computers, and 100,000 domestically produced computers are sold abroad. At the end of the year, the computer manufacturers hold the unsold computers in inventory.. What is the value of the investment component of GDP?
$0.6 billion
B. $0.8 billion
$0.9 billion
$1.0 billion

Answer: D

Difficulty: 03 Hard

Section: Different Methods for Measuring GDP

AACSB: Analytic

Blooms: Apply

Learning Objective: 13-02

Feedback: Investment is the amount of computers purchased by businesses (300,000) plus the amount of computers added to inventory (200,000), so investment is 500,000× $2,000 = $1.0 billion.

An economy produces 500,000 tables valued at $100 each. Households purchase 100,000 tables, of which 50,000 are imported. Businesses purchase 200,000 domestically produced tables, the government purchases 100,000 domestically produced tables, and 50,000 domestically produced tables are sold abroad. At the end of the year, the table manufacturers hold the unsold tables in inventory. What is value of GDP?
$5 million
$40 million
$45 million
$50 million

Answer: D

Difficulty: 03 Hard

Section: Different Methods for Measuring GDP

AACSB: Analytic

Blooms: Apply

Learning Objective: 13-02

Feedback: In this problem net exports are zero, so all domestically produced tables are either sold domestically or added to inventory. Thus, GDP is 500,000 ×$100 = $50,000,000, or $50 million.

1067 An economy produces 500,000 tables valued at $100 each. Households purchase 100,000 tables, of which 50,000 are imported. Businesses purchase 200,000 domestically produced tables, the government purchases 100,000 domestically produced tables, and 50,000 domestically produced tables are sold abroad. At the end of the year, the table manufacturers hold the unsold tables in inventory. What is value of the investment component of GDP?

$10 billion
$20 million
$25 million
$30 million

Answer: D

Difficulty: 03 Hard

Section: Different Methods for Measuring GDP

AACSB: Analytic

Blooms: Analyze

Learning Objective: 13-02

Feedback: Feedback: Investment is the value of tables sold to business and the net change in inventory. In this case, 200,000 tables are sold to business and 100,000 tables are unsold and added to inventory, so 300,000× $100 = $30 million goes into investment.

Three equivalent ways to measure GDP are total _____, total _____, and total ______.
profits; production; saving
expenditure; income; profits
investment; consumption; saving
production; income; expenditure

Answer: D

Difficulty: 01 Easy

Section: Different Methods for Measuring GDP

AACSB: Reflective Thinking

Blooms: Remember

Learning Objective: 13-02

Feedback: Whenever a good or service is produced and sold, the revenue from the sale is distributed to the workers and the owners of the capital involved in the production of the good or service.

The total income of capital and labor must equal the value of total:
production.
profits.
revenue.
investment.

Answer: A

Difficulty: 01 Easy

Section: Different Methods for Measuring GDP

AACSB: Reflective Thinking

Blooms: Remember

Learning Objective: 13-02

Feedback: Capital and labor are mixed together in production. The value of that production must equal the payments to the productive factors.

GDP can be measured as each of the following except:
the market value of production.
total expenditure on final goods and services.
incomes of capital and labor.
total business revenues.

Answer: D

Difficulty: 02 Medium

Section: Different Methods for Measuring GDP

AACSB: Reflective Thinking

Blooms: Understand

Learning Objective: 13-02

Feedback: Total business revenues include previously sold goods as well as new goods, plus intermediate goods, so total business revenues overstate GDP.

Labor income in the U.S. equals approximately ______ of GDP.
one third
two fifths
one half
two thirds

Answer: D

Difficulty: 01 Easy

Section: Different Methods for Measuring GDP

AACSB: Reflective Thinking

Blooms: Remember

Learning Objective: 13-02

Feedback: Labor income is, by far, the biggest category of earned income.

Capital income in the U.S. equals approximately ______ of GDP.
one third
two fifths
one half
two thirds

Answer: A

Difficulty: 01 Easy

Section: Different Methods for Measuring GDP

AACSB: Reflective Thinking

Blooms: Remember

Learning Objective: 13-02

Fedback: Capital income accounts for about one third of GDP whereas labor income accounts for about two thirds.

Labor income includes:
wages, salaries, and earnings of the self-employed.
payments to owners of factories, machines, and buildings.
interest, dividends, and rent.
profits, royalties, and rent.

Answer: A

Difficulty: 01 Easy

Section: Different Methods for Measuring GDP

AACSB: Reflective Thinking

Blooms: Remember

Learning Objective: 13-02

Feedback: Labor income includes wages, salaries, and earning of the self-employed.

Wages and salaries are examples of:
consumption.
labor income.
capital income.
profits.

Answer: B

Difficulty: 01 Easy

Section: Different Methods for Measuring GDP

AACSB: Reflective Thinking

Blooms: Remember

Learning Objective: 13-02

Feedback: Wages, salaries and related benefits make up labor income.

Capital income includes:
profits, rent, and interest.
wages and salaries.
earnings of the self-employed.
capital gains from stock sales.

Answer: A

Difficulty: 01 Easy

Section: Different Methods for Measuring GDP

AACSB: Reflective Thinkikng

Blooms: Remember

Learning Objective: 13-02

Feedback: Capital income includes all earnings that go to owners of the productive capital used by a firm.

Profits, rents, interest, and royalties are examples of:
consumption.
labor income.
capital income.
investment.

Answer: C

Difficulty: 01 Easy

Section: Different Methods for Measuring GDP

AACSB: Reflective Thinking

Blooms: Remember

Learning Objective: 13-02

Feedback: “Capital income” is that income earned on productive resources other than labor.

A measure of GDP in which quantities produced are valued at the prices of a fixed base year is called:
real GDP.
nominal GDP.
base GDP.
current GDP.

Answer: A

Difficulty: 01 Easy

Section: Nominal GDP Versus Real GDP

AACSB: Reflective Thinking

Blooms: Remember

Learning Objective: 13-03

Feedback: Real GDP is also known as “inflation-adjusted” GDP as it measures only the changes in the physical volume of production.

To compare the change in physical production (GDP) between 2010 and 2016, we should compare ______ GDP in 2010 with ______ GDP in 2016.
real; real
real; nominal
nominal; nominal
current dollar; current dollar

Answer: A

Difficulty: 01 Easy

Section: Nominal GDP Versus Real GDP

AACSB: Reflective Thinking

Blooms: Remember

Learning Objective: 13-03

Feedback: To measure physical production we have to take out changes that are only due to inflation. This means comparing historical real values with current real values.

Comparisons of economic activity over time should be made using:
nominal GDP adjusted for unemployment.
nominal GDP per capita.
current-dollar GDP.
real GDP.

Answer: D

Difficulty: 01 Easy

Section: Nominal GDP Versus Real GDP

AACSB: Reflective Thinking

Blooms: Remember

Learning Objective: 13-03

Feedback: To measure physical production we have to take out changes that are only due to inflation. This means comparing historical real values with current real values.

Real GDP is measured in ______ prices; nominal GDP is measured in ______ prices.
current; base-year
base-year; current
current; current
base-year; base-year

Answer: B

Difficulty: 01 Easy

Section: Nominal GDP Versus Real GDP

AACSB: Reflective Thinking

Blooms: Remember

Learning Objective: 13-03

Feedback: Real GDP takes inflation out of nominal values; so real GDP is computed at the fixed prices of the base year.

Real GDP measures the ______ of production; nominal GDP measures the ______ of production.
current dollar value; physical volume
current dollar value; current dollar value
current dollar value; market value
physical volume; current dollar value

Answer: D

Difficulty: 01 Easy

Section: Nominal GDP Versus Real GDP

AACSB: Reflective Thinking

Blooms: Remember

Learning Objective: 13-03

Feedback: Real GDP measures the physical volume and nominal GDP measures the current dollar value.

A measure of GDP in which quantities produced are valued at current-year prices is called:
real GDP.
nominal GDP.
base GDP.
physical GDP.

Answer: B

Difficulty: 01 Easy

Section: Nominal GDP Versus Real GDP

AACSB: Reflective Thinking

Blooms: Remember

Learning Objective: 13-03

Feedback: Nominal GDP measures the current dollar value.

In the base year, real GDP ______ nominal GDP.
is greater than
is less than
is equal to
could be greater than or less than

Answer: C

Difficulty: 02 Medium

Section: Nominal GDP Versus Real GDP

AACSB: Reflective Thinking

Blooms: Understand

Learning Objective: 13-03

Feedback: In the base year, current prices are the prices of the base year.

Nominal GDP measures the ______ of production.
change in the volume
physical volume
current dollar value
base year value

Answer: C

Difficulty: 01 Easy

Section: Nominal GDP Versus Real GDP

AACSB: Reflective Thinking

Blooms: Remember

Learning Objective: 13-03

Feedback: Nominal GDP measures the current dollar value.

Real GDP measures the ______ of production.
change in the volume
physical volume
current dollar value
current market value

Answer: B

Difficulty: 01 Easy

Section: Nominal GDP Versus Real GDP

AACSB: Reflective Thinking

Blooms: Remember

Learning Objective: 13-03

Feedback: Real GDP measures the market value of production using the prices of in a base year rather than current prices.

If prices in the current year are higher on average than in the base year, real GDP in the current year ______ nominal GDP in the current year.
is greater than
is less than
is equal to
could be greater than or less than

Answer: B

Difficulty: 02 Medium

Section: Nominal GDP Versus Real GDP

AACSB: Reflective Thinking

Blooms: Understand

Learning Objective: 13-03

Feedback: When the price level has risen, the current prices used when computing today’s nominal GDP are higher than the prices in the base-year, which used for computing real GDP.

Assume an economy produces only hamburgers and hotdogs and the base year is 2005.

Given the data in the table above, what is the value of real GDP in 2006?

A. $ 5,000
$ 7,000
$10,000
$10,500

Answer: C

Difficulty: 03 Hard

Section: Nominal GDP Versus Real GDP

AACSB: Analytic

Blooms: Apply

Learning Objective: 13-03

Feedback: Real GDP in 2006 is: the quantities in 2006 × prices in the base = 3,000 hamburgers × $2 + 4,000 hotdogs × $1 = $6,000 + 4,000 = $10,000.

Assume an economy produces only hamburgers and hotdogs and the base year is 2005.

Given the data in the table above, what is the value of nominal GDP in 2006?

A. $ 5,000
$ 7,000
$10,500
$15,000

Answer: D

Difficulty: 03 Hard

Section: Nominal GDP Versus Real GDP

AACSB: Analytic

Blooms: Apply

Learning Objective: 13-03

Feedback: Nominal GDP in 2006 is: (3,000 hamburger× $3) + (4,000 hotdogs× $1.50) = $9,000 + $6,000 = $15,000.

Assume an economy produces only footballs and baseballs and the base year is 2005.

Given the data in the table above, what is the value of real GDP in 2006?

A. $ 9,000
$10,000
$12, 000
$12,500

Answer: C

Difficulty: 03 Hard

Section: Nominal GDP Versus Real GDP

AACSB: Analytic

Blooms: Apply

Learning Objective: 13-03

Feedback: Feedback: Real GDP in 2006 is: the quantities in 2006 × prices in the base = 300 footballs × $20 + 600 baseballs × $10 = $6,000 + 6,000 = $12,000

Assume an economy produces only footballs and baseballs and the base year is 2005.

Given the data in the table above, what is the value of nominal GDP in 2006?

A. $10,000
$12,000
$12,500
$16,500

Answer: D

Difficulty: 03 Hard

Section: Nominal GDP Versus Real GDP

AACSB: Analytic

Blooms: Apply

Learning Objective: 13-03

Feedback: Nominal GDP in 2006 is: (300 footballs × $25) + (600 baseballs × $15) = $7,500 + $9,000 = $16,500.

Bob’s Barber Shop cut 3,000 heads of hair in 2014 and 3,100 in 2015. The price of a haircut was $7 in 2014 and $8 in 2015. If 2014 is the base year, what was Bob’s contribution to real GDP in 2014?
$21,000
$21,700
$24,000
$24,800

Answer: A

Difficulty: 03 Hard

Section: Nominal GDP Versus Real GDP

AACSB: Analytic

Blooms: Analyze

Learning Objective: 13-03

Feedback: Bob’s contribution to real GDP was: (3,000 × $7) = $21,000.

Bob’s Barber Shop cut 3,000 heads of hair in 2014 and 3,100 in 2015. The price of a haircut was $7 in 2014 and $8 in 2015. If 2014is the base year, what was Bob’s contribution to nominal GDP in the year 2014?
$21,000
$21,700
$24,000
$24,800

Answer: A

Difficulty: 03 Hard

Section: Nominal GDP Versus Real GDP

AACSB: Analytic

Blooms: Analyze

Learning Objective: 13-03

Feedback: Bob’s contribution to nominal GDP was: (3,000 ×$7) = $21,000.

Bob’s Barber Shop cut 3,000 heads of hair in 2014 and 3,100 in 2015. The price of a haircut was $7 in 2014 and $8 in 2015. If 2014 is the base year, what was Bob’s contribution to real GDP in 2015?
$21,000
$21,700
$24,000
$24,800

Answer: B

Difficulty: 03 Hard

Section: Nominal GDP Versus Real GDP

AACSB: Analytic

Blooms: Apply

Learning Objective: 13-03

Feedback: Bob’s contribution to real GDP was: (3,100 × $7) = $21,700.

Bob’s Barber Shop cut 3,000 heads of hair in 2014 and 3,100 in 2015. The price of a haircut was $7 in 2014 and $8 in 2015. If 2014 is the base year, what was Bob’s contribution to nominal GDP in 2015?
$21,000
$21,700
$24,000
$24,800

Answer: D

Difficulty: 03 Hard

Section: Nominal GDP Versus Real GDP

AACSB: Analytic

Blooms: Apply

Learning Objective: 13-03

Feedback: Bob’s contribution to nominal GDP in 2015 was: (3,100 × $8) = $24,800.

Peg’s Manicure Manor did 4,000 sets of nails in 2015 and 4,500 sets of nails in 2016. The price of a set of nails was $20 in 2015 and $22 in 2016. If 2015 is the base year, Peg’s contribution to real GDP in 2015 was ______ and in 2016 was _____.
$80,000; $88,000
$80,000; $90,000
$80,000; $99,000
$88,000; $90,000

Answer: B

Difficulty: 03 Hard

Section: Nominal GDP Versus Real GDP

AACSB: Analytic

Blooms: Apply

Learning Objective: 13-03

Feedback: First note that in order to find Peg’s contribution to real GDP, we must use the price of nails in the base years ($20) in both computations. So Peg’s contribution to real GDP in the base year, 2015, was 4,000 nails × $20 or $80,000. Similarly, Peg’s contribution to real GDP in 2016, was: (4,500 nails × $20) = $90,000.

Peg’s Manicure Manor did 4,000 sets of nails in 2015 and 4,500 sets of nails in 2016. The price of a set of nails was $20 in 2015 and $22 in 2016. If 2015 is the base year, Peg’s contribution to nominal GDP in 2015 was ______ and in 2016 was _______.
$80,000; $88,000
$80,000; $90,000
$80,000; $99,000
$88,000; $90,000

Answer: C

Difficulty: 03 Hard

Section: Nominal GDP Versus Real GDP

AACSB: Analytic

Blooms: Apply

Learning Objective: 13-03

Feedback: Peg’s contribution to nominal GDP in 2015 was (4,000 nails × $20) = $80,000, and her contribution in 2016 was (4,500 nails × $22) = $99,000.

Peg’s Manicure Manor did 4,000 sets of nails in 2015 and 4,500 sets of nails in 2016. The price of a set of nails was $20 in 2015 and $22 in 2016. If 2015 is the base year, Peg’s contribution to nominal GDP in 2015 was ______ and to real GDP in 2015 was _____.
$80,000; $80,000
$80,000; $88,000
$80,000; $99,000
$88,000; $90,000

Answer: A

Difficulty: 03 Hard

Section: Nominal GDP Versus Real GDP

AACSB: Analytic

Blooms: Apply

Learning Objective: 13-03

Feedback: Peg’s contribution to nominal GDP in 2015 was: (4,000 nails × $20) = $80,000. Since 2015 was the base year, the nominal and real GDP contributions are the same.

Peg’s Manicure Manor did 4,000 sets of nails in 2015 and 4,500 sets of nails in 2016. The price of a set of nails was $20 in 2015 and $22 in 2016. If 2015 is the base year, Peg’s contribution to real GDP in 2016 was ______ and to nominal GDP in 2016 was _____.
$80,000; $88,000
$80,000; $90,000
$80,000; $99,000
$90,000; $99,000

Answer: D

Difficulty: 03 Hard

Section: Nominal GDP Versus Real GDP

AACSB: Analytic

Blooms: Apply

Learning Objective: 13-03

Feedback: First note that in order to find Peg’s contribution to real GDP, we must use the price of nails in the base years ($20), so Peg’s contribution to real GDP in 2016 was: (4,500 nails × $20) = $90,000. Peg’s contribution to nominal GDP in 2016 was: (4,500 nails × $22) = $99,000.

The table below gives the quantities and prices for 2000 and 2010 for an economy that produces just two goods: sailboats and coconuts.

	Quantity produced		Price
	2000	2010	2000	2010
Sailboats	10	20	$500	$525
Coconuts	2,000	2,400	$1	$2

For this economy that produces just sailboats and coconuts, and with 2000 is the base year, real GDP was approximately ______ times larger in 2010 than it was in 2000.

1.34
1.65
1.77
2.19

Answer: C

Difficulty: 03 Hard

Section: Nominal GDP Versus Real GDP

AACSB: Analytic

Blooms: Analyze

Learning Objective: 13-03

Feedback: First note that in order to find real GDP, we must use the prices from the base year in both commutations. So real GDP in 2000 was: (10 sailboats × $500) + (2,000 coconuts × $1) = $7,000. Real GDP in 2010 was (20 sailboats × $500) + (2,400 coconuts × $1) = $12,400. Thus, real GDP in 2010 was 1.77 times larger ($12,400 / 7,000) than in 2000.

The table below gives the quantities and prices for 2010 and 2015 for an economy that produces just two goods: sailboats and coconuts.

	Quantity produced		Price
	2010	2015	2010	2015
Sailboats	10	20	$500	$525
Coconuts	2,000	2,400	$1	$2

For this economy that produces just sailboats and coconuts, and with 2010 is the base year, nominal GDP was approximately ______ times larger in 2015 than it was in 2010.

1.34
1.65
1.77
2.19

Answer: D

Difficulty: 03 Hard

Section: Nominal GDP Versus Real GDP

AACSB: Analytic

Blooms: Analyze

Learning Objective: 13-03

Feedback: Nominal GDP in 2010 was (10 sailboats × $500) + (2,000 coconuts × $1) = $7,000 and nominal GDP in 2015 was (20 sailboats × $525) + (2,400 coconuts × $2) = $15,300. So the economy was 2.19 times larger ($15,300 / $7,000) in 2015 in nominal dollars.

The table below gives the quantities and prices for 2010 and 2015 for an economy that produces just two goods: sailboats and coconuts.

	Quantity produced		Price
	2010	2015	2010	2015
Sailboats	10	20	$500	$525
Coconuts	2,000	2,400	$1	$2

For this economy that produces just sailboats and coconuts, and with 2010 is the base year, real GDP was approximately ______ times larger in 2015 than it was in 2010.

1.34
1.65
1.77
2.19

Answer: C

Difficulty: 03 Hard

Section: Nominal GDP Versus Real GDP

AACSB: Analytic

Blooms: Analyze

Learning Objective: 13-03

Feedback: Real GDP in 2010 was (10 sailboats × $500) + (2,000 coconuts × $1) = $7,000 and real GDP in 2015 was (20 sailboats × $500) + (2,400 coconuts × $1) = $12,400. So the economy was 1.77 times larger ($12,400 / $7,000) in 2015 in real dollars.

Real GDP is not a perfect measure of economic well-being because it excludes the value of all of the following except:
leisure time.
goods and services available in the market economy.
nonmarket economic activity.
goods and services produced in the underground economy.

Answer: B

Difficulty: 02 Medium

Section: Nominal GDP versus Real GDP

AACSB: Reflective Thinking

Blooms: Understand

Learning Objective: 13-03

Feedback: GDP only measures things that are purchased in conventional markets, which excludes the underground economy, nonmarket activity, and leisure time.

GDP excludes important factors that affect people’s well-being, such as the value of:
leisure time.
government purchases of goods and services.
services purchased by households.
goods produced domestically but sold to foreigners.

Answer: A

Difficulty: 01 Easy

Section: Nominal GDP versus Real GDP

AACSB: Reflective Thinking

Blooms: Remember

Learning Objective: 13-03

Feedback: Since leisure time is not traded in conventional markets, it is not measured in GDP even though leisure time is very important.

If you knew that two countries had the same level of real GDP per person, what additional piece of information would help you determine in which country people had a better standard of living?
A. The total physical volume of output for each country
The population of each country
The average number of hours worked per week in each country
The average level of prices in each country

Answer: C

Difficulty: 02 Medium

Section: Nominal GDP versus Real GDP

AACSB: Reflective Thinking

Blooms: Understand

Learning Objective: 13-03

Fedback: GDP does not included information about how many hours were worked to produce that level of GDP.

Using real GDP to compare the level of economic well-being in two countries may be misleading because the value of ______ contributes to economic well-being, but is excluded from real GDP.
A. capital goods
services
leisure
formal education

Answer: C

Difficulty: 02 Medium

Section: Nominal GDP versus Real GDP

AACSB: Reflective Thinking

Blooms: Understand

Learning Objective: 13-03

Feedback: Since leisure time is not traded in conventional markets, it is not measured in GDP even though leisure time is very important.

If two countries are economically identical except that there is significant air and water pollution in one, then the level of GDP:
A. will be higher in the country with pollution.
B. will be higher in the country with no pollution.
C. will be the same in both countries.
D. will be greater than the level of economic well-being in each country.

Answer: C

Difficulty: 02 Medium

Section: Nominal GDP versus Real GDP

AACSB: Reflective Thinking

Blooms: Understand

Learning Objective: 13-03

Feedback: GDP does not account for pollution and other non-traded features of the economy.

If two countries are economically identical except that citizens in one country have more leisure time, then the level of GDP:
A. will be higher in the country with more leisure time.
B. will be higher in the country with less leisure time.
C. will be the same in both countries.
D. will be greater than the level of economic well being in each country.

Answer: C

Difficulty: 02 Medium

Section: Nominal GDP versus Real GDP

AACSB: Reflective Thinking

Blooms: Understand

Learning Objective: 13-03

Feedback: Since leisure time is not traded in conventional markets, it is not measured in GDP even though leisure time is very important.

Although GDP is not the same as economic well-being, high levels of GDP are positively correlated with all of the following except:
longer life expectancies.
B. higher rates of literacy.
higher material standards of living.
higher rates of infant mortality.

Answer: D

Difficulty: 02 Medium

Section: Nominal GDP versus Real GDP

AACSB: Reflective Thinking

Blooms: Understand

Learning Objective: 13-03

Feedback: High GDP correlates with many favorable non-economic conditions. Conversely, low GDP correlates with higher rates of infant mortality and many other non-favorable economic conditions.

Countries with high real GDP tend to have ______ infant mortality rates and ______ literacy rates than countries with low real GDP.
higher; higher
higher; lower
lower; higher
lower; lower

Answer: C

Difficulty: 02 Medium

Section: Nominal GDP versus Real GDP

AACSB: Reflective Thinking

Blooms: Understand

Learning Objective: 13-03

Feedback: High GDP correlates with many favorable non-economic conditions. Conversely, low GDP correlates with higher rates of infant mortality and lower rates of literacy.

150 One shortcoming of real GDP as an indicator of society’s social well-being is that it fails to take into account the:

growth in productivity.
increase in the quantity of goods.
non-market production.
change in the price level.

Answer: C

Difficulty: 01 Easy

Section: Nominal GDP versus Real GDP

AACSB: Reflective Thinking

Blooms: Remember

Learning Objective: 13-03

Feedback: Real GDP does not measure things that are not traded in conventional markets, such as mowing your own lawn or cooking your own dinner.

GDP would be a better measure of economic well-being if it included:
the costs of education.
the total value of intermediate goods.
the market value of final goods.
the value of leisure.

Answer: D

Difficulty: 01 Easy

Section: Nominal GDP versus Real GDP

AACSB: Reflective Thinking

Blooms: Remember

Learning Objective: 13-03

Feedback: Since leisure time is not traded in conventional markets, it is not measured in GDP even though leisure time is very important.

Despite some problems with equating GDP with economic well-being, higher real GDP per person does imply greater economic well-being because it tends to be positively associated with:
crime, pollution, and economic inequality.
better education, health and life expectancy.
poverty, depletion of nonrenewable resources, and congestion.
unemployment, availability of goods and services, and better education.

Answer: B

Difficulty: 01 Easy

Section: Nominal GDP versus Real GDP

AACSB: Reflective Thinking

Blooms: Remember

Learning Objective: 13-03

Feedback: High GDP correlates with many favorable non-economic conditions. Conversely, low GDP correlates with many unfavorable non-economic conditions.

Each person who is 16 years or older is considered to be in one of the following categories:
employed, unemployed, or discouraged worker.
part-time worker, full-time worker, or unemployed.
part-time worker, full-time worker, or out of the labor force.
employed, unemployed, or out of the labor force.

Answer: D

Difficulty: 01 Easy

Topic: Unemployment and the Unemployment Rate

AACSB: Reflective Thinking

Blooms: Remember

Learning Objective: 13-04

Feedback: For economic measurement purposes, workers are sorted into 3 categories: employed, unemployed, or out of the labor force.

A person 16 years or older who does not work, but is actively looking for work, is officially classified as:
employed.
unemployed.
chronically unemployed.
out of the labor force.

Answer: B

Difficulty: 01 Easy

Topic: Unemployment and the Unemployment Rate

AACSB: Reflective Thinking

Blooms: Remember

Learning Objective: 13-04

Feedback: This is the definition of “unemployed.”

Who from among the following would be counted as unemployed?
A person with a part-time job who wants and is looking for a full-time job.
A person who is willing to work and has looked for a job in the last week.
A person who is willing to work but has not looked for a job in two months.
All of these people would be counted as unemployed.

Answer: B

Difficulty: 01 Easy

Topic: Unemployment and the Unemployment Rate

AACSB: Reflective Thinking

Blooms: Remember

Learning Objective: 13-04

Feedback: For a person to be classified as unemployed, he or she must be willing to work and have recently looked for work.

Who from among the following would be classified as out of the labor force?
A person with a part-time job who wants and is looking for a full-time job.
A person who is willing to work and has looked for a job in the last week.
A person who is willing to work but has not looked for a job in two months.
None of these people would be classified as out of the labor force.

Answer: C

Difficulty: 01 Easy

Topic: Unemployment and the Unemployment Rate

AACSB: Reflective Thinking

Blooms: Remember

Learning Objective: 13-04

Feedback: For a person to be classified as out of the labor force, he or she must not be actively looking for work.

Which of the following events would increase the unemployment rate, if nothing else changed?
Unemployed workers leave the labor force.
Employed workers leave the labor force.
Workers from outside the labor force become employed.
Unemployed workers become employed.

Answer: B

Difficulty: 02 Medium

Topic: Unemployment and the Unemployment Rate

AACSB: Reflective Thinking

Blooms: Understand

Learning Objective: 13-04

Feedback: The unemployment rate is computed as the number of unemployed divided with the labor force. When employed workers leave the labor force, as often happens at retirement, the denominator in the unemployment rate computation decreases, making the unemployment rate go up, ceteris paribus.

Based on the information in the table, how big is the labor force?

Population 16 and older	1,000,000
Participation Rate	80%
Employed Workers	720,000

576,000
720,000
800,000
1,000,000

Answer: C

Difficulty: 03 Hard

Topic: Unemployment and the Unemployment Rate

AACSB: Analytic

Blooms: Apply

Learning Objective: 13-04

Feedback: There are 800,000 in the labor force, i.e., 1,000,000 × 0.80.

Based on the information in the table, what is the unemployment rate?

Population 16 and older	1,000,000
Participation Rate	80%
Employed Workers	720,000

7.2%
8.0%
10.0%
28.0%

Answer: C

Difficulty: 03 Hard

Topic: Unemployment and the Unemployment Rate

AACSB: Analytic

Blooms: Apply

Learning Objective: 13-04

Feedback: There are 800,000 in the labor force, i.e., 1,000,000 × 0.80. From this labor force, 720,000 are employed and so 80,000 must be unemployed. The unemployment rate is 80,000/800,000, or 10%.

Based on the information in the table, how many people are out of the labor force?

Population 16 and older	1,000,000
Participation Rate	80%
Employed Workers	720,000

144,000
200,000
280,000
576,000

Answer: B

Difficulty: 03 Hard

Topic: Unemployment and the Unemployment Rate

AACSB: Analytic

Blooms: Apply

Learning Objective: 13-04

Feedback: Since there are 800,000 in the labor force (0.80 × 1,000,000), then there must be 200,000 out of the labor force, i.e., 1,000,000- (0.80 × 1,000,000).

Who from among the following would be classified as employed?
Brenda Smith, an 18 year old full-time college student.
Mario Faubert, a NHL hockey player at home sick with the flu.
Jack Little, a 21 year old new college graduate actively looking for his first job.
Sarah Lopez, a retired public school teacher.

Answer: B

Difficulty: 02 Medium

Topic: Unemployment and the Unemployment Rate

AACSB: Reflective Thinking

Blooms: Understand

Learning Objective: 13-04

Feedback: Mario Faubert is employed because he is in the labor force and has a job.

Who from among the following would be classified as out of the labor force?
Brenda Smith, an 18 year old college student employed part-time at a fast food restaurant.
Mario Faubert, a NHL hockey player at home sick with the flu.
Jack Little, a 21 year old new college graduate actively looking for his first job.
Amanda Pie, a full-time homemaker.

Answer: D

Difficulty: 02 Medium

Topic: Unemployment and the Unemployment Rate

AACSB: Reflective Thinking

Blooms: Understand

Learning Objective: 13-04

Feedback: Amanda Pie is out of the labor force because she is not employed or actively looking for work.

The labor force equals the number of people:
employed.
aged 16 years and older.
both employed and unemployed.
employed, unemployed and discouraged.

Answer: C

Difficulty: 01 Easy

Topic: Unemployment and the Unemployment Rate

AACSB: Reflective Thinking

Blooms: Remember

Learning Objective: 13-04

Feedback: The labor force includes both people working and those 16 and older who are not working but are actively looking for work.

The unemployment rate equals the number of people:
unemployed.
unemployed divided by the number employed.
unemployed divided by the labor force.
unemployed plus discouraged workers divided by the labor force.

Answer: C

Difficulty: 01 Easy

Topic: Unemployment and the Unemployment Rate

AACSB: Reflective Thinking

Blooms: Remember

Learning Objective: 13-04

Feedback: The unemployment rate equals the number of people unemployed divided by the labor force.

The participation rate is the number of people:
employed divided by the labor force.
employed divided by the population aged 16 years and older.
employed and unemployed divided by the labor force.
employed and unemployed divided by the population aged 16 years and older.

Answer: D

Difficulty: 01 Easy

Topic: Unemployment and the Unemployment Rate

AACSB: Reflective Thinking

Blooms: Remember

Learning Objective: 13-04

Feedback: The participation rate is the number of people employed and unemployed divided by the population aged 16 years and older.

In a country with 200 million people aged 16 years and older, 120 million are in the labor force, and 114 million are employed, what is the participation rate?
40 percent
57 percent
60 percent
95 percent

Answer: C

Difficulty: 02 Medium

Topic: Unemployment and the Unemployment Rate

AACSB: Reflective Thinking

Blooms: Understand

Learning Objective: 13-04

Feedback: To find the participation rate, divide the labor force by the number of people 16 and older, i.e., 120,000,000/200,000,000 = 0.60, or 60 percent.

In a small town of 100 people, there are 10 children under 16, 10 retired people, 60 people with full-time jobs, 3 people with part-time jobs, 3 full-time students over 16, and 4 full-time homemakers. The remaining people did not have jobs, but wanted jobs. What is the unemployment rate in this town?
10.0%
11.0%
13.7 %
14.5%

Answer: C

Difficulty: 03 Hard

Topic: Unemployment and the Unemployment Rate

AACSB: Analytic

Blooms: Analyze

Learning Objective: 13-04

Feedback: To compute the unemployment rate you must know the number unemployed and divide it by the labor force. The labor force is 73, taking out those 10 children who are too young to work and the 17 people who are not in the labor force (retired, full-time students, and homemakers). We know 63 are working, so 10 must be unemployed. Ten divided by 73 is 13.7%.

In a small town of 100 people, there are 10 children under 16, 10 retired people, 60 people with full-time jobs, 3 people with part-time jobs, 3 full-time students over 16, and 4 full-time homemakers. The remaining people did not have jobs, but wanted them. What is the participation rate in this town?
63.0%
72.0%
81.1%
87.5%

Answer: C

Difficulty: 03 Hard

Topic: Unemployment and the Unemployment Rate

AACSB: Analytic

Blooms: Analyze

Learning Objective: 13-04

Feedback: To compute the participation rate you need to know the labor force and divide it by those in the age-eligible population. The age-eligible population is 90, taking out the 10 children who are too young to work. The labor force is 73, taking out the 17 people who are not in the labor force (retired, full-time students, and homemakers). Thus, the participation rate is 73/90 = 0.811, or 81.1%.

The number of unemployed divided by the labor force equals the:
labor-force participation rate.
employment rate.
unemployment rate.
duration rate.

Answer: C

Difficulty: 01 Easy

Topic: Unemployment and the Unemployment Rate

AACSB: Reflective Thinking

Blooms: Remember

Learning Objective: 13-04

Feedback: The unemployment rate is the number of unemployed divided by the labor force.

The labor force divided by the working age population equals the:
unemployment rate.
employment rate.
participation rate.
population rate.

Answer: C

Difficulty: 01 Easy

Topic: Unemployment and the Unemployment Rate

AACSB: Reflective Thinking

Blooms: Remember

Learning Objective: 13-04

Feedback: The participation rate is the number of people employed and unemployed divided by the population aged 16 years and older.

Data for an economy show that the unemployment rate is 6 percent, the participation rate is 60 percent, and 200 million people 16 years or older are not in the labor force. How many people are in the working-age population in this economy?
333 million
500 million
800 million
1.20 billion

Answer: B

Difficulty: 03 Hard

Topic: Unemployment and the Unemployment Rate

AACSB: Analytic

Blooms: Application

Learning Objective: 13-04

Data for an economy show that the unemployment rate is 6 percent, the participation rate 60 percent, and 200 million people 16 years or older are not in the labor force. How many people are unemployed this economy?
12.0 million
18.0 million
28.8 million
43.2 million

Answer: B

Difficulty: 03 Hard

Topic: Unemployment and the Unemployment Rate

AACSB: Analytic

Blooms: Apply

Learning Objective: 13-04

Feedback: Since the participation rate is 60 percent, 40 percent are not participating in the labor market. So the 200 million people are not participating represent 40 percent of the working-age population, or (0.40 × x) = 200,000,000, where x is the working-age population. Then x = 200,000,000/0.40 = 500,000,000, or 500 million. With 200 million of these 500 million people being outside the labor force, there must be 300 million in the labor force. Unemployment is 6 percent of 300 million, or 18.0 million.

Data for an economy show that the unemployment rate is 6 percent, the participation rate 60 percent, and 200 million people 16 years or older are not in the labor force. How many people are employed in this economy?
30 million
188 million
282 million
300 million

Answer: C

Difficulty: 03 Hard

Topic: Unemployment and the Unemployment Rate

AACSB: Analytic

Blooms: Apply

Learning Objective: 13-04

Data for an economy shows that the unemployment rate is 10%, the participation rate 80 percent, and 200 million people 16 years or older are not in the labor force. How many people are in the working-age population in this economy?
250 million
800 million
1.0 billion
1.6 billion

Answer: C

Difficulty: 03 Hard

Topic: Unemployment and the Unemployment Rate

AACSB: Analytic

Blooms: Apply

Learning Objective: 13-04

Feedback Since the participation rate is 80 percent, 20 percent are not participating in the labor market. So the 200 million people are not participating represent 20 percent of the working-age population, or (0.20 × x) = 200,000,000, where x is the working-age population. Then x = 200,000,000/0.20 = 1,000,000,000, or 1 billion

Data for an economy shows that the unemployment rate is 10%, the participation rate 80 percent, and 200 million people 16 years or older are not in the labor force. How many people are in the labor force in this economy?
80 million
200 million
800 million
1.0 billion

Answer: C

Difficulty: 03 Hard

Topic: Unemployment and the Unemployment Rate

AACSB: Analytic

Blooms: Apply

Learning Objective: 13-04

Feedback: Since the participation rate is 80 percent, 20 percent are not participating in the labor market. So the 200 million people are not participating represent 20 percent of the working-age population, or (0.20 × x) = 200,000,000, where x is the working-age population. Then x = 200,000,000/0.20 = 1,000,000,000, or 1 billion. With 200 million of these 1 billion people being outside the labor force, there must be 800 million are in the labor force.

Income lost by the unemployed is an example of the ______ cost of unemployment, while the additional spending to control crime is an example of the _____ cost of unemployment.
social; psychological
economic; social
economic; psychological
psychological; economic

Answer: B

Difficulty: 01 Easy

Topic: Unemployment and the Unemployment Rate

AACSB: Reflective Thinking

Blooms: Remember

Learning Objective: 13-04

Feedback: Unemployment creates more than just economic costs such as lost income; it also causes social costs such as by hiring more police to control crime.

Depression and lost self-esteem are examples of the ______ costs of unemployment, while the lost income and tax revenue are examples of the ______ costs of unemployment.
social; psychological
economic; social
economic; psychological
psychological; economic

Answer: D

Difficulty: 01 Easy

Topic: Unemployment and the Unemployment Rate

AACSB: Reflective Thinking

Blooms: Remember

Learning Objective: 13-04

Feedback: Unemployment creates more than just economic costs such as lost income and tax revenue; it also causes psychological costs such as lost self-esteem among others.

A cost of unemployment typically borne by society at large rather than the unemployed themselves is:
feelings of loss of control over one’s life
lost tax revenue.
lost self-esteem.
lost income.

Answer: B

Difficulty: 01 Easy

Topic: Unemployment and the Unemployment Rate

AACSB: Reflective Thinking

Blooms: Remember

Learning Objective: 13-04

Feedback: Unemployment creates costs for not just the unemployed and their families, but also for society at large because of lost tax revenue.

The economic and social costs of unemployment are borne by:
only the unemployed.
only society in general.
only taxpayers..
the unemployed, their families, taxpayers, and society in general.

Answer: D

Difficulty: 01 Easy

Topic: Unemployment and the Unemployment Rate

AACSB: Reflective Thinking

Blooms: Remember

Learning Objective: 13-04

Feedback: Unemployment creates costs for not just the unemployed and their families, but also for society at large because of lost tax revenue.

An “unemployment spell” is a period during which:
the unemployment rate is less than 10 percent.
the unemployment rate exceeds 15 percent.
an unemployed individual leaves the labor force and then returns.
an individual is continuously unemployed.

Answer: D

Difficulty: 01 Easy

Topic: Unemployment and the Unemployment Rate

AACSB: Reflective Thinking

Blooms: Remember

Learning Objective: 13-04

Feedback: An unemployment spell is a period during which an individual is continuously unemployed.

The duration of unemployment _____ during a recession.
increases.
decreases.
remains constant.
varies between 5 and 14 weeks.

Answer: A

Difficulty: 01 Easy

Topic: Unemployment and the Unemployment Rate

AACSB: Reflective Thinking

Blooms: Remember

Learning Objective: 13-04

Feedback: The duration of unemployment rises during recessions, reflecting the greater difficulty of finding work during those periods.

Leaving the labor force or finding a job are two ways that:
a person can become a discouraged worker.
a person can become an involuntary part-time worker.
an unemployment spell can begin.
an unemployment spell can end.

Answer: D

Difficulty: 01 Easy

Topic: Unemployment and the Unemployment Rate

AACSB: Reflective Thinking

Blooms: Remember

Learning Objective: 13-04

Feedback: Leaving the labor force would mean a person was no longer actively looking for work, and therefore no longer counted in the labor force. Finding a job changes a person’s status from unemployed to employed. Both of these would end an unemployment spell.

The towns of Jekyll and Hyde each have a labor force of 2,000 people. In Jekyll, 500 people were unemployed for the entire year, while the rest of the labor force was employed continuously. In Hyde, every member of the labor force was unemployed for three months and was employed for nine months. The average duration of unemployment spells over the year was ______ months in Jekyll and ______ months in Hyde.
3; 3
3; 9
12; 3
12; 9

Answer: C

Difficulty: 03 Hard

Topic: Unemployment and the Unemployment Rate

AACSB: Analytic

Blooms: Analyze

Learning Objective: 13-04

Feedback: An unemployment spell is the average duration of unemployment per worker. In Jekyll, workers were out of work for 12 months, on average, whereas in Hyde it averaged 3 months.

The duration of an unemployment spell is a measure of the:
income lost while unemployed.
length of time a spell of unemployment lasts.
number of times during a year a worker becomes unemployed.
number of workers unemployed during a specific period of time.

Answer: B

Difficulty: 01 Easy

Topic: Unemployment and the Unemployment Rate

AACSB: Reflective Thinking

Blooms: Remember

Learning Objective: 13-04

Feedback: An unemployment spell is a period during which an individual is continuously unemployed.

People who say that they would like to have a job, but have not made an effort to find a job in the past four weeks, are called ______ workers.
unemployed
involuntary part-time
discouraged
chronically unemployed

Answer: C

Difficulty: 01 Easy

Topic: Unemployment and the Unemployment Rate

AACSB: Reflective Thinking

Blooms: Remember

Learning Objective: 13-04

Feedback: Discouraged workers are people who say they would like to have a job but have not made an effort to find one in the past four

Jim Smith would like to work, but has not looked for work in the past four weeks because he does not believe any jobs are available. In the official employment statistics, Jim is classified as:
employed.
unemployed.
out of the labor force.
underemployed.

Answer: C

Difficulty: 02 Medium

Topic: Unemployment and the Unemployment Rate

AACSB: Reflective Thinking

Blooms: Understand

Learning Objective: 13-04

Feedback: If a prospective worker has not looked for work in four weeks then that person is considered to be out of the labor force.

Susan Clark would like to work forty hours per week, but can only find twenty hours per week of work. In the official employment statistics, Susan is classified as:
employed.
unemployed.
out of the labor force.
underemployed.

Answer: A

Difficulty: 02 Medium

Topic: Unemployment and the Unemployment Rate

AACSB: Reflective Thinking

Blooms: Understand

Learning Objective: 13-04

Feedback: Although this worker might be considered to be “underemployed,” there is no such designation in labor statistics. The designation is “employed” or “unemployed.”

Who of the following would be considered a discouraged worker?
Ray wants to work forty hours per week, but can only find work for twenty hours per week.
Anna Marie has been looking for a job every day for the last month, but has not been hired.
Frank would like to work, but has not looked for work because he believes no jobs are available.
Marissa has a Ph.D. in physics, but is currently employed full time driving a taxi.

Answer: C

Difficulty: 02 Medium

Topic: Unemployment and the Unemployment Rate

AACSB: Reflective Thinking

Blooms: Understand

Learning Objective: 13-04

Feedback: Frank would be considered a discouraged worker because he has not looked for work in the past 4 weeks.

Who from among the following is counted as employed?
Ray wants to work forty hours per week, but can only find work for twenty hours per week.
Anna Marie spends all of her time taking care of her children at home.
Frank would like to work, but has not looked for work because he believes no jobs are available.
Aikira has been offered several jobs in the past four weeks, but has chosen not to accept any of the offers.

Answer: A

Difficulty: 02 Medium

Topic: Unemployment and the Unemployment Rate

AACSB: Reflective Thinking

Blooms: Understand

Learning Objective: 13-04

Feedback: Ray is working, so he is considered “employed.”

Involuntary part-time workers are:
chronically unemployed.
considered out of the labor force.
short-term unemployed workers.
not counted as unemployed.

Answer: D

Difficulty: 01 Easy

Topic: Unemployment and the Unemployment Rate

AACSB: Reflective Thinking

Blooms: Remember

Learning Objective: 13-04

Feedback: Involuntary part-time workers would like to work full-time but cannot find suitable positions. Since they are working, they are considered “employed.”

Two groups of workers not counted as unemployed in the official unemployment statistics are ______ workers.
chronically unemployed and short-term unemployed
chronically-unemployed and discouraged
chronically unemployed and involuntary part-time
discouraged and involuntary part-time

Answer: D

Difficulty: 01 Easy

Topic: Unemployment and the Unemployment Rate

AACSB: Reflective Thinking

Blooms: Remember

Learning Objective: 13-04

Feedback: Official statistics count discouraged workers as being out-of-the labor force; involuntary part-time workers are counted as employed.

Involuntary part-time workers are:
counted as employed.
considered out of the labor force.
counted as unemployed.
discouraged workers.

Answer: A

Difficulty: 01 Easy

Topic: Unemployment and the Unemployment Rate

AACSB: Reflective Thinking

Blooms: Remember

Learning Objective: 13-04

Feedback: Involuntary part-time workers would like to work full-time but cannot find suitable positions. Since they are working, they are considered “employed.”

The measure of the cost of a standard basket of goods and services in any period relative to the cost of the same basket of goods and services in the base year is called the:
consumption cost calculator.
consumption production index.
consumer production index.
consumer price index.

Answer: D

Difficulty: 01 Easy

Topic: The Consumer Price Index: Measuring the Price Level

AACSB: Reflective Thinking

Blooms: Remember

Learning Objective: 13-05

Feedback: The consumer price index compares the cost of a standard basket of goods and services in any period relative to the cost of the same basket of goods and services in the base year.

The consumer price index for the current year measures the cost of a standard basket in the ______ year relative to the cost of the same basket in the ______ year.
current; base
current; current
base; index
base; current

Answer: A

Difficulty: 01 Easy

Topic: The Consumer Price Index: Measuring the Price Level

AACSB: Reflective Thinking

Blooms: Remember

Learning Objective: 13-05

Feedback: The consumer price index compares the cost of a standard basket of goods and services in any period relative to the cost of the same basket of goods and services in the base year.

The CPI is a measure of the:
real wage.
price of a specific good or service.
rate of inflation.
average level of prices relative to prices in the base year.

Answer: D

Difficulty: 01 Easy

Topic: The Consumer Price Index: Measuring the Price Level

AACSB: Reflective Thinking

Blooms: Remember

Learning Objective: 13-05

Feedback: The consumer price index compares the cost of a standard basket of goods and services in any period relative to the cost of the same basket of goods and services in the base year.

Suppose that the total expenditures for a typical household in 2010 equaled $2,500 per month, while the cost of purchasing exactly the same items in 2015 was $3,000. If 2010 is the base year, the CPI for 2010 equals:
0.83
1.00
1.20
1.25

Answer: B

Difficulty: 02 Medium

Topic: The Consumer Price Index: Measuring the Price Level

AACSB: Reflective Thinking

Blooms: Understand

Learning Objective: 13-05

Feedback: The base year, by definition, has a CPI value equal to 1.00.

Suppose that the total expenditures for a typical household in 2010 equaled $5,500 per month, while the cost of purchasing exactly the same items in 2015 was $6,875. If 2010 is the base year, the CPI for the year 2015 equals:
0.80
1.00
1.20
1.25

Answer: D

Difficulty: 03 Hard

Topic: The Consumer Price Index: Measuring the Price Level

AACSB: Analytic

Blooms: Apply

Learning Objective: 13-05

Feedback: CPI is calculated by taking the current price of the basket and dividing it by the historical price of the basket. In this case, $6,875/$5,500 = 1.25.

If the total expenditures of a typical family equaled $35,000 per year in 2010 and the exact same basket of goods and services cost $40,000 in the year 2015, the family’s cost of living:
increased by 14 percent.
decreased by 12.5 percent.
decreased by 14 percent.
increased by 12.5 percent.

Answer: A

Difficulty: 03 Hard

Topic: The Consumer Price Index: Measuring the Price Level

AACSB: Analytic

Blooms: Apply

Learning Objective: 13-05

Feedback: The percentage change in the CPI is computed by taking the current price of the basket divided by the historic price of the basket and then subtracting 1. In this case, ($40,000/$35,000) – 1 = 0.143, or a 14 percent increase.

The consumer price index for Planet Econ consists of only two items: books and hamburgers. In 2010, the base year, the typical consumer purchased 10 books for $25 each and 25 hamburgers for $2 each. In 2015, the typical consumer purchased 15 books for $30 each and 30 hamburgers for $3 each. The consumer price index for 2015 on Planet Econ equals:
1.00
1.15
1.25
1.45

Answer: C

Difficulty: 03 Hard

Topic: The Consumer Price Index: Measuring the Price Level

AACSB: Analytic

Blooms: Apply

Learning Objective: 13-05

Feedback: First, note that in the computation of the CPI, the basket of goods and services is fixed – so the quantities remain the same as in the base year. The market basket cost in 2010 was (10 × $25) + (25 × $2) = $300. The same market basket’s cost in 2015 was (10 ×$30) + (25 × $3) = $375, so the consumer price index is 1.25.

The typical family on the Planet Econ consumes 10 pizzas, 7 pairs of jeans, and 20 gallons of milk. In 2008, pizzas cost $10 each, jeans cost $40 per pair, and milk cost $3 per gallon. In 2009, the price of pizzas went down to $8 each, while the prices of jeans and milk remained the same. Between 2008 and 2009, a typical family’s cost of living:
increased by 4.5 percent.
decreased by 4.5 percent.
remained the same.
decreased by 20 percent.

Answer: B

Difficulty: 03 Hard

Topic: The Consumer Price Index: Measuring the Price Level

AACSB: Analytic

Blooms: Apply

Learning Objective: 13-05

Feedback: The market basket cost in 2008 was (10 × $10) + (7 × $40) + (20 × $3) = $440. The same market basket’s cost in 2009 was (10 × $8) + (7 × $40) + (20 × $3) = $420, so the consumer price index is 0.955, or a decrease of 4.5 percent.

The typical family on the Planet Econ consumes 10 pizzas, 7 pairs of jeans, and 20 gallons of milk. In 2008, pizzas cost $10 each, jeans cost $40 per pair, and milk cost $3 per gallon. In 2009, the price of pizzas increased to $14 each, while the price of jeans and milk remained the same. Between 2008 and 2009, a typical family’s cost of living:
increased by 9 percent.
decreased by 9 percent.
remained the same.
increased by 40 percent.

Answer: A

Difficulty: 03 Hard

Topic: The Consumer Price Index: Measuring the Price Level

AACSB: Analytic

Blooms: Apply

Learning Objective: 13-05

Feedback: The market basket cost in 2008 was (10 × $10) + (7 × $40) + (20 × $3) = $440. The same market basket’s cost in 2009 was (10 × $14) + (7 × $40) + (20 × $3) = $480, so the consumer price index is 1.091, or an increase of 9.1 percent.

If the consumer price index increased from 1.52 to 1.65, then it must be the case that ______ relative to prices in the base year.
all prices rose
the weighted average level of prices rose
all prices fell
some prices rose and some prices fell

Answer: B

Difficulty: 02 Medium

Topic: The Consumer Price Index: Measuring the Price Level

AACSB: Reflective Thinking

Blooms: Understand

Learning Objective: 13-05

Feedback: It is typical for some prices to rise and some to fall in the same year, but the consumer price index measures the average price of the entire basket, weighted by the quantity of each item.

The consumer price index measures the cost of:
a fixed basket of goods and services.
a changing basket of goods and services.
all goods and services purchased by consumers.
goods and services required to live above the poverty level.

Answer: A

Difficulty: 01 Easy

Topic: The Consumer Price Index: Measuring the Price Level

AACSB: Reflective Thinking

Blooms: Remember

Learning Objective: 13-05

Feedback: In the computation of the Consumer Price Index, the basket of goods and services is fixed.

A consumer expenditure survey reports the following information on consumer protein spending:

Using 2005 as the base year, by how much does a “cost of protein” index increase between 2005 and 2006?

5.2 percent
8.6 percent
13.4 percent
14.3 percent

Answer: C

Difficulty: 03 Hard

Topic: The Consumer Price Index: Measuring the Price Level

AACSB: Analytic

Blooms: Apply

Learning Objective: 13-05

Feedback: First, note that in the computation of the CPI, the basket of goods and services is fixed – so the quantities remain the same as in the base year. The protein cost in 2005 was (5 × $5) + (10 × $3) + (7 × $6) = $97. Protein cost in 2006 was (5 × $7) + (10 × $4) + (7 × $5) = $110, so the protein price index is 1.134, or an increase of 13.4 percent.

A consumer expenditure survey reports the following information on entertainment spending:

	2008		2009
	Price	Quantity	Price	Quantity
Movies	$7	5	$8	7
Concerts	$30	2	$35	2
CDs	$16	7	$15	10

Using 2008 as the base year, by how much does a “cost of entertainment” index increase between 2008 and 2009?

3.9 percent
8.6 percent
13.4 percent
29.4 percent

Answer: A

Difficulty: 03 Hard

Topic: The Consumer Price Index: Measuring the Price Level

AACSB: Analytic

Blooms: Apply

Learning Objective: 13-05

Feedback: The entertainment cost in 2008 was (5 × $7) + (2 × $30) + (7 × $16) = $207. Entertainment cost in 2009 was (5 × $8) + (2 × $35) + (7 × $15) = $215, so the entertainment price index is 1.039, or an increase of 3.9 percent.

A CPI that equals 1.34 in 2008 (when 2000 is the base year) means that:
prices in 2008 are 34 percent higher than in 2007.
the CPI equals $1.34 in 2008.
the inflation rate in 2008 is 134 percent.
the average level of prices is 34 percent higher in 2008 than in the base year.

Answer: D

Difficulty: 02 Medium

Topic: The Consumer Price Index: Measuring the Price Level

AACSB: Reflective Thinking

Blooms: Understand

Learning Objective: 13-05

Feedback: A CPI of 1.34 means that prices on average have risen 34 percent since the base year.

A measure of the average price of a given class of goods or services relative to the price of the same goods and services in a base year is called a:
real price.
real quantity.
rate of inflation.
price index.

Answer: D

Difficulty: 01 Easy

Topic: The Consumer Price Index: Measuring the Price Level

AACSB: Reflective Thinking

Blooms: Remember

Learning Objective: 13-05

Feedback: This is the definition of “price index.”

A price index measures:
the price of specific good or service.
the change in the price of a specific good or service.
only the prices that change.
the average price of a given class of goods or services relative to the price of the same goods and services in a base year.

Answer: D

Difficulty: 01 Easy

Topic: The Consumer Price Index: Measuring the Price Level

AACSB: Reflective Thinking

Blooms: Remember

Learning Objective: 13-05

Feedback: A price index measures the average price of a given class of goods or services relative to the price of the same goods.

The annual percentage rate of change in the price level is the:
relative price.
Fisher effect.
cost of living.
inflation rate.

Answer: D

Difficulty: 01 Easy

Topic: The Consumer Price Index: Measuring the Price Level

AACSB: Reflective Thinking

Blooms: Remember

Learning Objective: 13-05

Feedback: The inflation rate is the annual percentage rate of change in the price level.

The inflation rate can be calculated as the percentage change in:
real GDP.
nominal GDP.
the CPI.
the exchange rate.

Answer: C

Difficulty: 01 Easy

Topic: The Consumer Price Index: Measuring the Price Level

AACSB: Reflective Thinking

Blooms: Remember

Learning Objective: 13-05

Feedback: Percent changes in the CPI is the most popular measure of the inflation rate.

The CPI in year one equaled 1.45. The CPI in year two equaled 1.51. The rate of inflation between years one and two was ______ percent.
4.0
4.1
4.5
6.0

Answer: B

Difficulty: 03 Hard

Topic: The Consumer Price Index: Measuring the Price Level

AACSB: Analytic

Blooms: Apply

Learning Objective: 13-05

Feedback: The percentage change in CPI is calculated as: (current price index – historic prices) / historic price index. In this case: (1.51 – 1.45) / 1.45 = 0.041, or 4.1 percent.

The CPI in 1974 equaled 0.49. The CPI in 1975 equaled 0.54. The rate of inflation between 1974 and 1975 was ______ percent.
5.0
5.4
9.3
10.2

Answer: D

Difficulty: 03 Hard

Topic: The Consumer Price Index: Measuring the Price Level

AACSB: Analytic

Blooms: Apply

Learning Objective: 13-05

Feedback: The percentage change in CPI is calculated as: (current price index – historic prices) / historic price index. In this case: (0.54 – 0.49) / 0.49 = 0.102, or 10.2 percent.

Inflation is a measure of the ______ of prices; the CPI is a measure of the ______ of prices.
current level; rate of change in the level
rate of change in the level; current level
index; base year’s level
base year’s level; index

Answer: B

Difficulty: 02 Medium

Topic: The Consumer Price Index: Measuring the Price Level

AACSB: Reflective Thinking

Blooms: Understand

Learning Objective: 13-05

Feedback: Inflation is a rate of change, whereas the CPI measures a level.

The ______ is the rate of change of the _______.
base year price index; current year price index
current year price index; base year price index
CPI; rate of inflation
rate of inflation; CPI

Answer: D

Difficulty: 02 Medium

Topic: The Consumer Price Index: Measuring the Price Level

AACSB: Reflective Thinking

Blooms: Understand

Learning Objective: 13-05

Feedback: The CPI measures how fast prices get from one level to another measured by the CPI.

In 1929, the CPI equaled 0.171 and in 1930, the CPI equaled 0.167. These data provide evidence of a period of:
inflation.
deflation.
trade deficit.
expansion.

Answer: B

Difficulty: 02 Medium

Topic: The Consumer Price Index: Measuring the Price Level

AACSB: Reflective Thinking

Blooms: Understand

Learning Objective: 13-05

Feedback: Over the period 1929 to 1930 the price level fell, which is called “deflation.”

If the CPI equaled 1.43 in 2008 and 1.56 in 2009, then between 2008 and 2009 there was:
inflation.
deflation
a recession
an expansion

Answer: A

Difficulty: 01 Easy

Topic: The Consumer Price Index: Measuring the Price Level

AACSB: Reflective Thinking

Blooms: Understand

Learning Objective: 13-05

Feedback: Inflation occurs when the CPI increases over time.

The CPI in 1930 equaled 0.17. The CPI in 1931 equaled 0.15. The rate of inflation between 1930 and 1931 was ______ percent.
-13.3
-11.8
1.5
11.8

Answer: B

Difficulty: 03 Hard

Topic: The Consumer Price Index: Measuring the Price Level

AACSB: Analytic

Blooms: Apply

Learning Objective: 13-05

Feedback: The percentage change in CPI is calculated as: (current price index – historic prices) / historic price index. In this case: (0.15 – 0.17) / 0.17 = -0.118, or an 11.8 percent decrease.

The CPI in 1931 equaled 0.15. The CPI in 1932 equaled 0.14. The rate of inflation between 1931 and 1932 was ______ percent.
-7.1
-6.7
1.4
6.7

Answer: B

Difficulty: 03 Hard

Topic: The Consumer Price Index: Measuring the Price Level

AACSB: Analytic

Blooms: Apply

Learning Objective: 13-05

Feedback: The percentage change in CPI is calculated as: (current price index – historic prices) / historic price index. In this case: (0.14 – 0.15) / 0.15 = -0.667, or a 6.7 percent decrease.

Deflation is a situation in which the:
quantity of goods and services produced is increasing over time.
quantity of goods and services produced is decreasing over time.
prices of most goods and services are falling over time.
prices of most goods and services are rising over time.

Answer: C

Difficulty: 01 Easy

Topic: The Consumer Price Index: Measuring the Price Level

AACSB: Reflective Thinking

Blooms: Remember

Learning Objective: 13-05

Feedback: Deflation occurs when the average price level falls, and this is usually a situation where most goods and services see falling prices.

The situation when the price of most goods and services are falling over time is called:
inflation.
disinflation.
a boom.
deflation.

Answer: D

Difficulty: 02 Medium

Topic: The Consumer Price Index: Measuring the Price Level

AACSB: Reflective Thinking

Blooms: Understand

Learning Objective: 13-05

Feedback: Deflation occurs when the average price level falls, and this is usually a situation where most goods and services see falling prices.

A nominal value is measured:
in physical terms.
in terms of current dollar value.
using the consumer price index.
by indexing.

Answer: B

Difficulty: 01 Easy

Topic: Adjusting for Inflation

AACSB: Reflective Thinking

Blooms: Remember

Learning Objective: 13-06

Feedback: A nominal value is measured in terms of current dollar value.

A measurement in terms of current dollar value is called a(n) ______ quantity.
nominal
real
deflated
indexed

Answer: A

Difficulty: 01 Easy

Topic: Adjusting for Inflation

AACSB: Reflective Thinking

Blooms: Remember

Learning Objective: 13-06

Feedback: A nominal value is measured in terms of current dollar value.

Which of the following is a nominal quantity?
The number of people unemployed
The current price of a barrel of oil
The number of cars produced in 2005
The amount of coal mined in one month

Answer: B

Difficulty: 02 Medium

Topic: Adjusting for Inflation

AACSB: Reflective Thinking

Blooms: Understand

Learning Objective: 13-06

Feedback: The value of a barrel of oil changes when the price level changes whereas the others would not change, as they are not measured in prices.

Which of the following is a real quantity?
The current wages paid to factory workers
The cost of a new car
The number of tons of steel produced in 2005
The current price of a barrel of oil

Answer: C

Difficulty: 02 Medium

Topic: Adjusting for Inflation

AACSB: Reflective Thinking

Blooms: Understand

Learning Objective: 13-06

Feedback: Real quantities do not depend on the price level whereas nominal quantities do.

A real quantity is a quantity measured:
in physical terms.
in terms of current dollar value.
by the average quantity.
using real prices.

Answer: A

Difficulty: 01 Easy

Topic: Adjusting for Inflation

AACSB: Reflective Thinking

Blooms: Remember

Learning Objective: 13-06

Feedback: A real quantity is measured in physical terms.

All of the following are real quantities except the:
number of new cars produced in one year.
tons of steel shipped to South America.
millions of computer chips shipped to computer makers.
billions of dollars invested in stocks.

Answer: D

Difficulty: 02 Medium

Topic: Adjusting for Inflation

AACSB: Reflective Thinking

Blooms: Understand

Learning Objective: 13-06

Feedback: The value of “billions of dollars invested in stocks” depends on the price level whereas the values of the others do not.

To correct a nominal quantity for changes in the price level, one should:
add a price index to it.
subtract a price index from it.
divide it by a price index.
multiply it by a price index.

Answer: C

Difficulty: 01 Easy

Topic: Adjusting for Inflation

AACSB: Reflective Thinking

Blooms: Remember

Learning Objective: 13-06

Feedback: Deflating is the process of dividing a nominal value by a price index to obtain the real value.

To compare the purchasing power of nominal wages in two different years, one must:
compare the nominal values.
deflate both quantities by a common price index.
increase both quantities by the same percentage increase in a price index.
adjust both quantities by the real interest rate.

Answer: B

Difficulty: 02 Medium

Topic: Adjusting for Inflation

AACSB: Reflective Thinking

Blooms: Understand

Learning Objective: 13-06

Feedback Deflating is the process of dividing a nominal value by a price index to obtain the real value.

If the CPI equaled 1.00 in 1995 and 1.65 in 2005 and a typical household’s income equaled $35,000 in 1995 and $40,000 in 2005, then between 1995 and 2005, real household income:
increased.
decreased.
was constant.
may have either increased or decreased.

Answer: B

Difficulty: 03 Hard

Topic: Adjusting for Inflation

AACSB: Analytic

Blooms: Apply

Learning Objective: 13-06

Feedback: Household real income fell because real income was $35,000 ($35,000 / 1.00) in 1995 and only $24,242 ($40,000 / 1.65) in 2005.

A college graduate in 1972 found a job paying $7,200. The CPI was 0.418 in 1972. A college graduate in 2005 found a job paying $30,000. The CPI was 1.68 in 2005. The 1972 graduate’s job paid ______ in nominal terms and ______ in real terms than the 2005 graduate’s job.
more; less
more; more
less; more
less, less

Answer: D

Difficulty: 03 Hard

Topic: Adjusting for Inflation

AACSB: Analytic

Blooms: Apply

Learning Objective: 13-06

Feedback: The 1972 graduate’s job paid less not only in nominal terms ($7,200 is clearly less than $30,000) but also in real terms. The real wage for the 1972 graduate was $17,225 ($7,200 / 0.418) compared to $17,857 ($30,000 / 1.68) for the 2005 graduate.

A college graduate in 1972 found a job paying $7,200. The CPI was 0.418 in 1972. A college graduate in 2005 found a job paying $28,000. The CPI was 1.68 in 2005. The 1972 graduate’s job paid ______ in nominal terms and ______ in real terms than the 2005 graduate’s job.
more; less
more; more
less; more
less, less

Answer: C

Difficulty: 03 Hard

Topic: Adjusting for Inflation

AACSB: Analytic

Blooms: Apply

Learning Objective: 13-06

Feedback: The 1972 graduate’s job paid less in nominal terms ($7,200 is clearly less than $30,000) but more in real terms. The real wage for the 1972 graduate was $17,225 ($7,200 / 0.418) compared to $16,667 ($28,000 / 1.68) for the 2005 graduate.

A year’s tuition at a state university cost $250 in 1972 when the CPI equaled 0.418. The cost of a year’s tuition at the same state university cost $3,000 in 2005 when the CPI equaled 1.68. The real cost of tuition between 1972 and 2005:
increased.
decreased.
remained constant.
may have either increased or decreased.

Answer: A

Difficulty: 03 Hard

Topic: Adjusting for Inflation

AACSB: Analytic

Blooms: Apply

Learning Objective: 13-06

Feedback: The real cost of tuition increased from $598 ($250 / 0.418) in 1972 to $1,786 ($3000 / 1.68) in 2005. In other words the real cost of tuition almost tripled in those 33 years.

The price of a gallon of gasoline was $0.35 in 1972 when the CPI equaled 0.418. The cost of a gallon of gasoline was $2.25 in 2005 when the CPI equaled 1.68. The real cost of a gallon of gasoline between 1972 and 2005:
increased.
decreased.
remained constant.
may have either increased or decreased.

Answer: A

Difficulty: 03 Hard

Topic: Adjusting for Inflation

AACSB: Analytic

Blooms: Apply

Learning Objective: 13-06

Feedback: The real cost of gasoline increased from $.84 per gallon ($0.35 / 0.418) in 1972 to $1.34 ($2.25 / 1.68) in 2005.

The wage paid to workers measured in terms of real purchasing power is called the:
nominal wage.
cost of living.
minimum wage.
real wage.

Answer: D

Difficulty: 01 Easy

Topic: Adjusting for Inflation

AACSB: Reflective Thinking

Blooms: Remember

Learning Objective: 13-06

Feedback: The “real wage” is the wage paid to workers measured in terms of real purchasing power.

The real wage is the wage:
measured in current dollars.
required to maintain a minimum standard of living.
employers are required to pay workers.
measured in terms of purchasing power.

Answer: D

Difficulty: 01 Easy

Topic: Adjusting for Inflation

AACSB: Reflective Thinking

Blooms: Remember

Learning Objective: 13-06

Feedback: The real wage identifies the purchasing power of labor earnings.

A report indicated that the average real wage in manufacturing declined by 2% between 1990 and 2000. If the CPI equaled 1.30 in 1990, 1.69 in 2000, and the average nominal wage in manufacturing was $35 in 2000, what was the average nominal wage in manufacturing in 1990?
$21.13
$26.40
$26.92
$27.47

Answer: D

Difficulty: 03 Hard

Topic: Adjusting for Inflation

AACSB: Analytic

Blooms: Analyze

Learning Objective: 13-06

Feedback: The real wage in 2000 was $20.71 ($35/1.69). This real wage is 98 percent, or (0.98), of the real wage in 1990. So the real wage 2000 = real wage 1990 * 0.98, or 20.71 = real age 1990 * 0.98. We solve for the real wage in 1990, by dividing each side with 0.98: $20.71 / 0.98 = 21.13. Finally we can obtain the nominal wage for 1990 by multiplying the real wage in 1990 with the CPI in 1990: 21.13 * 1.3 = $27.47.

A factory worker earned $10 an hour in 1980. The CPI was 0.82 in 1980. The same factory worker was earning $15 an hour in 1990 when the CPI was 1.31. From 1980 to 1990, the factory worker’s hourly real wage:
increased from $7.63 to $18.29.
decreased from $12.20 to $11.45.
remained constant.
increased from $10 to $15

Answer: B

Difficulty: 03 Hard

Topic: Adjusting for Inflation

AACSB: Analytic

Blooms: Analyze

Learning Objective: 13-06

Feedback: Real hourly wage decreased from $12.20 (i.e., $10/0.82) to $11.45 (i.e., $15/1.31).

The practice of increasing a nominal quantity each period by an amount equal to the percentage increase in a specified price index is called:
a substitution bias.
the Fisher effect.
deflating.
indexing.

Answer: D

Difficulty: 01 Easy

Topic: Adjusting for Inflation

AACSB: Reflective Thinking

Blooms: Remember

Learning Objective: 13-06

Feedback: Indexing is the practice of increasing a nominal quantity each period by an amount equal to the percentage increase in a specified price index.

Indexing is the process of:
dividing a real quantity by a price index.
dividing a nominal quantity by a price index.
increasing a nominal quantity by an amount equal to the percentage change in a price index.
increasing a real quantity by an amount equal to the percentage change in a price index.

Answer: C

Difficulty: 01 Easy

Topic: Adjusting for Inflation

AACSB: Reflective Thinking

Blooms: Remember

Learning Objective: 13-06

Feedback: Indexing is the practice of increasing a nominal quantity each period by an amount equal to the percentage increase in a specified price index.

To ensure that your salary maintains its real purchasing power from year to year, your nominal salary must be:
deflated.
indexed.
aggregated.
hyperinflated.

Answer: B

Difficulty: 02 Medium

Topic: Adjusting for Inflation

AACSB: Reflective Thinking

Blooms: Understand

Learning Objective: 13-06

Feedback: Indexing is the act of increasing nominal amounts by the inflation index to ensure that salaries keep up with inflation.

If you wish to maintain a constant purchasing power when you retire, you should choose retirement income options that are:
deflated.
nominal.
indexed.
inflated.

Answer: C

Difficulty: 02 Medium

Topic: Adjusting for Inflation

AACSB: Reflective Thinking

Blooms: Understand

Learning Objective: 13-06

Feedback: Indexing keeps wages and prices increasing at the same rate as inflation.

Because the minimum wage is not indexed to inflation, when there is inflation the nominal minimum wage _____, and the real minimum wage _____.
remains constant; decreases
remains constant; remains constant
decreases; remains constant
increases; decreases

Answer: A

Difficulty: 02 Medium

Topic: Adjusting for Inflation

AACSB: Reflective Thinking

Blooms: Understand

Learning Objective: 13-06

Feedback: Income that is not indexed to inflation loses purchasing power over time when inflation occurs. In the case of the minimum wage, it is constant in nominal terms but decreases in real terms.

The CPI equals 1.00 in year one and 1.15 in year two. If the nominal wage is $15 in year one and a contract calls for the wage to be indexed to the CPI, what will be the nominal wage in year two?
$15.00
$16.15
$17.25
$22.50

Answer: C

Difficulty: 03 Hard

Topic: Adjusting for Inflation

AACSB: Analytic

Blooms: Apply

Learning Objective: 13-06

Feedback: To find the indexed wage in year two, take the nominal wage in year one and multiply it by the CPI, i.e., $15 × 1.15 = $17.25.

A labor contract provides for a first-year wage of $10 per hour, and specifies that the real wage will rise by 3 percent in the second year of the contract. The CPI is 1.00 in the first year and 1.07 in the second year. What dollar wage must be paid in the second year?
$10.30
$10.70
$10.90
$11.02

Answer: D

Difficulty: 03 Hard

Topic: Adjusting for Inflation

AACSB: Analytic

Blooms: Apply

Learning Objective: 13-06

Feedback: To find the indexed wage in year two, the wage that would maintain the purchasing power from the first year, take the nominal wage in year one and multiply it by the CPI:, $10 × 1.07 = $10.70. Then, since the contract calls for an increase in the real wage by 3%, the indexed wage must be increased by 3 percent: $10.70 × 1.03 = $11.02.

A labor contract provides for a first-year wage of $15 per hour, and specifies that the real wage will rise by 2 percent in the second year of the contract. The CPI is 1.00 in the first year and 1.09 in the second year. What dollar wage must be paid in the second year?
$15.30
$16.09
$16.45
$16.68

Answer: D

Difficulty: 03 Hard

Topic: Adjusting for Inflation

AACSB: Analytic

Blooms: Apply

Learning Objective: 13-06

Feedback: To find the indexed wage in year two, the wage that would maintain the purchasing power from the first year, take the nominal wage in year one and multiply it by the CPI:, $15 × 1.09 = $16.35. Then, since the contract calls for an increase in the real wage by 3%, the indexed wage must be increased by 2 percent: $16.35 × 1.02 = $16.68.

To ensure that a nominal payment represents a constant level of purchasing power over time, one should:
add the price index to it.
subtract the price index from it.
divide it by the price index.
increase it by a percentage equal to the rate of inflation for that year.

Answer: D

Difficulty: 01 Easy

Topic: Adjusting for Inflation

AACSB: Reflective Thinking

Blooms: Remember

Learning Objective: 13-06

Feedback: To keep nominal amounts constant in real terms, increase nominal amounts by the rate of inflation each year.

Two methods used to adjust nominal values for inflation are:
substituting and complementing.
indexing and deflating.
aggregating and disaggregating.
real and nominal.

Answer: B

Difficulty: 01 Easy

Topic: Adjusting for Inflation

AACSB: Reflective Thinking

Blooms: Remember

Learning Objective: 13-06

Feedback: Indexing increases nominal amounts by the rate of inflation each year to maintain a certain real value, while deflating is the process of obtaining real values from nominal ones.

If CPI overstates the “true” inflation rate, then indexing Social Security benefits to the CPI:
costs the federal government billions of dollars.
saves the federal government billions of dollars.
earns the federal government billions of dollars.
has no impact on the dollars spend by the federal government.

Answer: A

Difficulty: 01 Easy

Topic: Inflation Measurement and Quality Change

AACSB: Reflective Thinking

Blooms: Remember

Learning Objective: 13-07

Feedback: If the CPI overstates the “true” inflation rate, anything indexed to the CPI will over-correct for inflation. This overstating costs the federal government billions of dollars each year.

Suppose the CPI does indeed overstate the inflation rate. When the CPI increases by 5% and household incomes increase by 5%, we should conclude that real incomes of households have:
increased.
stayed constant.
decreased.
increased more slowly than has inflation.

Answer: A

Difficulty: 02 Medium

Topic: Inflation Measurement and Quality Change

AACSB: Reflective Thinking

Blooms: Understand

Learning Objective: 13-07

Feedback: The overstatement of the CPI is about 2 percent. So the “true” inflation rate would be the inflation rate based on the CPI minus two percent: 5% – 2% = 3%. So if household income increased by 5%, then incomes have increased more than the 3% “true” rate of inflation, and real income has increased.

When statisticians fail to take into account improvements in the quality of goods and services, the CPI will tend to ______ the rate of inflation.
understate
precisely measure
be unrelated to
overstate

Answer: D

Difficulty: 01 Easy

Topic: Inflation Measurement and Quality Change

AACSB: Reflective Thinking

Blooms: Remember

Learning Objective: 13-07

Feedback: It’s hard to correctly factor in improvement to the quality of goods and services. To the extent that quality improvements are not fully accounted for, the CPI overstates the “true” inflation rate.

Suppose manufacturers introduce a new model car to replace a car currently included in the CPI basket. The price of the new car is 10 percent higher than the discontinued model, but the new car has additional safety features and amenities. In this situation the CPI will tend to ______ inflation as a result of ______ bias.
overstate; substitution
understate; quality adjustment
accurately measure; substitution
overstate; quality adjustment

Answer: D

Difficulty: 02 Medium

Topic: Inflation Measurement and Quality Change

AACSB: Reflective Thinking

Blooms: Understand

Learning Objective: 13-07

Feedback: The CPI did not fully reflect the higher quality of the new car, so it overstated the price increase. This is called “quality adjustment” bias.

The quality adjustment bias of the CPI refers to the failure of statisticians to:
allow for the possibility that consumers switch from products whose prices are rising.
allow for the possibility that consumers switch stores at which they shop.
take into account improvements in goods and services.
take into account price changes in goods and services.

Answer: C

Difficulty: 01 Easy

Topic: Inflation Measurement and Quality Change

AACSB: Reflective Thinking

Blooms: Remember

Learning Objective: 13-07

Feedback: The quality adjustment bias of the CPI refers to the failure of statisticians to take into account improvements in goods and services.

Product improvements make it difficult for the statisticians who construct the CPI to distinguish between ______ changes and ______ changes.
price; quality
quantity; price
quantity; quality
income; price

Answer: A

Difficulty: 02 Medium

Topic: Inflation Measurement and Quality Change

AACSB: Reflective Thinking

Blooms: Understand

Learning Objective: 13-07

Feedback: The price index seeks to compare prices of goods and services while keeping the quality of goods and services constant. But products are always changing and usually changing for the better. It is common for both prices and quality to go up at the same time.

The price level is:
the rate of inflation.
a measure of overall prices at a particular point in time.
the percentage change in a price index such as the CPI.
the price of a specific good in comparison to the prices of other goods and services.

Answer: B

Difficulty: 01 Easy

Topic: The Costs of Inflation: Not What You Think

AACSB: Reflective Thinking

Blooms: Remember

Learning Objective: 13-08

Feedback: The price level is a measure of overall prices at a particular point in time.

A relative price is:
the rate of inflation.
a measure of overall prices at a particular point in time.
the percentage change in a price index such as the CPI.
the price of a specific good in comparison to the prices of other goods and services.

Answer: D

Difficulty: 01 Easy

Topic: The Costs of Inflation: Not What You Think

AACSB: Reflective Thinking

Blooms: Remember

Learning Objective: 13-08

Feedback: A relative price is the price of a specific good in comparison to the prices of other goods and services.

A measure of overall prices at a particular point in time is called:
a relative price.
the price level.
a real price.
inflation.

Answer: B

Difficulty: 01 Easy

Topic: The Costs of Inflation: Not What You Think

AACSB: Reflective Thinking

Blooms: Remember

Learning Objective: 13-08

Feedback: The price level is a measure of overall prices at a particular point in time.

If the price of motel rooms increases by 10% while the prices of other goods and services increase by 5% on average, the relative price of motel rooms has:
increased.
decreased by 5%.
decreased by 10%.
remained constant.

Answer: A

Difficulty: 03 Hard

Topic: The Costs of Inflation: Not What You Think

AACSB: Analytic

Blooms: Apply

Learning Objective: 13-08

Feedback: In this case, motel rooms prices increased by more than other goods and services so the relative price of motel rooms increased.

If all prices, including the price of beef, increase by 3%, then the relative price of beef has ______ and inflation _____.
increased; has occurred
increased; has not occurred
remained constant; has occurred
remained constant; has not occurred

Answer: C

Difficulty: 02 Medium

Topic: The Costs of Inflation: Not What You Think

AACSB: Reflective Thinking

Blooms: Understand

Learning Objective: 13-08

Feedback: In this case, the price of beef rose at the same rate as the general price level. Thus the relative price of beef was constant although inflation occurred at a rate of 3%.

To counteract relative price changes, the government would implement:
monetary policy.
fiscal policy.
polices that affect the supply and demand for a specific good.
policies that affect the supply and demand for all goods and services.

Answer: C

Difficulty: 01 Easy

Topic: The Costs of Inflation: Not What You Think

AACSB: Reflective Thinking

Blooms: Remember

Learning Objective: 13-08

Feedback: If the government doesn’t like relative price changes that make a specific good, like milk, more expensive then the government must use policies that affect the supply and demand for that particular good or service.

A change in the average price level is called _____, while a change in the price of a specific good in comparison with other goods and services is called _______.
a quality adjustment; a substitution bias
a change in a relative price; inflation
inflation; a change in a relative price
a price level adjustment; a quality adjustment

Answer: C

Difficulty: 02 Medium

Topic: The Costs of Inflation: Not What You Think

AACSB: Reflective Thinking

Blooms: Understand

Learning Objective: 13-08

Feedback: These are the definitions of “inflation” and “changes in relative prices.”

Suppose the value of the CPI is 1.100 in year one, 1.122 in year two, and 1.133 in year three. Assume also that the price of computers increases by 3% between year one and year two, and by another 3% between year two and year three. The price level is increasing, the inflation rate is _______, and the relative price of computers is _________.
decreasing; increasing
increasing; increasing
decreasing; decreasing
increasing; decreasing

Answer: A

Difficulty: 03 Hard

Topic: The Costs of Inflation: Not What You Think

AACSB: Analytic

Blooms: Apply

Learning Objective: 13-08

Feedback: The inflation rate is decreasing because the rate of change is falling from year one to ears two: (1.122 -1.100) / 1.122 = 0.02 or 2% versus (1.133 – 1.122) / 1.122 = 0.01 or 1%. The relative price of computers is increasing because its price change of 3% exceeds inflation rate in both years.

Suppose the value of the CPI is 1.100 in year one, 1.210 in year two, and 1.331 in year three. Assume also that the price of computers increases by 3% between year one and year two, and by another 3% between year two and year three. The price level is increasing, the inflation rate is _______, and the relative price of computers is _________.
increasing; increasing
constant; increasing
constant; decreasing
increasing; decreasing

Answer: C

Difficulty: 03 Hard

Topic: The Costs of Inflation: Not What You Think

AACSB: Analytic

Blooms: Apply

Learning Objective: 13-08

Feedback: The inflation rate is constant because the rate of change is the same in both years: (1.210 – 1.100) / 1.100 = = 0.1 or 10% and (1.331 – 1.210) / 1.210 = 0.1 or 10%. The relative price of computers is decreasing because its 3% rate of price change is less than the inflation rate in both years.

Suppose the value of the CPI is 1.100 in year one, 1.160 in year two, and 1.270 in year three. Assume also that the price of computers increases by 3% between year one and year two, and by another 3% between year two and year three. The price level is increasing, the inflation rate is _______, and the relative price of computers is _________.
increasing; increasing
constant; increasing
constant; decreasing
increasing; decreasing

Answer: D

Difficulty: 03 Hard

Topic: The Costs of Inflation: Not What You Think

AACSB: Analytic

Blooms: Apply

Learning Objective: 13-08

Feedback: The inflation rate is increasing because the rate of change is increasing from year ne to year two: (1.160 – 1.100) / 1.1 = 0.0545 or 5.45% and (1.270 – 1.160) / 1.160 = 0.0948 or 9.48%. The relative price of computers is decreasing because its 3% price change is less than the inflation rate in both years.

______ is an increase in the price level, while ______ is an increase in the price of one good in comparison to other goods and services.
Inflation; hyperinflation
A relative price increase; inflation
Hyperinflation; inflation
Inflation; a relative price increase

Answer: D

Difficulty: 02 Medium

Topic: The Costs of Inflation: Not What You Think

AACSB: Reflective Thinking

Blooms: Understand

Learning Objective: 13-08

Feedback: This is the definition of both “inflation” and the definition of “relative price increase.”

Inflation makes it difficult to distinguish relative price changes from changes in the general level of prices. Consequently, inflation ______ the efficiency of the market system.
increases
decreases
does not change
may either increase or decrease

Answer: B

Difficulty: 01 Easy

Topic: The Costs of Inflation: Not What You Think

AACSB: Reflective Thinking

Blooms: Remember

Learning Objective: 13-08

Feedback: This may be the biggest problem with price movement: it is hard to distinguish between changes in the general price level and changes in a specific good’s price.

Inflation ______ the signals sent by price changes to demanders and suppliers of goods and services.
amplifies
obscures
enhances
has no impact on

Answer: B

Difficulty: 01 Easy

Topic: The Costs of Inflation: Not What You Think

AACSB: Reflective Thinking

Blooms: Remember

Learning Objective: 13-08

Feedback: This may be the biggest problem with price movement: it is hard to distinguish between changes in the general price level and changes in a specific good’s price.

The shoe leather costs of inflation include all of the following except:
the lost purchasing power of cash.
the extra costs incurred to avoid holding cash.
the cost of more frequent trips to the bank.
the installation of a new cash management system.

Answer: A

Difficulty: 01 Easy

Topic: The Costs of Inflation: Not What You Think

AACSB: Reflective Thinking

Blooms: Remember

Learning Objective: 13-08

Feedback: The “shoe leather” costs of inflation are the inconveniences that occur in dealing with cash during times of high inflation.

The extra costs incurred to avoid holding cash when there is inflation are called the:
average costs of inflation.
consumer price index costs.
external costs.
shoe leather costs.

Answer: D

Difficulty: 01 Easy

Topic: The Costs of Inflation: Not What You Think

AACSB: Reflective Thinking

Blooms: Remember

Learning Objective: 13-08

Feedback: The extra costs incurred to avoid holding cash when there is inflation are called shoe leather costs.

Making more frequent, but smaller cash withdrawals from banks ______ the inflation losses from holding cash and ______ the shoe leather costs of inflation.
increases; increases
increases; reduces
reduces; has no impact on
reduces; increases

Answer: D

Difficulty: 02 Medium

Topic: The Costs of Inflation: Not What You Think

AACSB: Reflective Thinking

Blooms: Understand

Learning Objective: 13-08

Feedback: Keeping lower cash balances reduces the loss from inflation but increases the inconvenience of inflation by requiring more frequent trips to the bank or ATM.

Shoe leather costs include the ______ due to the more frequent trips to the bank, the new cash management systems and the expanded employment in banks that inflation causes.
redistribution that occur
deflating and indexing that are necessary
substitution and price adjustment biases that arise
time and effort that are used up

Answer: D

Difficulty: 01 Easy

Topic: The Costs of Inflation: Not What You Think

AACSB: Reflective Thinking

Blooms: Remember

Learning Objective: 13-08

Feedback: Shoe leather costs are any of the inconveniences people face when they need money for a transaction.

As the rate of inflation increases, the increased cost to a consumer of more frequent trips to the bank to make cash withdrawals represents an increase in the:
shoe leather costs of inflation.
erosion of the purchasing power of cash.
tax distortion generated by inflation.
“noise” in the price system.

Answer: A

Difficulty: 01 Easy

Topic: The Costs of Inflation: Not What You Think

AACSB: Reflective Thinking

Blooms: Remember

Learning Objective: 13-08

Feedback: Shoe leather costs are any of the inconveniences people face when they need money for a transaction.

It is difficult to engage in long-term financial planning when inflation is:
high and erratic.
low and stable.
accounted for through indexing.
predictable.

Answer: A

Difficulty: 01 Easy

Topic: The Costs of Inflation: Not What You Think

AACSB: Reflective Thinking

Blooms: Remember

Learning Objective: 13-08

Feedback: The word “erratic” is important here. If inflation is erratic, parties to long-term contracts are uncertain about the worth of repaid dollars.

The real costs of inflation to society include:
an increase in the general level of prices.
lost purchasing power of income.
higher relative prices.
interference with long-term planning.

Answer: D

Difficulty: 01 Easy

Topic: The Costs of Inflation: Not What You Think

AACSB: Reflective Thinking

Blooms: Remember

Learning Objective: 13-08

Feedback: If inflation is unanticipated, parties to long-term contracts are uncertain about the value of repaid dollars, so these contracts are sometimes not written. Note that income will only lose purchasing power if it is not adequately adjusted for inflation.

The “true” costs of inflation to an economy include all of the following except:
shoe-leather costs.
higher relative prices.
noise in the price system.
unexpected redistribution of wealth.

Answer: B

Difficulty: 01 Easy

Topic: The Costs of Inflation: Not What You Think

AACSB: Reflective Thinking

Blooms: Remember

Learning Objective: 13-08

Feedback: Higher relative prices indicate that a particular good or service has become more scares compared to others. This phenomenon is not necessarily related to inflation.

Inflation reduces economic efficiency because it does each of the following except:
Distort incentives through interaction with the tax laws.
Obscure information transmitted by prices.
Induce people to minimize cash holdings.
Change relative prices.

Answer: D

Difficulty: 01 Easy

Topic: The Costs of Inflation: Not What You Think

AACSB: Reflective Thinking

Blooms: Remember

Learning Objective: 13-08

Feedback: Higher relative prices indicate that a particular good or service has become more scares compared to others. This phenomenon is not necessarily related to inflation.

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Principles of Macroeconomics A Streamlined Approach Robert Frank 3e - Test Bank

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