Macroeconomics CH 7

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Description Question pool for Chapter 07: Tracking the Macroeconomy
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Question
The economic crisis in Portugal in December 1975:
Answer
was inevitable because capitalism does not work in Europe.
ended in the government's seizing control of the nation's factories.
was somewhat overstated due to problems in measuring economic activity.
caused Poland to lose its membership in the European Union.
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Question
According to the circular flow diagram, which of the following economic agents engages in consumer spending?
Answer
firms
households
factor markets
financial markets
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Question
A share in the ownership of a company held by a shareholder is considered a(n):
Answer
bond.
stock.
dividend.
IOU.
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Question
Which of the following would accurately characterize the portion of a firm's profit paid to the owner of one share of its stock?
Answer
interest
dividend
stock
bond
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Question
Which of the following is considered to be an IOU?
Answer
stock
bond
interest
dividend
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Question
Households derive income from all of the following except:
Answer
wages or labor income.
interest from lending.
rent from allowing firms to use their land.
imports.
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Total income households have after paying taxes and receiving government transfers is called:
Answer
disposable income.
private savings.
aggregate spending.
investment.
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Question
The national accounts keep track of all except:
Answer
the spending of consumers and the government.
the sales of producers.
business investment.
exchange rates.
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Question
Private savings is:
Answer
disposable income less taxes.
disposable income less consumption.
wealth.
wealth plus government transfer payments.
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Question
A stock in a company is:
Answer
a share of ownership of a company held by a shareholder.
an IOU that pays interest.
a portion of a firm's profits paid to stock owners.
part of private savings.
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Question
A bond is:
Answer
a share of ownership of a company held by a shareholder.
an IOU that pays interest.
a portion of a firm's profits paid to stock owners.
part of private savings.
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Question
Figure: Circular Flow Model
Reference: Ref 7-01
(Figure: Circular Flow Model) What is GDP in this economy?
Answer
$100
$400
$500
$600
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Question
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Reference: Ref 7-01
(Figure: Circular Flow Model) If the circular flow model is in equilibrium (the sum of money flows into each box is equal to the sum of the
money flows out of that box), which of the following is likely to happen if there is an increase in consumer spending?
Answer
an increase in the nominal GDP
a decrease in the nominal GDP
an increase in the unemployment rate
a decrease in the inflation rate
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Question
Reference: Ref 7-01
money flows out of that box), which of the following is likely to happen if there is a decrease in consumer spending?
Answer
an increase in the real GDP
an increase in the inflation rate
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Question
Reference: Ref 7-01
money flows out of that box), which of the following is likely to happen if there is an increase in investment spending?
Answer
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Question
Reference: Ref 7-01
money flows out of that box), which of the following is likely to happen if there is a decrease in investment spending?
Answer
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Question
Reference: Ref 7-01
money flows out of that box), which of the following is likely to happen if there is an increase in government spending?
Answer
a decrease in the real GDP
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Reference: Ref 7-01
money flows out of that box), which of the following is likely to happen if there is a decrease in government spending?
Answer
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Question
Reference: Ref 7-01
money flows out of that box), which of the following is likely to happen if there is an increase in exports?
Answer
a decrease in the real GDP
a decrease in the unemployment rate
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Question
Reference: Ref 7-01
money flows out of that box), which of the following is likely to happen if there is a decrease in exports?
Answer
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Question
Reference: Ref 7-01
money flows out of that box), which of the following is likely to happen if there is an increase in imports?
Answer
an increase in the nominal GDP and in the unemployment rate
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Question
Reference: Ref 7-01
money flows out of that box), which of the following is likely to happen if there is a decrease in imports?
Answer
an increase in the nominal GDP, a decrease in the nominal GDP, and an increase in the unemployment rate
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Reference: Ref 7-01
(Figure: Circular Flow Model) What are net exports in this economy?
Answer
$0
$30
$60
$100
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Question
Reference: Ref 7-01
(Figure: Circular Flow Model) What is disposable income in this economy?
Answer
$0
$100
$400
$500
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Question
Reference: Ref 7-01
(Figure: Circular Flow Model) How does the government finance its purchases of goods and services?
Answer
by printing money
by taxes
by borrowing
by taxes and borrowing
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Question
In the circular flow model, households:
Answer
receive transfer payments from the government.
buy resources in the factor markets.
sell products in the market for goods and services.
issue stocks and bonds to raise capital.
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Question
The indirect ownership of physical capital refers to households owning:
Answer
cash.
stock.
savings accounts.
their houses.
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The money spent on domestically produced final goods and services:
Answer
is the GDP.
appears as income to someone.
appears in the circular flow model.
is the GDP, appears as income to someone, and appears in the circular flow model.
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Question
Most households derive the bulk of their income from which of the following sources?
Answer
wages
interest
profit
rent
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Question
An example of a government transfer is a(n):
Answer
expenditure on an interstate highway.
bequest from a deceased relative.
Social Security payment.
salary for members of the armed forces.
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Question
Which of the following would NOT be considered a government transfer?
Answer
unemployment compensation
food stamps
payments by the Defense Department for a new weapons system
Medicare benefits paid to someone who is indigent
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Question
Disposable income equals:
Answer
income plus government transfers minus taxes.
income plus government spending minus taxes.
income minus taxes plus government spending.
income minus taxes minus government transfers.
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The market(s) that channel excess savings of households into investment spending by firms is(are) known as:
Answer
the stock market.
the financial markets.
the international market.
the bond market.
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Goods that are produced domestically but sold abroad are:
Answer
imports.
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exports.
part of domestic consumption.
investment.
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Investment spending represents spending on:
Answer
productive physical capital.
stocks.
mutual funds.
corporate bonds.
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Disposable income in a particular period is:
Answer
total income earned.
income earned plus government transfer payments.
income earned plus government transfer payments less taxes.
income earned plus government transfer payments less taxes and savings.
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Goods and services sold to people in other countries are known as:
Answer
imports.
investments.
exports.
transfer payments.
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Investment spending is:
Answer
spending on productive physical capital.
spending on bonds.
spending on shares of stock.
spending on productive physical capital, on bonds, and on shares of stock.
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Question
An example of investment spending would be:
Answer
purchase of a bond.
purchase of a loaf of bread.
purchase of a new productive machine.
purchase of a bond, a loaf of bread or a new productive machine.
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Question
Government borrowing is:
Answer
the amount of funds raised by government in the financial markets.
government spending on goods and services.
government tax revenues.
the amount of funds raised by government in the financial markets, government spending on goods and services, and
government tax revenues.
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Question
If we add up the consumer spending on goods and services, investment spending, government purchases of goods and services, and
the value of exports, then subtract the value of imports, we have measured the nation's _____.
Answer
disposable income.
gross domestic product.
trade deficit.
value added.
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Question
Which of the following represents an outflow of funds from a domestic economy?
Answer
household savings
government tax collections
government transfer payments
imports
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Question
The value, at current market prices, of the final goods and services produced during a particular period is:
Answer
disposable personal product.
gross foreign factor output.
gross personal product.
gross domestic product.
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Question
If we add up all the values added at every stage of production for a good, we will get:
Answer
the total cost of the labor used to produce the good.
the prices of the factors of production used to produce the good.
the final value of the good.
the intermediate value of the good.
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Question
Gross domestic product is defined as:
Answer
consumer spending +government purchases +financial spending +exports imports.
consumer spending +government transfers +investment spending +exports imports.
disposable income +taxes +investment spending +exports +imports.
consumer spending +government purchases +investment spending +exports imports.
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Question
Which of the following is the best definition of GDP?
Answer
the total dollar value of all final goods and services produced in the economy during a given year
the total value of all goods and services produced in the economy during a given year
the total value of all primary, intermediate, and final goods and services produced in the economy during a given year
the total value of all goods and services produced and sold in the economy during a given year
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Question
Gross domestic product or GDP is:
Answer
the total dollar value intermediate goods and services produced in the economy in a given time period.
the total dollar value of wages paid to producing workers in a given time period.
the total dollar value of final goods and services produced in the economy in a given time period.
the total dollar value of government production in a given time period.
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Question
GDP is the:
Answer
total market value of all final goods and services produced in one year.
total accumulated wealth of an economy.
volume of all dollar transactions made in an economy in one year.
dollar amount of all sales made in the economy in one year.
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Question
Gross domestic product is the economy's total production of _______ for a given time period.
Answer
good and services
final goods and services
intermediate goods and services
consumer goods and services
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Question
Which of the following is false? Gross domestic product:
Answer
is aggregate output.
is the total production of final goods and services.
grows during an expansion.
is the total production of all final and intermediate goods and services.
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Question
Which one of the following transactions is included in a current year's GDP as investment spending?
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Answer
ABC company purchased 10,000 shares of IBM stock.
Ronnie bought a new BMW.
Anton purchased his friend's condo.
Maggie bought a play-gym set for her day-care business.
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Question
Table: Calculating GDP
Reference: Ref 7-02
(Table: Calculating GDP) Using the information in the table provided, which of the following is the correct calculation for GDP in 2008?
Answer
$47,475
$12,200
$21,485
$34,085
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Question
Which one of the following is an example of consumption expenditure?
Answer
Samantha bought an oven for her cooking show on Food Network.
Stephanie bought a laptop for her brother.
J im purchased 200 shares of Google stock.
Mr. Smith spent $1500 to buy a used car for his son.
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Question
GDP is the sum of:
Answer
personal consumption, investment, government purchases, exports and imports.
personal consumption, investment, government purchases, and net exports.
personal consumption, investment, government purchases, and net imports.
value added, net imports, and government purchases.
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Question
Table: GDP
Reference: Ref 7-03
(Table: GDP) The GDP for 2007, was:
Answer
$94 billion.
$188 billion.
$168 billion.
$139 billion.
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Question
The Arcadia Entertainment Co. produced 20,000 DVD's of the movie Hulk in 2007. Only 4000 copies remained unsold at the end of
2007, as a result:
Answer
only 16,000 DVD's should be included in GDP in 2007 as consumption expenditure.
all 20,000 DVD's will be included in GDP in 2007, 16,000 as consumption expenditure and 4,000 as investment
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expenditure
only 16,000 DVD's are included in GDP of 2007, remaining 4,000 is counted in GDP of 2008.
all 20,000 DVD's are initially counted in 2007 GDP as consumption expenditure, but subtracted and added to 2008 GDP
as the merchandise gets sold.
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Question
In 2008, consumption spending is $7,000, government purchases is $2,000 and investment spending is $1,500. If GDP for 2008 is
$10,300, then:
Answer
export is $400 and import is $200.
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Question
A transfer payment is a payment for:
Answer
a military transfer to a war-zone.
which no services were rendered during the current year.
transfer of a debt to a different person.
being transferred to a different city by your employer.
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Question
Enchante Inc., a designer clothing company buys $400 worth of silk from a silk trader, and $30 worth of accessories from
AccessoriesRUs to produce each dress. If the value-added by Enchante is equal to $200, then according to the value-added approach,
the price of the designer dress should be:
Answer
$630.
$230.
$200.
$830.
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Question
The Boeing Corporation buys $3 million worth of steel from the Steel manufacturers, $2.5 million worth of computerized hardware and
software, and $1 million worth of mechanical tools to manufacture a certain model of aircraft. Boeing Corporation sells this particular
model of aircraft at $10 million. The value-added by Boeing is equal to:
Answer
$3.5 million.
$16.5 million.
$13 million.
$15.5 million.
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Question
Which one of the following equations correctly measures GDP?
Answer
C +I +G +IM X
C +I +G +X IM
C +I +G +X +IM
C +I +G T +TR
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Question
Don has built an extension to his house, this transaction will be:
Answer
not included in GDP because it is not produced for the marketplace.
included in GDP because Don is a professional builder.
not included in GDP because it is an intermediate good.
included in GDP because building is Don's hobby.
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Question
Which one of the following transactions will be included in the official measurement of GDP?
Answer
Stan sold his house at a huge gain.
Monica illegally downloaded movies to her laptop.
Ben won the state lottery.
Sean bought a new iPhone.
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An example of an intermediate good will be:
Answer
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wages paid to an employee.
steel purchased by the aircraft manufacturers.
vegetables purchased for your dinner.
electric bills for the office.
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Question
The intermediate goods are not counted in the calculation of GDP, because:
Answer
that involves double-counting.
these goods are not produced for the market.
these are produced in the underground economy.
these goods involve financial transactions.
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Question
Which of the following would NOT be included in this year's GDP?
Answer
the production of a television show
the purchase of a new work truck
the hiring of a new police officer
your purchase of your neighbor's 2001 Toyota
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Question
Which of the following best represents the equation for GDP?
Answer
GDP =C+I +G X +IM
GDP =C +I +G +X IM
GDP =C +I +G +Taxes Value Added
GDP =C +I +G +Taxes +X +IM
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Question
Of the following items, which would NOT be included in GDP?
Answer
the dollar value of a repair job done by your professor on his or her own car
the dollar value of a lawyer's service
new car sales by a local car dealer
the production of new cars that were not sold in the current year
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Question
Goods that are produced in a particular period but not sold in that period:
Answer
count as consumption in the next year.
are included in investment.
are treated like exports.
are classified as purely financial transactions.
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Question
Purchases of foreign-produced goods and services during a period are:
Answer
net exports.
exports.
imports.
transfer payments.
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A country's exports minus its imports during a period are:
Answer
net exports.
gross exports.
net imports.
gross imports.
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Net exports are calculated by subtracting:
Answer
imports from exports.
exports from imports.
out all intermediate goods.
I, G, and value added from GDP.
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Question
A nation's exports minus its imports:
Answer
equals its private investment.
is net exports.
is always a positive number.
is equal to net transfer payments.
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Question
Which of the following would NOT be a part of GDP?
Answer
used car sales
new residential construction
a new truck purchased by a building contractor
telephone service purchased for a home
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Question
An intermediate good would be:
Answer
a new boat purchased by a professor to be used on vacation.
lumber used in building a house.
payments to military personnel.
a professor's salary.
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Question
The total volume of business sales in the economy is much larger than GDP because:
Answer
GDP understates the value of total output.
the output approach to measuring GDP excludes intermediate transactions.
GDP includes transfer payments.
GDP excludes exports.
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Question
In the United States:
Answer
GNP is about twice GDP.
GDP is about twice GNP.
GDP exceeds GNP by depreciation plus indirect business taxes.
GNP and GDP are about equal.
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Question
Which of the following would NOT be included in this year's GDP?
Answer
the production of a television show
the purchase of a new hybrid truck
the hiring of a new school teacher
your purchase of your neighbor's house which was built in 1994
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Question
If your professor wins the lottery:
Answer
GDP goes up.
GDP goes down.
GDP is not affected.
the economy will clearly be better off.
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Question
Goods that are produced in a particular period but NOT sold in that period:
Answer
go into inventories and are called consumption.
end up in inventories and are included in investment.
are finally included in depreciation when they are sold.
are classified as intermediate goods.
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Question
Which of the following would be classified as consumption?
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Answer
a new computer purchased by Federal Express for one of its corporate executives.
a storage facility for a moving company.
a new car purchased by an employee of a company for personal use.
a dump truck purchased by a demolition company.
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Question
Which of the following would be an example of an intermediate good?
Answer
stocks and bonds purchased by a business executive
a cellular telephone purchased by a college student
a wedding ring purchased by an engineer for his fiance
tires purchased from Goodyear by General Motors for newly produced electric cars
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Question
The purchases of which of the following goods are included in GDP?
Answer
used goods
newly issued stocks
foreign-produced investment goods
capital goods
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Question
Inventory investment is counted as investment because:
Answer
inventory is used for future production.
inventory is a source of future sales.
inventory has no opportunity cost.
inventory is tax deductible.
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Question
The reason the dollar value of only final goods and services are counted in GDP is that:
Answer
we can only measure the value of final goods and services and can not measure the value of inputs.
if we counted the value of all goods we would count inputs, like the value of steel in a new automobile, more than once.
intermediate goods reduce GDP.
only final goods and services matter for the economy.
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Question
The value of all the following goods is included in the calculation of Gross Domestic Product EXCEPT:
Answer
the value of Firestone tires sold at your local garage.
the value of Bridgestone tires purchased by Ford Motor Co.
the value of Goodyear tires purchased by the United States Secret Service.
the value of Michelin tires purchased by Canadian car collectors.
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Question
A country's Gross National Product (GNP):
Answer
must be larger than its Gross Domestic Product (GDP).
is the total factor income earned by residents of a country.
includes factor income earned by foreigners.
excludes factor income earned abroad by Americans.
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Question
Table: Furniture Production Schedule
Reference: Ref 7-04
(Table: Furniture Production Schedule) What is the value added at all stages of the production process of the furniture as described in
the accompanying table?
Answer
$800
$1,200
$1,800
$2,000
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Question
Which of the following is NOT included in investment spending in the national income accounts?
Answer
new residential construction
the purchase of machinery and other productive physical capital
the purchase of stocks and bonds by a business
spending on inventories
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Question
Suppose that Mr. Green J eans sells $5,000 of wheat to Big Ben Bakery. Big Ben uses the wheat to make flour and then hamburger
buns, which they sell to Hamburger Heaven for $11,000. Hamburger Heaven also buys $20,000 of beef from a rancher. Hamburger
Heaven uses the beef and buns to make 10,000 hamburgers which are sold for $5 each. How much do these transactions add to GDP?
Answer
$86,000
$36,000
$31,000
$50,000
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Question
Value added in national income accounts refers to the:
Answer
value added by labor to the production process.
difference in the final price and the value of inputs purchased.
difference in profits at various stages of production.
value of all the inputs used by the final producer.
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Question
Table: Measuring GDP
Reference: Ref 7-05
(Table: Measuring GDP) GDP is:
Answer
$500 billion.
$850 billion.
$995 billion.
$1,000 billion.
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Question
Reference: Ref 7-05
(Table: Measuring GDP) Total expenditures on GDP by the household sector are:
Answer
$100 billion.
$150 billion.
$200 billion.
$500 billion.
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Reference: Ref 7-05
(Table: Measuring GDP) Government purchases of goods and services are:
Answer
$50 billion.
$100 billion.
$200 billion.
$300 billion.
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Question
Reference: Ref 7-05
(Table: Measuring GDP) Exports are:
Answer
$5 billion.
$0 billion.
$5 billion.
$10 billion.
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Question
A laptop computer purchased by an accounting firm is considered to be:
Answer
consumption spending.
investment spending.
private saving.
a pre-tax dividend.
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Question
An example of investment spending is:
Answer
the amount of funds raised by the government in the financial markets.
the purchase of government bonds by a private household.
the purchase of a freezer by an ice-cream parlor.
the purchase of stock shares by a mutual fund.
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Question
Which of the following is included in GDP?
Answer
the purchase of 100 shares of Microsoft stock
the purchase of a 1965 Ford Mustang
Social Security payments from the U.S. government to retired people
the purchase of a ticket to a Rolling Stones concert
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Question
A laptop computer purchased by a private individual is considered to be:
Answer
consumption spending.
private saving.
a transfer of income.
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Question
Suppose that a doctor who lives alone hires the services of a maid and pays her $15,000 a year to clean his house. Suppose that he
marries her the following year. Other things equal, which of the following can we safely conclude would be true about the reported
official GDP the following year?
Answer
It would rise.
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It would fall.
It would stay the same.
There is not enough information to evaluate the impact that it would have on GDP.
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Question
GDP excludes all of the following EXCEPT:
Answer
the value of leisure.
damage done to the environment.
the value of housework.
the value of owner-occupied housing.
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Question
Which of the following would be included in the calculation of GDP?
Answer
expenditure on new construction
a retiree's monthly Social Security check
buying an existing house
buying shares of Home Depot stock
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Question
Included in GDP would be:
Answer
the dollar value of a used car sold during the period.
the dollar value of a new car imported during the period.
the dollar value of a new car exported during the period.
the purchase of 100 shares of General Motors stock.
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Question
The value of which of the following would be counted in GDP?
Answer
glass for windshields purchased by a car manufacturer
a new car sold by a car dealer
a used car sold by a car dealer
a share of stock in a car manufacturer
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Question
Which of the following transactions would be included in the nation's gross domestic product?
Answer
A college student buys a used textbook from his roommate.
A construction company purchases lumber to use in building a new house.
A college student has a pizza delivered to her dormroom.
A group of college students volunteer to rake leaves at an assisted living facility for senior citizens.
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Question
If during 2005, the country of Sildavia recorded investment spending for $3 billion, government purchases for $3 billion, consumer
spending for $7 billion, imports for $5 billion, government transfers for $1 billion, and exports for $3 billion. Sildavia's GDP in 2005 was:
Answer
$11 billion.
$12 billion.
$13 billion.
$14 billion.
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Question
Suppose a consumer buys a frozen cheese pizza at the grocery store at a price of $10. The frozen pizza company sold the pizza to the
store for $5. The frozen pizza company purchased the pizza dough and tomato sauce from a food processing company at a price of $2
and bought the cheese from a dairy at a price of $1. How much has GDP increased?
Answer
$2
$5
$10
$18
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Question
The equation that breaks GDP down by the four sources of aggregate spending is:
Answer
GDP =C +I +G +X +IM
GDP =C +I +G X IM
GDP =C I G X +IM
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GDP =C +I +G +X IM
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Question
Which of the following transactions would not be counted in the GDP for the United States?
Answer
Nike builds a Niketown retail store in Chicago.
Your mother buys a pound of Washington grown apples at the grocery store.
Your mother buys 100 shares of Nike stock.
The Indiana state government spends taxpayer money to repair a damaged bridge over the Wabash River.
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Question
Gross Domestic Product (GDP) is:
Answer
the total dollar value of all transactions in the economy in a year.
the total value of all final goods and services produced in the economy in a year.
the total value of all final goods and services produced by Americans at home and abroad in a year.
the total dollar value of all goods produced in the economy in a year.
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Question
Gross Domestic Product (GDP) may be calculated as the sum of:
Answer
consumer spending, investment spending, government purchases of goods and services, and exports minus imports.
consumer spending, investment spending, government transfer payments, and exports minus imports.
consumer spending, investment spending, government purchases of goods and services, and exports.
exports and imports only.
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Question
Table: Pizza Economy I
Reference: Ref 7-06
(Table: Pizza Economy I) Based on the accompanying table, GDP in this economy is:
Answer
$73,000.
$65,000.
$57,000.
$51,000.
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Question
Table: Pizza Economy II
Reference: Ref 7-07
(Table: Pizza Economy II) Based on the accompanying table, GDP in this economy is:
Answer
$74,000.
$45,000.
$29,000.
$16,000.
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Question
If during 2009 the country of Sildavia recorded a value added of $78 billion, wages of $40 billion, profits of $8 billion, and total sales of
$90 billion, the value of intermediate goods purchased during 2009 in Sildavia was:
Answer
$42 billion.
$30 billion.
$12 billion.
$4 billion.
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Question
If during 2009, the country of Sildavia recorded a GDP of $65 billion, interest payments of $15 billion, imports of $13 billion, profits of $7
billion, exports of $15 billion, and rent of $7 billion, wages during 2009 in Sildavia were:
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Answer
$36 billion.
$38 billion.
$51 billion.
$64 billion.
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Question
Households receive income in the form of all the following EXCEPT:
Answer
wages.
dividends.
interest and rent.
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Question
In the United States, consumer spending accounts for approximately what percentage of GDP?
Answer
50%
60%
70%
80%
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Question
The largest component of U.S. GDP involves value added in:
Answer
household production.
business production.
government production.
production of goods sold overseas.
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Question
In the United States, investment spending accounts for approximately what percentage of GDP?
Answer
6%
16%
24%
33%
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Question
In the United States, government spending accounts for approximately what percentage of GDP?
Answer
7%
9%
19%
29%
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Question
In 2007, _____ was the largest component of U.S. GDP, at 70% of the total aggregate spending.
Answer
government spending
consumer spending
investment spending
net export spending
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Question
GDP tends to understate our economic well being because it:
Answer
includes the value of services produced in the home.
excludes the value of leisure.
includes expenditures on crime prevention equipment.
includes health care costs related to the consumption of cigarettes.
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Question
GDP tends to overstate our economic well being by including which of the following?
Answer
expenditures on crime prevention
payments for cleaning up the environment
repairs to structures destroyed by storms
expenditures on crime prevention, payments for cleaning up the environment, and repairs to structures destroyed by
Page 20of 45
storms
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Question
The person who is usually credited with developing national income accounts is:
Answer
Adam Smith.
J ohn Maynard Keynes.
Simon Kuznets.
Milton Friedman.
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Question
The value of all the following goods is included in the calculation of aggregate output EXCEPT:
Answer
the value of Firestone tires sold at your local garage.
the value of a new shower installed in a recently purchased 1920's house.
the value of the 6-CD player installed to replace the factory-mounted radio-cassette in your new car.
the value of Firestone tires installed on brand-new Volvo station wagons.
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Question
The actual numerical measure of aggregate output typically used by economists is called:
Answer
aggregated output.
nominal gross domestic product.
net domestic product.
real gross domestic product.
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Question
Real GDP is nominal GDP adjusted for:
Answer
double counting.
changes in prices.
population.
imports.
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Question
If real GDP rises while nominal GDP falls, then prices on average have:
Answer
risen.
fallen.
stayed the same.
Real GDP can not rise when nominal GDP falls.
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Question
Consider an economy that only produces two goods: DVDs and DVD players. If 10 DVDs are sold at $20 each and 5 DVD players are
sold at $100 each, then nominal GDP is:
Answer
$100.
$700.
$1,100.
$900.
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Question
Consider an economy that only produces two goods: DVDs and DVD players. Last year, 10 DVDs were sold at $20 each and 5 DVD
players were sold at $100 each, while this year 15 DVDs were sold at $10 each and 10 DVD players were sold at $50 each. Nominal
GDP this year is:
Answer
$100.
$650.
$700.
$500
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Question
Consider an economy that only produces two goods: DVDs and DVD players. Last year, 10 DVDs were sold at $20 each and 5 DVD
players were sold at $100 each, while this year 15 DVDs were sold at $10 each and 10 DVD players were sold at $50 each. Real GDP
this year using last year as the base year is:
Answer
$100.
$700.
$1,300.
Page 21of 45
$300
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Question
Suppose that nominal GDP is $1000 in 2006 and nominal GDP is $1500 in 2007. If the overall price level ____ between 2006 and
2007, we could say that real GDP _____.
Answer
increased by 50%; stayed constant.
increased by less than 50%; decreased.
increased by more than 50%; increased.
increased by 50%; increased.
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Question
Table: Peanut Butter and Jelly Economy
Reference: Ref 7-08
(Table: Peanut Butter and J elly Economy) A simple economy produces only peanut butter and jelly. Using the data in the attached
table, nominal GDP in 2009 was ____ and real GDP in 2009 was _____.
Answer
$450; $400
$525; $450
$525; $400
$450; $575
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Question
Table: Peanut Butter and Jelly Economy
Reference: Ref 7-08
(Table: Peanut Butter and J elly Economy) A simple economy produces only peanut butter and jelly. Using the data in the attached
table, from 2008 to 2009 real GDP ____ by _____%.
Answer
increased; 12.5
decreased; 50
increased; 43.75
decreased; 12.5
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Question
Table: Price and Output Data
Reference: Ref 7-09
(Table: Price and Output Data) The value of Year 4's output in nominal dollars is:
Answer
$6.
$24.
$30.
$36.
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Question
Reference: Ref 7-09
(Table: Price and Output Data) The value of Year 2's output in real dollars is:
Answer
$4.
Page 22of 45
$12.
$15.
$16.
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Question
Reference: Ref 7-09
Answer
$5.
$20.
$27.
$36.
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Question
Table: Real and Nominal Output
Reference: Ref 7-10
(Table: Real and Nominal Output) Nominal GDP in Year 4 is equal to:
Answer
$40.
$60.
$100.
$280.
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Question
Reference: Ref 7-10
(Table: Real and Nominal Output) Nominal GDP in Year 2 is equal to:
Answer
$40.
$60.
$100.
$280.
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Question
Reference: Ref 7-10
(Table: Real and Nominal Output) The year in which the increase in nominal GDP is exclusively due to the increase in the price level
rather than physical output is Year:
Answer
2.
3.
4.
6.
Page 23of 45
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Question
Chained dollars:
Answer
is money that banks are required to keep in their vaults to back deposits.
is the measure for the value of intermediate goods.
is a method for calculating changes in real GDP which uses an early base year and a late base year.
is a method used to convert real to nominal GDP.
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Question
Real GDP is:
Answer
the value of the production of all final goods and services measured in current prices.
the value of the production of all final goods and services adjusted for price changes.
the projected future value of GDP.
calculated by adding up only the real number of all items sold in the U.S. regardless of their prices.
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Question
When measuring a nation's standard of living, of the following, the best measure is:
Answer
nominal GDP.
market GDP.
real GDP per capita.
nominal GDP per capita.
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Question
Dividing real GDP by the population:
Answer
will result in consumption per capita.
results in nominal GDP per person.
gives real GDP per capita.
is a measure of happiness.
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Question
Use this scenario to answer questions 145148.
Scenario: Real GDP
Suppose that in Year 1 an economy produces 100 golf balls that sell for $3 each and 75 pizzas that sell for $8 each. The next year the
economy produces 110 golf balls that sell for $3.25 each and 80 pizzas that sell for $9 each.
Reference: Ref 7-11
(Scenario: Real GDP) The value of nominal GDP in Years 1 and 2 respectively is:
Answer
$900; $1,077.50.
$900; $990.
$180,000; $257,400.
$1,000; $1,005.
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Question
Scenario: Real GDP
Reference: Ref 7-11
(Scenario: Real GDP) Using Year 1 as the base year, real GDP in Year 2 is:
Answer
$900.
$970.
$1,000.
$1,077.50.
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Question
Scenario: Real GDP
Reference: Ref 7-11
(Scenario: Real GDP) The growth rate of nominal GDP from Year 1 to Year 2 is:
Answer
10%.
7.8%.
19.7%.
8.8%.
Page 24of 45
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Question
Scenario: Real GDP
Reference: Ref 7-11
(Scenario: Real GDP) Using Year 1 as the base year, the growth rate of real GDP from Year 1 to Year 2 is:
Answer
10%.
7.8%.
19.7%.
8.8%.
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Question
Table: Pizza Economy III
Reference: Ref 7-12
(Table: Pizza Economy III) Considering 2008 as the base year, nominal GDP in 2009 was:
Answer
$47,000.
$69,000.
$72,000.
$114,000.
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Question
Reference: Ref 7-12
(Table: Pizza Economy III) Considering 2008 as the base year, real GDP in 2009 was:
Answer
$47,000.
$69,000.
$72,000.
$114,000.
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Question
Reference: Ref 7-12
(Table: Pizza Economy III) Considering 2008 as the base year, real GDP between 2008 and 2009 grew at a rate of:
Answer
53.19%.
39.47%.
39.47%.
58.67%.
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Question
Reference: Ref 7-12
(Table: Pizza Economy III) Considering 2008 as the base year, given that total population was 1,140 in 2008 and 1,300 in 2009, real
GDP per capita in 2008 was:
Page 25of 45
Answer
$80.
$53.
$60.
$100.
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Question
Reference: Ref 7-12
(Table: Pizza Economy III) Considering 2008 as the base year, given that total population was 1,140 in 2008 and 1,380 in 2009, real
GDP per capita between 2008 and 2009 grew at a rate of:
Answer
50%.
25%.
50%.
75%.
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Question
Nominal GDP may be used to compare:
Answer
the dollar amount of final goods produced in different years.
the price of final goods times the number of goods produced in one year.
output if prices are held constant.
living standards among different countries.
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Question
Nominal GDP:
Answer
has not been adjusted for changes in prices over time.
has been adjusted for changes in prices over time.
is a small or nominal amount of output.
excludes the international sector.
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Question
If both aggregate output and the aggregate price level increase:
Answer
real GDP will increase faster than nominal GDP.
nominal GDP will increase faster than real GDP.
it makes no difference to real or nominal GDP.
real GDP and nominal GDP will increase faster than the price level.
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Question
If nominal GDP increased from one year to the next, we can conclude that:
Answer
prices rose from one year to the next.
real GDP rose from one year to the next.
prices and real GDP rose from one year to the next.
prices rose from one year to the next, real GDP rose from one year to the next or that prices and real GDP rose from one
year to the next.
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Question
If nominal GDP decreased from one year to the next, we can conclude that:
Answer
prices fell from one year to the next.
real GDP fell from one year to the next.
prices and real GDP fell from one year to the next.
prices fell from one year to the next, real GDP fell from one year to the next, or that prices and real GDP fell from one year
to the next.
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Question
Assume that the real GDP of the U.S. is approximately $12 trillion and the population of the United States is approximately 300 million.
What is per capita real GDP?
Answer
$4,000
$36,000
Page 26of 45
$40,000
Real per capita GDP can't be determined without more information.
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Question
If nominal GDP of 2009 is higher than nominal GDP of 2008, we can state that:
Answer
production in 2009 is higher than production in 2008, while prices remain unchanged.
production or prices or both are higher in 2009, compared to 2008.
prices in 2009 are higher than prices in 2008, while production remains unchanged.
production in 2009 has gone down while prices have increased.
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Question
If the price level in the economy and the nominal wages both doubled, then the real wages would:
Answer
also double.
increase by one half.
remain unchanged.
decrease by one half.
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Question
Real GDP is the same as
Answer
current dollar GDP.
inflation adjusted GDP.
nominal GDP.
value added GDP.
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Question
Nominal GDP is:
Answer
the inflation adjusted GDP.
the real GDP minus depreciation.
the current dollar GDP.
the constant dollar GDP.
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Question
The government economists have adopted a new method of calculating the change in real GDP known as ________, which uses the
average between the GDP growth rate calculated using an early base year and the GDP growth rate calculated using a late base year.
Answer
cost indexation method.
straight line depreciation method.
chain-linking method.
fixed base year method.
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Question
Assume that in the base year (2008), a country's nominal GDP is 10,000 billion dollars. The country has been experiencing inflation at a
rate of 5% each year since the year 2003. Based on this information, the real GDP of 2008 is equal to:
Answer
$10,500 billion.
$11,025 billion.
$10,000 billion.
$9,500 billion.
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Question
A country's living standard is best measured by the:
Answer
per capita nominal GDP.
real GDP.
nominal GDP.
per capita real GDP.
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Question
Economists frequently use GDP per capita to better reflect:
Answer
the impact of prices on GDP.
differences in living standards across countries.
people who are employed.
people who are both employed and unemployed.
Page 27of 45
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Question
GDP per capita is:
Answer
a perfect measure of a country's standard of living.
the only way to measure living standards among different countries.
an incomplete measure of a country's standard of living.
used by the U.N. to compare nations based on measures of welfare.
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Question
The aggregate price level is:
Answer
the average price of shares on the stock market.
the average price of commodities.
the overall level of prices in the economy.
the average rate of inflation.
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Question
Inflation is when there is:
Answer
a rising aggregate price level.
an expansion of output.
a rise in wages.
a rise in the unemployment rate.
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Question
Deflation is when there is:
Answer
a decrease in unemployment.
a decreasing aggregate price level.
a decline in wages.
a recession.
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Question
A price index:
Answer
always includes a base year.
measures the cost of purchasing a market basket of output across different years.
is normalized to 100 for the base year.
always includes a base year, measures the cost of purchasing a market basket of output across different years and is
normalized to 100 for the base year.
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Question
In a market basket of goods:
Answer
the quantities stay constant and the prices change.
the quantities change and the prices are held constant.
both the prices and the quantities are held constant.
both the prices and the quantities change.
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Question
Scenario: Price Index
Suppose that in the base period a college student buys 20 gallons of gasoline at $2.00 per gallon, 2 CDs for $13 each, and 4 movie
tickets for $7 each. In the next month, the price of gasoline is $2.25 per gallon, CDs cost $12.50 each, and the price of a movie ticket is
$7.50.
Reference: Ref 7-13
(Scenario: Price Index) The price index for the second month is:
Answer
94.
106.4.
100.
impossible to determine without more information.
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Question
Scenario: Price Index
Suppose that in the base period a college student buys 20 gallons of gasoline at $2.00 per gallon, 2 CDs for $13 each, and 4 movie
tickets for $7 each. In the next month, the price of gasoline is $2.25 per gallon, CDs cost $12.50 each, and the price of a movie ticket is
$7.50.
Page 28of 45
Reference: Ref 7-13
(Scenario: Price Index) The change in prices for the month is:
Answer
7.6%.
94%.
6.4%.
6%.
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Question
In the country of Sildavia, a market basket of goods and services cost $130 in 2007, $140 in 2008, and $160 in 2009. Based on this
information and considering 2007 as the base year, the price index in 2009 was:
Answer
100.
107.69.
123.07.
130.
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Question
In the country of Sildavia, a market basket of goods and services cost $130 in 2003, $140 in 2004, and $160 in 2005. Based on this
information and considering 2003 as the base year, inflation from 2003 to 2005 was:
Answer
7.14%.
7.69%.
14.28%.
23.07%.
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Question
The ______ is the most widely used measure of inflation in the United States.
Answer
producer price index
consumer price index
GDP deflator
national income account
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Question
Table: Market Basket of School Supplies
Reference: Ref 7-14
(Table: Market Basket of School Supplies) The accompanying table shows the prices of three common school supplies in 2008 and
2009, and the quantities of each school supply that consumers bought in 2008, the base year. If we were to construct a school supply
index (SSI) in 2009, it would be equal to:
Answer
81.8
100
122.2
112,500
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Question
Table: Market Basket of School Supplies
Reference: Ref 7-14
(Table: Market Basket of School Supplies) The accompanying table shows the prices of three common school supplies in 2008 and
2009, and the quantities of each school supply that consumers bought in 2008, the base year. If we were to construct a school supply
index (SSI) to measure the rate at which average school supply prices have changed, we would find an inflation rate of:
Answer
22%
122%
82%
18%
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Question
If the cost of a market basket is $200 in Year 1 and $230 in Year 2, the price index for Year 2 with a Year 1 base is:
Answer
100.
115.
Page 29of 45
130.
200.
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Question
If the cost of a market basket is $150 in Year 1 and $200 in Year 2, the price index for Year 1 with a Year 2 base is:
Answer
75.
100.
133.
150.
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Question
Reference: Ref 7-15
(Table: Price and Output Data) The value of Year 3's output in nominal dollars is:
Answer
$5.
$5.20.
$20.
$36.
Add Question Here
Question
Reference: Ref 7-15
Answer
$5.20.
$6.
$30.
$36.
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Question
Reference: Ref 7-15
(Table: Price and Output Data) The price index for Year 2 is:
Answer
$4.
$12.
$60.
$80.
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Question
Reference: Ref 7-15
Page 30of 45
(Table: Price and Output Data) The price index for Year 4 is:
Answer
$80.
$120.
$0.
$6.
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Question
Suppose that the market basket for the University Student Price Index (USPI) consists of 5 textbooks and 100 gallons of gasoline. In
2007, which is the base year for this index, textbooks cost $50 each and gas costs $1.00 per gallon. Suppose that in 2008, textbooks
cost $80 each and gasoline costs $3.00 per gallon. Then, the USPI for 2008 is:
Answer
100.
150.
200.
250.
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Question
Suppose that the market basket for the University Student Price Index (USPI) consists of 4 textbooks and 100 gallons of gasoline. In
2007, which is the base year for this index, textbooks cost $50 each and gas costs $1.00 per gallon. Suppose that in 2008, textbooks
still cost $50 each and gasoline costs $4.00 per gallon. Then, the USPI for 2008 is:
Answer
250.
200.
150.
100.
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Question
The inflation or deflation rate is:
Answer
the change in a price index divided by the initial value of the index.
the change in a price index divided by the new index number.
the difference between the initial price index number and the new price index number.
computed by dividing the old price index number by the new price index number.
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Question
Inflation can be measured by:
Answer
the percentage change in the CPI.
the absolute change in the CPI.
the absolute change in the GDP deflator.
the percentage change in GDP.
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Question
If the CPI is 120 in Year 1 and 150 in Year 2, then the rate of inflation from Year 1 to Year 2 is _____.
Answer
10%
20%
25%
50%
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Question
Table: The Consumer Price Index
Reference: Ref 7-16
(Table: The Consumer Price Index) The approximate rate of inflation in Year 3 is _____ percent.
Answer
5
10
19
20
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Question
Page 31of 45
Reference: Ref 7-16
(Table: The Consumer Price Index) The approximate rate of inflation in Year 5 is _____ percent.
Answer
5
10
19
20
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Question
Reference: Ref 7-16
(Table: The Consumer Price Index) The approximate rate of inflation in Year 2 is _____.
Answer
10%
19%
20%
25%
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Question
If the consumer price index changes from 120 to 125 between December 2007 and December 2008, the:
Answer
inflation rate for 2008 is 4.2%.
inflation rate for 2008 is 5%.
deflation rate for 2008 is 5%.
deflation rate for 2008 is 4.2%.
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Question
If a price index in Year 1 is 146 and in Year 2 is 163, the rate of inflation between Year 1 and Year 2 is _____.
Answer
8.2%
10.43%
11.64%
15.0%
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Question
If the consumer price index is 180 in Year 1 and 190 in Year 2, the inflation rate between Year 1 and Year 2 is about ________.
Answer
5.26%
5.56%
6.5%
10%
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Question
Assume that the Consumer Price Index (CPI) for 2007 was 72.6 and that the CPI was 82.4 in 2008. What was the inflation rate between
the two years?
Answer
0.88%
1.13%
11.9%
13.5%
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Question
Assume that the Consumer Price Index (CPI) for 2007 was 103.9 and that the CPI was 107.6 in 2008. What was the inflation rate
between the two years?
Answer
0.97%
1.04%
3.56%
3.70%
Page 32of 45
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Question
Assume that the Consumer Price Index (CPI) for 2007 was 124.0 and that the CPI was 130.7 in 2008. What was the inflation rate
between the two years?
Answer
0.95%
5.40%
6.70%
3.20%
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Question
If the Consumer Price Index (CPI) for 2007 was 148.3 and 152.5 in 2008, what was the inflation rate between the two years?
Answer
0.97%
2.83%
4.20%
9.72%
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Question
If the Consumer Price Index (CPI) for 2007 was 160.6 and 163.1 in 2008, what was the inflation rate between the two years?
Answer
0.25%
1.56%
2.59%
5.00%
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Question
The consumer price index reflects the:
Answer
changes in the prices of goods and services typically purchased by consumers.
level of prices for intermediate goods and services purchased by business.
level of prices for raw materials.
prices of all goods and services computed from the ratio of nominal GDP to real GDP.
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Question
Which of the following is not true concerning the consumer price index? The consumer price index:
Answer
reflects changes in the prices of goods typically purchased by consumers.
contains thousands of goods and services.
is calculated by the Bureau of Labor Statistics.
changes only in the base year, every 5-7 years.
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Question
In the consumer price index of the United States:
Answer
the current cost of a basket of goods is compared to the base-period cost of the same basket of goods.
calculation of the base-period index is always equal to 100.
the base period is 19821984.
the current cost of a basket of goods is compared to the base-period cost of the same basket of goods, the calculation of
the base-period index is always equal to 100, and the base period is 1982-1984.
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Question
The CPI is used for calculating payments from the U.S. government to individuals. To the extent it is biased upward, this index:
Answer
leads to lower benefits than would be the case if it weren't biased upward.
raises government expenditures.
lowers government expenditures.
leads to lower benefits than would be the case if it weren't biased upward and raises government expenditures.
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Question
Page 33of 45
Reference: Ref 7-17
(Table: Real and Nominal Output) The price index in Year 1, using Year 3 as the base period, is equal to:
Answer
25.
50.
100.
150.
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Question
Reference: Ref 7-17
(Table: Real and Nominal Output) The price index in Year 1, using Year 4 as the base period, is equal to:
Answer
25.
50.
100.
150.
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Question
You read in the newspaper that the CPI in 2008 was 120, you will conclude that a typical market basket in 2008 would have cost
Answer
20 percent more than the same market basket purchased in 2007.
120 percent more than the same market basket purchased in 2007.
20 percent more than the same market basket purchased in the base year.
120 percent more than the same market basket purchased in the base year.
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Question
Table: Price Index
Reference: Ref 7-18
(Table: Price Index) Consider the information in table provided. Which year is most likely to be the base year?
Answer
2006
2008
2007
2005
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Question
Table: Price Index
Reference: Ref 7-18
(Table: Price Index) Consider the information in table provided. What is the inflation rate between the years 2007 and 2008?
Answer
6.8%
4%
1%
6%
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Question
Which one of the following price indices measures the cost of living?
Answer
producer price index
wholesale price index
consumer price index
GDP deflator
Page 34of 45
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Question
The GDP deflator is equal to:
Answer
nominal GDP/real GDP x 100
real GDP/nominal GDP x 100
real GDP x nominal GDP x 100
[(real GDP x nominal GDP) / real GDP] x 100
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Question
Table: GDP II
Reference: Ref 7-19
(Table: GDP II) Using the information in the table provided, calculate the GDP deflator for 2007.
Answer
111
104
90
96
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Question
Table: GDP II
Reference: Ref 7-19
(Table: GDP II) Using the information in the table provided, calculate the GDP deflator for 2008.
Answer
111
104
90
96
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Question
Table: CPI
Reference: Ref 7-20
(Table: CPI) Suppose the economy only produces three goods: bread, laptops, and movies. Calculate the CPI of 2008, using 2004 as
the base year.
Answer
81.9
100
75.8
95
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Question
Table: CPI II
Reference: Ref 7-21
(Table: CPI II) Calculate by how much the prices changed between 2007 and 2008.
Answer
Prices fell by 5%.
Prices fell by 4%.
Prices increased by 4%.
Prices increased by 5%.
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Question
Many economists believe that the CPI overstates inflation because:
Answer
innovation forces consumers to pay more for most goods and services.
Page 35of 45
the Bureau of Labor Statistics collects data on the prices of only a few goods and services.
the CPI market basket doesn't reflect the fact that consumers shift consumption away from more expensive goods.
people use it to bargain for wage increases.
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Question
Which of the following statistics is used to measure changes in the prices that firms pay for goods and services?
Answer
Producer Price Index
Consumer Price Index
GDP Deflator
Cost of Living Index
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Question
Which of the following is true concerning the Producer Price Index?
Answer
The Producer Price Index is just another term for the GDP deflator.
Changes in the Producer Price Index generally follow changes in the Consumer Price Index.
The Producer Price Index measures the cost of a basket of goods typically purchased by producers.
The Producer Price Index shows how the cost of all purchases by urban families changes.
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Question
The major difference between the Consumer Price Index and the Producer Price Index is that:
Answer
the PPI is based on retail prices and CPI is based on wholesale prices.
the PPI measures the cost of living of self-employed workers and the CPI measures the cost of living of salaried workers.
the PPI generally registers a higher rate of inflation than the CPI.
the PPI is based on the cost of a basket typically purchased by producers, while the CPI is based on the cost of a basket
typically purchased by consumers.
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Question
The PPI is often regarded as a warning sign of inflation:
Answer
because commodity producers are relatively quick to raise prices.
because producers are more likely to have monopoly control over prices.
because consumers have to pay the prices charged.
because commodity producers can sell whatever they want at higher prices.
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Question
The purpose of indexing Social Security payments to the CPI is to:
Answer
increase corporate profits.
justify continued government funding of the Bureau of Labor Statistics.
avoid the privatization of Social Security.
maintain the purchasing power of retirees.
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Question 224 True/False 0 points Modify Remove
Question
The government returns part of the money it raises from taxes in the form of government transfers.
Answer
True
False
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Question
When measuring GDP as spending on domestically produced final goods and services, spending on inputs like steel in manufacturing a
car is counted in GDP, but spending on a new factory in which the cars are produced is NOT counted in GDP.
Answer
True
False
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Question
When Disney builds a new amusement park in the United States, it is counted as part of GDP.
Answer
True
False
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Question
Final goods and services are sold to the final or end user.
Answer
Page 36of 45
True
False
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Question
Most of the value added in GDP in the United States is added by businesses rather than consumers.
Answer
True
False
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Question
The largest spending category in GDP is consumption.
Answer
True
False
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Question
If the United States exports $500 of goods and services and imports $700 of goods and services, net exports are $1200.
Answer
True
False
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Question
The national income accounts were developed in the early 1970s by Robert McNamara to document spending on the Vietnam War.
Answer
True
False
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Question
Steel manufactured for the purpose of producing a car is not counted in aggregate output, but the car that results is counted.
Answer
True
False
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Question
Overcounting of GDP can be avoided by including both finaland intermediateproduction.
Answer
True
False
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Question
Renting a car to go on a vacation will result in more GDP than if you used your own car.
Answer
True
False
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Question
GDP per capita measures the value of all intermediate goods and services produced in the economy.
Answer
True
False
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Question
U.S. GDP was $5,803 billion in 1994 and $11,734 billion in 2008, so we can conclude that aggregate output roughly doubled over the
fourteen year period in the United States.
Answer
True
False
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Question
Chain-linking is a method used to measure the change in real GDP.
Answer
True
False
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Page 37of 45
Question
The price index in the base year is normalized so that it equals 100 in the base year.
Answer
True
False
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Question
If the price index in year 1 is 110 and the price index in year 2 is 115, then the inflation rate is exactly 5% from year 1 to year 2.
Answer
True
False
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Question
The CPI is intended to measure the cost of all goods purchased in the economy over time.
Answer
True
False
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Question
The inflation rate is measured as the percentage change per year in a price index.
Answer
True
False
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Question
The producer price index and the consumer price index are both examples of price indices.
Answer
True
False
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Question
The producer price index usually responds to price changes more quickly than the consumer price index (CPI).
Answer
True
False
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Question
The GDP deflator is another name for the consumer price index (CPI).
Answer
True
False
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Question
Income tax brackets are indexed to the consumer price index (CPI).
Answer
True
False
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Question
If the CPI increases from 125 to 130 in one year, the rate of inflation is 5 percent.
Answer
True
False
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Question
Economists generally agree that the CPI understates the rate of inflation.
Answer
True
False
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Question
The CPI does not fully account for quality changes in goods and services, and does not, therefore, indicate a correct measure of
inflation.
Answer
True
False
Page 38of 45
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Question
Because consumers tend to look for the cheapest substitute available, the CPI (which tracks only certain products) is thought to be
overstated.
Answer
True
False
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Question 250 Essay 0 points Modify Remove
Question
For each of the following transactions, explain why, or why not, they would be counted in the GDP of the United States.
a. J apanese auto producer Honda builds a factory in Indiana.
b. You buy a new pair of pants produced at a factory in Honduras.
c. You mow your uncle's yard and he gives you $10 for a job well done.
Answer a. Yes. If a factory is being built in America, it would count as investment spending in the U.S. GDP. It doesn't matter if the
builder is headquartered in J apan or any other nation.
b. No. You did purchase the pants in the U.S., which does count as consumption spending, but this garment was produced in
a foreign country. Thus it would be deducted from U.S. GDP as an import.
c. No. In an accountant's perfect world, this sort of cash under the tabletransaction would count, because you have produced
a service and received payment for it. However you are unlikely to report this income on your tax returns and your uncle is
unlikely to demand a receipt for his payment. Official GDP tabulations would miss almost all of these smaller transactions.
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Question
For each of the following transactions, explain why, or why not, they would be counted in the GDP of the United States.
a. American auto producer Ford builds a factory in Alberta, Canada.
b. You buy a blueberry muffin at your local coffee shop.
c. A Ford dealership in Ohio has 15 unsold new 2008 model cars at the end of 2008.
Answer a. No. This is investment spending, but not in America, so it does not count in U.S. GDP.
b. Yes. This is consumer spending.
c. Yes. These unsold cars would be counted as unsold inventory in investment spending.
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Question
A single woman is a busy attorney who is too busy to take care of her yard so she hires a local firm to perform monthly lawn service like
mowing the grass, raking the leaves and trimming the rose bushes. After several years she and the owner of the lawn service fall madly
in love and get married. After the honeymoon, her new husband takes care of the yard maintenance, and she no longer pays his
company the monthly fee. What has happened to GDP?
Answer Official GDP accounts would show a decrease. While the lawn service is still being performed, the husband's firm is no
longer receiving a payment. Domestic work performed by a family member is not captured by the standard measure of GDP.
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Question
Why do economists bother to compute real GDP? Why can't we just compare nominal GDP from one year to the next?
Answer Nominal GDP shows the value of a nation's output of goods and services in a given year, but part of that value is determined
by the prices of those goods and services. If those prices increase, nominal GDP will increase, even if output levels stayed the
same. Real GDP computes the value of goods and services produced during a year, using prices from a reference year, or
base year. This way a person can see whether the nation's output changed, holding prices constant.
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Question
Table: Gadget GDP in Rayistan
Reference: Ref 7-22
(Table: Gadget GDP in Rayistan) Rayistan is a small nation that produces only one good, the gadget. The table shows production and
prices of gadgets for two consecutive years, as well as the population of Rayistan.
a. Compute nominal GDP in 2007 and 2008.
b. Compute real GDP in 2007 and 2008.
c. Has Rayistan's standard of living, as measured by real GDP per capita, increased, decreased, or stayed the same?
Answer a. Nominal GDP in 2007 =4000*$500 =$2,000,000. Nominal GDP 2008 =4400*$600 =$2,640,000
b. Real GDP in 2007 =$2,000,000 because it is the base year. Real GDP 2008 =4400*$500 =$2,200,000
c. Real per capita GDP in 2007 =$2,000,000/10,000 =$200. Real per capita GDP in 2008 =$2,200,000/12,000 =$183. So
the standard of living has actually fallen, as measured by real GDP per capita.
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Question
Suppose the consumer price index last year was 180.5 and this year the CPI is equal to 202.2. What is the rate of inflation between last
year and this year? What is the rate of inflation between the base year and this year?
Answer Inflation between last year and this year =(202.2 180.5)/180.5 =12%. We don't need to know how many years separate this
year from the base year because the CPI is always 100 in the base year. So inflation since the base year is =(202.2
100)/100 =102.2%
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Page 39of 45
Question 256
Question
Table: Muffin Price Index
Reference: Ref 7-23
(Table: Muffin Price Index) A college town has a booming number of small coffee shops and each coffee shop offers a variety of muffins
for sale. As an economics project you have been assigned the creation of a muffin price index (MPI) and the accompanying table
summarizes price data for recent years. Use this data to compute the MPI for each year. Assume that the base year is 2007.
Answer The first step is to calculate the cost of the market basket of muffins in the base year 2007. The cost of muffins in 2007 =
4*$1.10 +1*$1.10 +2*$1.25 =$8. Now using the market basket quantities in 2007 and prices in 2008, we compute the cost
of muffins in 2008 as: =4*$1.15 +1*$1.10 +2*$1.45 =$8.60. The MPI in 2008 is =(8.60/8)*100 =107.5.
Following the same steps for 2009, the cost of muffins in 2009 is: =4*$1.25 +1*$1.20 +2*$1.50 =$9.20. The MPI in 2009 is
=(9.20/8)*100 =115.
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Question
Table: Muffin Price Index
Reference: Ref 7-23
(Table: Muffin Price Index) A college town has a booming number of small coffee shops and each coffee shop offers a variety of muffins
for sale. As an economics project you have been assigned the creation of a muffin price index (MPI) and the accompanying table
summarizes price data for three years. Assume that the base year is 2007. Use this data to compute the rate of inflation in the MPI
between
a. 2007 and 2008
b. 2008 and 2009
Answer a. The first step is to calculate the cost of the market basket of muffins in the base year 2007. The cost of muffins in 2007 =
4*$1.10 +1*$1.10 +2*$1.25 =$8. The MPI in the base year is 100. Now using the market basket quantities in 2007 and prices
in 2008, we compute the cost of muffins in 2008 as: =4*$1.15 +1*$1.10 +2*$1.45 =$8.60. The MPI in 2008 is =(8.60/8)*100
=107.5. Thus the rate of inflation is (107.5 100)/100 =.075 or 7.5%.
b. The rate of inflation between 2008 and 2009 is the percentage change in the MPI between the two years: (115-107.5)/107.5
=.07 or 7%
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Question
Explain the difference between the CPI and the PPI. Which is likely to be the first to indicate inflation?
Answer The CPI measures the overall price level of typical goods and services that consumers and households consume. The PPI
measures the overall price level of typical goods and services, like raw materials, that firms (producers) are likely to consume.
The PPI is likely to be the first to indicate inflation in the economy because producers of commodities can often more quickly
identify changes in the demand for their goods. These changes in the price of raw materials will eventually result in changes in
the prices of consumer goods.
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Question
Some economists say that the CPI is biased and actually overstates the true rise in the cost of living. Describe the two main reasons for
this claim.
Answer The first reason is that consumers, when faced with higher prices, will change their buying habits. They will decrease their
consumption of goods that have prices rising faster than the prices of other substitutable goods. If consumers are buying fewer
of these relatively expensive items, and more of the relatively inexpensive items, then the actual inflation facing consumers is
lower than the CPI might indicate. The second reason is that products available to us today were not available a few years
ago, or they are dramatically improved compared to the same products from a few years ago. For example, the computer you
could purchase today for $1000 is vastly more powerful and faster than a computer you could buy 5 years ago for $1000. On
paper, the price of these hypothetical computers has not changed, but the $1000 buys you much more. Thus each dollar spent
on the computer buys you more, and this acts as a decrease in the price of a computer.
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Question
Gross domestic product measures the:
Answer
amount of money circulating through an economy during a year.
value of final goods and services produced within the borders of a country during a given time period.
value of final goods and services produced by the citizens of a country regardless of their location during a given time
period.
amount of government spending undertaken during a given time period.
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Question
In the circular flow diagram, government purchases of goods and services are financed by:
Answer
tax revenues.
tax revenues net of transfer payments.
tax revenues net of transfer payments plus government borrowing from financial markets.
tax revenues plus government borrowing from financial markets.
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Page 40of 45
Question
When a household makes a loan to a firm with the firm providing interest to the household, this is known as:
Answer
a stock.
a bond.
a transfer payment.
disposable income.
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Question
The indirect ownership of physical capital used by firms by households is considered:
Answer
stock.
a bond.
a transfer payment.
public debt.
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Question
Private saving by households is:
Answer
the portion of disposable income not spent on goods and services.
the portion of income coming from transfer payments.
often larger than consumption spending.
does not impact consumption spending.
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Question
Investment refers to the:
Answer
accumulation of stocks by an individual.
addition to the economy's supply of productive physical capital.
total net amount of assets sold to foreigners.
total spending by households in an economy.
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Question
Construction of new homes is considered part of:
Answer
consumption.
government spending.
private saving.
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Question
Flows into the financial markets are equal to the sum of:
Answer
foreign lending.
foreign lending and purchases of stock plus private saving.
borrowing and stock issues plus foreign borrowing and sales of stock.
private saving.
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Question
A decrease in inventories is considered:
Answer
a fall in investment spending which will lead to a drop in future sales.
an increase in investment spending which will lead to an increase in future sales.
to have no impact on investment since it is not part of investment spending.
part of government spending.
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Question
An economy's gross domestic product is made up of:
Answer
consumption, saving, investment and government spending.
consumption, investment, government spending and net exports.
consumption, saving, inventories, financial markets, and government spending.
consumption and saving.
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Question
Within the circular flow diagram, the value of household income, the sum of wages, dividends, interest, and rent plus transfer payments
equals the sum of:
Page 41of 45
Answer
the value of household tax payments.
consumer spending, private saving, and the value of household tax payments.
the money supply.
transfer payments and household tax payments.
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Question
Transfer payments:
Answer
are a means by which government raises funds.
represent a redistribution of funds from one individual to another individual in the economy.
are counted in GDP.
is another term for government taxation.
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Question
Wages represent:
Answer
the income earned by households from the selling of their labor.
the interest earned from bonds.
rent earned from the use of land to firms.
indirect ownership of physical capital used by firms.
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Question
Disposable income refers to:
Answer
income spent on imports.
household income and government transfers less taxes paid to the government.
gross income.
government transfer payments.
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Question
Suppose only two countries existed in the world. Country A imported $200 million worth of goods and services from Country B. Country
B imported $100 million worth of goods and services from Country A. This means that net exports for:
Answer
Country A equals $200 million.
Country B equals $200 million.
Country A equals $100 million.
Country B equals $100 million.
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Question
When a firm buys a new machine for its business, this is considered:
Answer
consumption.
investment.
government spending.
private saving.
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Question
When intermediate goods are included in the GDP calculation, this is referred to as:
Answer
the value added method.
double counting.
deflating the value of GDP.
the expenditure method of GDP calculation.
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Question
Calculating GDP via the factor payments approach would include payments such as:
Answer
wages, interest payments, rent and profits.
taxes, wages, interest payments and rents.
rents, profits, value added adjustments, and taxes.
consumption, investment and government.
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Question
Which of the following is false? GDP can be calculated by summing:
Answer
total market value of all final goods and services within a country's borders in a given year.
all factor payments within a country's borders in a given year.
the value added for all goods and services.
Page 42of 45
government spending and tax revenues.
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Question
The value added is equal to:
Answer
the value of sales by a company.
the value of sales minus the value of intermediate goods used by a company.
the value of intermediate goods.
the sum of payments to labor and capital.
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Question
Which of the following is NOT included in the calculation of GDP?
Answer
the Social Security check your relative receives each month
the new textbook you purchase for a college course
a coffee you purchase from the coffee shop down the street
the wages you pay to the employee who cleans your house
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Question
Double counting would occur if:
Answer
GDP was calculated by adding together C, I, G, and NX.
used goods were included in the GDP calculation.
imports were subtracted from GDP.
inventories were added to the GDP calculation.
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Question
When consumers purchase imported products, this is:
Answer
subtracted from GDP.
considered domestic spending since it is spent by a domestic consumer.
double counting.
not a part of the GDP calculation.
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Question
Spending on inputs is __________________ and spending on investment is _______________.
Answer
part of GDP, part of GDP
not a part of GDP, part of GDP
part of GDP, not a part of GDP
not a part of GDP, not a part of GDP
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Question
Scenario: Good A and Good B
The town of York produces two goods, Good A and Good B. The following is information regarding York's production of these two
goods and their prices the following three years.
Reference: Ref 7-24
(Scenario: Good A and Good B) In 2007, nominal GDP is:
Answer
greater than the nominal GDP in 2008.
greater than the nominal GDP in 2006.
equal to the nominal GDP in 2008.
equal to the nominal GDP in 2006.
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Question
Reference: Ref 7-24
Page 43of 45
(Scenario: Good A and Good B) Using 2006 as the base year, then one would find that the real GDP in 2006:
Answer
is equal to the real GDP in 2007.
is equal to the nominal GDP in 2006.
is greater than the real GDP in 2007.
cannot be calculated.
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Question
Reference: Ref 7-24
(Scenario: Good A and Good B) Using 2006 as the base year, real GDP is greatest in:
Answer
2006.
2007.
2008.
Its base year always.
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Question
Real per capita GDP is:
Answer
real GDP divided by the population.
real GDP divided by the amount of capital available in the economy.
not a good useful measure of human welfare.
rarely used as a tool to compare countries' possible resources.
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Question
Scenario: Market Basket
Suppose a market basket consists of the following goods: 50 pens, 25 notepads, and 25 paperclips. Also assume the price per unit of
these goods is as follows for the years noted and 2007 is the base year.
Reference: Ref 7-25
(Scenario: Market Basket) What is the value of the price index in 2008?
Answer
100
90
111
132
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Question
Reference: Ref 7-25
(Scenario: Market Basket) What is the rate of inflation between 2007 and 2008?
Answer
10%
11%
32%
0%
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Question
Page 44of 45
Reference: Ref 7-25
(Scenario: Market Basket) What is the value of the price index in 2007?
Answer
100
111
90
0
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Question
The GDP deflator is:
Answer
a price index.
equal to 100 in the base year.
the ratio of real GDP for Year x divided by nominal GDP for Year x 100.
a measure that tracks price changes for consumer goods.
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Macroeconomics CH 7

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