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Macroeconomics (Acemoglu/Laibson/List)
Chapter 5 The Wealth of Nations: Defining and Measuring Macroeconomic Aggregates
5.1 Macroeconomic Questions
1) ________ is the study of economic aggregates and the economy as a whole.
A) Microeconomics
B) Econometrics
C) Macroeconomics
D) Ergonomics
Answer: C
Difficulty: Easy
AACSB: Analytical Thinking
Topic: Macroeconomic Questions
2) Which of the following is an example of a macroeconomic aggregate?
A) Total fixed cost faced by a firm
B) Income earned by a household
C) The annual inflation rate
D) Profit earned by an entrepreneur
Answer: C
Difficulty: Easy
AACSB: Analytical Thinking
Topic: Macroeconomic Questions
3) You are likely to learn about ________ in your macroeconomics class.
A) the price elasticity of demand for a good
B) the annual growth rate of an economy's output
C) the average revenue and cost curves of a firm
D) the Law of Diminishing Marginal Utility
Answer: B
Difficulty: Easy
AACSB: Analytical Thinking
Topic: Macroeconomic Questions
4) Which of the following is a macroeconomic concept?
A) The per capita income of a country
B) The average revenue earned by a firm
C) The elasticity of supply of a good
D) The income elasticity of demand for a good
Answer: A
Difficulty: Easy
AACSB: Analytical Thinking
Topic: Macroeconomic Questions
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5) Which of the following questions have a macroeconomic focus?
A) How does a monopolist decide how much to produce?
B) What is the unemployment rate in your country?
C) How does demand for a good change when there is an increase in a consumer's income?
D) How does a consumer choose which goods to consume given his/her income?
Answer: B
Difficulty: Easy
AACSB: Analytical Thinking
Topic: Macroeconomic Questions
6) Which of the following questions can be answered using the concepts of macroeconomics?
A) Why does the rate of economic growth fluctuate from year to year?
B) What is the difference between a public good and a private good?
C) What is the effect of an increase in price on the supply of a good?
D) Why do some firms produce differentiated goods?
Answer: A
Difficulty: Easy
AACSB: Analytical Thinking
Topic: Macroeconomic Questions
7) National accounts measure ________.
A) the level of aggregate economic activity in a country
B) the labor force participation rate in a country
C) the total amount of capital goods available in a country
D) the total money supply in a country
Answer: A
Difficulty: Easy
AACSB: Analytical Thinking
Topic: Macroeconomic Questions
5.2 National Income Accounts : Production = Expenditure = Income
1) ________ is the market value of the final goods and services produced within the borders of a
country during a particular period of time.
A) Gross National Product
B) Gross Domestic Product
C) Net Product Value
D) Total Product
Answer: B
Difficulty: Easy
AACSB: Analytical Thinking
Topic: National Income Accounts: Production = Expenditure = Income
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2) Gross Domestic Product is a measure of ________, not a measure of ________.
A) sales; production
B) production; sales
C) sales; consumption
D) income; production
Answer: B
Difficulty: Easy
AACSB: Analytical Thinking
Topic: National Income Accounts: Production = Expenditure = Income
3) Double counting occurs when:
A) inputs are included in the calculation of the gross domestic product.
B) unsold inventories are included in the calculation of the gross domestic product.
C) depreciation is included in the calculation of the gross domestic product.
D) household production is included in the calculation of the gross domestic product.
Answer: A
Difficulty: Easy
AACSB: Analytical Thinking
Topic: National Income Accounts: Production = Expenditure = Income
4) Which of the following is likely to be included in a country's Gross Domestic Product in a
particular year?
A) The total amount steel used in the production of automobiles in that year
B) An unsold inventory of automobiles produced in that year
C) An unused stock of goods produced in the previous year
D) The total amount of flour used by bakeries to make bread in that year
Answer: B
Difficulty: Medium
AACSB: Analytical Thinking
Topic: National Income Accounts: Production = Expenditure = Income
5) A factory in Techland could not sell 20% of its output during a certain year due to a decrease
in demand for its product. Which of the following would have happened if it produced 20% less?
A) Techland's GDP would have been higher.
B) Techland's GDP would have remained the same.
C) Techland's GDP would have been lower.
D) Techland's trade deficit would have been less.
Answer: C
Difficulty: Easy
AACSB: Application of Knowledge
Topic: National Income Accounts: Production = Expenditure = Income
3
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6) There is only one firm in a small island country. The firm produced 1,000 units of Good X
during a particular year out of which it could sell 900. If each unit of the good sells for $500,
what is the gross domestic product of the country?
A) $40,000
B) $450,000
C) $500,000
D) $150,000
Answer: C
Difficulty: Easy
AACSB: Application of Knowledge
Topic: National Income Accounts: Production = Expenditure = Income
7) The total value of inputs used in the production of 100,000 units of a good manufactured in a
country is $150,000. Assume that the country produces only this good and each unit of the good
sells for $10. What is the gross domestic product of the country?
A) $1,000,000
B) $1,150,000
C) $150,000
D) $250,000
Answer: A
Difficulty: Easy
AACSB: Application of Knowledge
Topic: National Income Accounts: Production = Expenditure = Income
8) Two variables are related by an accounting identity when:
A) the two variables have a positive relationship.
B) the two variables are mathematically identical.
C) the two variables have a negative relationship.
D) the value of the variables are always equal but have opposite signs.
Answer: B
Difficulty: Easy
AACSB: Analytical Thinking
Topic: National Income Accounts: Production = Expenditure = Income
9) The circular flow diagram implies that if accounting is done correctly, ________.
A) the implied value of the factors of production must exceed the flow of income
B) the flow of income must exceed the implied value of the factors of production
C) the flow of expenditure must equal the income of the households making those expenditures
D) the flow of expenditure must exceed the income of the households making those expenditures
Answer: C
Difficulty: Easy
AACSB: Analytical Thinking
Topic: Circular Flows
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10) Which of the following holds true in a circular flow diagram?
A) Factor flows are represented by drawing an arrow from the firm sector to the household
sector.
B) Income flow are represented by drawing an arrow from the household sector to firms.
C) Production flows are represented by drawing an arrow from the firm sector to the household
sector.
D) Expenditure flows are represented by drawing an arrow from the firm sector to the household
sector.
Answer: C
Difficulty: Easy
AACSB: Analytical Thinking
Topic: Circular Flows
11) Which of the following is an example of a physical capital?
A) A stock
B) A bond
C) A factory
D) A worker
Answer: C
Difficulty: Easy
AACSB: Analytical Thinking
Topic: National Income and Product Accounts: Expenditure
12) The expenditure-based method of national accounting ________.
A) only tracks the purchase of goods and services by firms
B) only tracks the purchase of goods and services by the government
C) does not track the purchase of investment goods by firms and households
D) tracks the purchase of all goods by households, firms and the government
Answer: D
Difficulty: Easy
AACSB: Analytical Thinking
Topic: National Income and Product Accounts: Expenditure
13) Which of the following is true of the expenditure-based method of national accounting?
A) It does not track the purchase of services by households.
B) It does not track the purchase of goods and services by the government.
C) It tracks the purchase of investment goods by firms and households.
D) It only tracks the purchase of goods and services by the government.
Answer: C
Difficulty: Easy
AACSB: Analytical Thinking
Topic: National Income and Product Accounts: Expenditure
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14) Which of the following will be included in the calculation of gross domestic product using
the expenditure method?
A) Dividends paid by firms to shareholders
B) Wages paid to labor by firms
C) Services purchased by the government
D) Interest paid by households for loans
Answer: C
Difficulty: Medium
AACSB: Analytical Thinking
Topic: National Income and Product Accounts: Expenditure
15) Which of the following will be included in the calculation of GDP using the expenditure
method?
A) Interest earned on money lent out
B) Investments in machineries
C) Dividend earned on shares
D) Value added in the production of a good
Answer: B
Difficulty: Easy
AACSB: Analytical Thinking
Topic: National Income and Product Accounts: Expenditure
16) Which of the following will be included in the calculation of GDP using the expenditure
method?
A) A worker's wage
B) A domestic producer's export of clothes
C) A firm's payment of employee bonuses
D) A bank's payment of interest to its customers
Answer: B
Difficulty: Easy
AACSB: Analytical Thinking
Topic: National Income and Product Accounts: Expenditure
17) Which of the following transactions will be included in the calculation of GDP using the
expenditure method?
A) The sale of a used car by a consumer
B) The purchase of a private jet by the CEO of a company
C) The purchase of a treasury bond by an investor
D) The payment made to a construction worker
Answer: B
Difficulty: Easy
AACSB: Analytical Thinking
Topic: National Income and Product Accounts: Expenditure
6
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18) The export of wheat will be included in the calculation of GDP using the ________ method.
A) production
B) expenditure
C) income
D) investment
Answer: B
Difficulty: Easy
AACSB: Analytical Thinking
Topic: National Income and Product Accounts: Expenditure
19) A machinery used in a factory is a(n) ________ good.
A) inferior
B) public
C) club
D) capital
Answer: D
Difficulty: Easy
AACSB: Analytical Thinking
Topic: National Income Accounts: Production = Expenditure = Income
20) The difference between ________ is known as the trade balance.
A) exports and imports
B) production and exports
C) consumption and imports
D) investment and consumption
Answer: A
Difficulty: Easy
AACSB: Analytical Thinking
Topic: National Income and Product Accounts: Expenditure
21) A ________ occurs when a country's exports exceed its imports.
A) trade deficit
B) trade surplus
C) budget surplus
D) fiscal deficit
Answer: B
Difficulty: Easy
AACSB: Analytical Thinking
Topic: National Income and Product Accounts: Expenditure
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22) A ________ occurs when a country's imports exceed its exports.
A) fiscal deficit
B) budget surplus
C) trade surplus
D) trade deficit
Answer: D
Difficulty: Easy
AACSB: Analytical Thinking
Topic: National Income and Product Accounts: Expenditure
23) The value of a country's exports during a particular year was $120,000 and the value of its
imports was $85,000. Which of the following is true?
A) The country ran a trade deficit of $35,000 during that year.
B) The country ran a trade surplus of $35,000 during that year.
C) The country ran a budget surplus of $205,000 during that year.
D) The country ran a fiscal deficit of $205,000 during that year.
Answer: B
Difficulty: Medium
AACSB: Application of Knowledge
Topic: National Income and Product Accounts: Expenditure
24) The value of a country's exports during a particular year was $610,000 and the value of its
imports was $995,000. Which of the following is true?
A) The country ran a trade deficit of $385,000 during that year.
B) The country ran a trade surplus of $385,000 during that year.
C) The country ran a budget surplus of $1,605,000 during that year.
D) The country ran a fiscal deficit of $605,000 during that year.
Answer: A
Difficulty: Medium
AACSB: Application of Knowledge
Topic: National Income and Product Accounts: Expenditure
25) Which of the following will lead to an increase in the gross domestic product of a country,
all other variables remaining unchanged?
A) An increase in imports
B) An increase in consumption expenditure
C) A fall in the expenditure on investment goods
D) A fall in the expenditure incurred by the government
Answer: B
Difficulty: Medium
AACSB: Analytical Thinking
Topic: National Income and Product Accounts: Expenditure
8
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26) ________ will lead to an increase in the gross domestic product of a country, all other
variables remaining constant.
A) An increase in imports
B) An increase in exports
C) A fall in the expenditure on investment goods
D) A fall in the expenditure incurred by the government
Answer: B
Difficulty: Medium
AACSB: Analytical Thinking
Topic: National Income and Product Accounts: Expenditure
27) Which of the following will lead to an increase in the gross domestic product of a country?
A) An increase in imports
B) An increase in expenditure on investment goods
C) A fall in the expenditure on consumption
D) A fall in the expenditure incurred by the government
Answer: B
Difficulty: Medium
AACSB: Analytical Thinking
Topic: National Income and Product Accounts: Expenditure
28) ________ will lead to an increase in the gross domestic product of a country, all other
variables remaining unchanged.
A) An increase in imports
B) An increase in expenditure incurred by the government
C) A fall in the expenditure on consumption
D) A fall in the expenditure on investment goods
Answer: B
Difficulty: Medium
AACSB: Analytical Thinking
Topic: National Income and Product Accounts: Expenditure
29) Which of the following will lead to a decrease in the gross domestic product of a country, all
other variables remaining unchanged?
A) An increase in exports
B) An increase in imports
C) An increase in the expenditure on consumption
D) An increase in the expenditure on investment
Answer: B
Difficulty: Medium
AACSB: Analytical Thinking
Topic: National Income and Product Accounts: Expenditure
9
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30) ________ will lead to a decrease in the gross domestic product of a country, all other
variables remaining unchanged.
A) A decrease in exports
B) A decrease in imports
C) An increase in the expenditure on consumption
D) An increase in the expenditure on investment
Answer: A
Difficulty: Medium
AACSB: Analytical Thinking
Topic: National Income and Product Accounts: Expenditure
31) Which of the following will lead to a decrease in the gross domestic product of a country, all
other variables remaining unchanged?
A) A decrease in the expenditure on consumption
B) A decrease in imports
C) An increase in exports
D) An increase in the expenditure on investment
Answer: A
Difficulty: Medium
AACSB: Analytical Thinking
Topic: National Income and Product Accounts: Expenditure
32) ________ will lead to a decrease in the gross domestic product of a country, all other
variables remaining unchanged.
A) An increase in exports
B) A decrease in imports
C) A decrease in the expenditure on investment
D) An increase in the expenditure on investment
Answer: C
Difficulty: Medium
AACSB: Analytical Thinking
Topic: National Income and Product Accounts: Expenditure
33) Which of the following will lead to a decrease in the gross domestic product of a country?
A) An increase in exports
B) A decrease in imports
C) A decrease in the expenditure incurred by the government
D) An increase in the expenditure on investment
Answer: C
Difficulty: Medium
AACSB: Analytical Thinking
Topic: National Income and Product Accounts: Expenditure
10
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34) The market value of domestic production is equal to the total expenditure on domestic
agents:
A) plus the expenditure of foreign agents on exports minus gross investment by the foreign
firms.
B) plus domestic expenditure on imports.
C) plus the expenditure of foreign agents on exports minus domestic expenditure on imports.
D) plus domestic expenditure on imports minus the expenditure of foreign agents on exports.
Answer: C
Difficulty: Easy
AACSB: Analytical Thinking
Topic: National Income Accounts: Production = Expenditure = Income
The table below shows the values of various economic variables of a country during a particular
year.
35) Refer to the table above. The gross domestic product of the country is ________.
A) $452,000
B) $402,000
C) $554,000
D) $352,000
Answer: D
Difficulty: Medium
AACSB: Application of Knowledge
Topic: National Income Accounts: Production = Expenditure = Income
36) Refer to the table above. The trade balance of the country during that particular year was
________.
A) -$104,000
B) $50,000
C) -$6,000
D) $4,000
Answer: D
Difficulty: Medium
AACSB: Application of Knowledge
Topic: National Income Accounts: Production = Expenditure = Income
11
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37) Refer to the table above. If exports increase by $4,000 in the next year, ________, all other
variables remaining unchanged.
A) gross domestic product will decrease by $4,000
B) gross domestic product will increase by $4,000
C) trade deficit will increase by $2,000
D) trade surplus will increase by $2,000
Answer: B
Difficulty: Easy
AACSB: Application of Knowledge
Topic: National Income Accounts: Production = Expenditure = Income
38) Refer to the table above. If consumption expenditure increases to $200,000 in the next year,
________, all other variables remaining unchanged.
A) gross domestic product will increase to $367,000
B) gross domestic product will increase to $400,000
C) gross domestic product will fall to $367,000
D) gross domestic product will fall to $400,000
Answer: A
Difficulty: Hard
AACSB: Application of Knowledge
Topic: National Income Accounts: Production = Expenditure = Income
39) Refer to the table above. If investment expenditure falls by $10,000 in the next year,
________, all other variables remaining unchanged.
A) gross domestic product will increase by $10,000
B) gross domestic product will increase to $500,000
C) gross domestic product will fall by $10,000
D) gross domestic product will fall to $467,000
Answer: C
Difficulty: Hard
AACSB: Application of Knowledge
Topic: National Income Accounts: Production = Expenditure = Income
40) Refer to the table above. If imports falls to $45,000 in the next year, ________, all other
variables remaining unchanged.
A) gross domestic product will increase by $5,000
B) gross domestic product will increase by $ 10,000
C) gross domestic product will fall by $5,000
D) gross domestic product will fall by $ 10,000
Answer: A
Difficulty: Hard
AACSB: Application of Knowledge
Topic: National Income Accounts: Production = Expenditure = Income
12
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41) Refer to the table above. If government expenditure increases by $2,000 in the next year,
________, all other variables remaining unchanged.
A) gross domestic product will increase by $2,000
B) gross domestic product will increase to $404,000
C) gross domestic product will fall by $ 2,000
D) gross domestic product will fall to $400,000
Answer: A
Difficulty: Hard
AACSB: Analytical Thinking
Topic: National Income Accounts: Production = Expenditure = Income
42) Refer to the table above. If a trade deficit of $23,000 occurs in the next year, ________, all
other variables remaining unchanged.
A) gross domestic product will fall to $325,000
B) gross domestic product will increase by $2,000
C) gross domestic product will fall by $2,000
D) gross domestic product will increase to $531,000
Answer: A
Difficulty: Hard
AACSB: Application of Knowledge
Topic: National Income Accounts: Production = Expenditure = Income
43) Refer to the table above. What will be the value of the gross domestic product of the country
if the country runs a trade surplus of $30,000 next year, everything else remaining unchanged?
A) $524,000
B) $378,000
C) $372,000
D) $407,000
Answer: B
Difficulty: Hard
AACSB: Application of Knowledge
Topic: National Income Accounts: Production = Expenditure = Income
44) The gross domestic product of Richland during a particular year was $672,500. If the
expenditure on consumption during that year was $220,000, the expenditure on investment was
$250,000, the expenditure incurred by the government was $100,000, and exports was $182,000,
calculate the value of imports.
A) $40,000
B) $79,500
C) $21,500
D) $100,750
Answer: B
Difficulty: Hard
AACSB: Application of Knowledge
Topic: National Income Accounts: Production = Expenditure = Income
13
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45) The gross domestic product of Ritzland during a particular year was $120,000. If the
expenditure on investment was $16,000, the expenditure incurred by the government was
$35,000, the value of exports was $10,000, and the value of imports was $22,000, calculate the
expenditure on consumption.
A) $81,000
B) $19,000
C) $37,500
D) $44,000
Answer: A
Difficulty: Hard
AACSB: Application of Knowledge
Topic: National Income Accounts: Production = Expenditure = Income
46) The expenditure on consumption in Berylia during a particular year was $310,000, the
expenditure on investment was $180,000, the expenditure incurred by the government was
$75,000, the expenditure of foreign economic agents on domestic products was $80,000, and
domestic expenditure on foreign produced goods was $103,000. What is the gross domestic
product of Berylia during that year?
A) $530,000
B) $479,000
C) $542,000
D) $645,000
Answer: C
Difficulty: Hard
AACSB: Application of Knowledge
Topic: National Income Accounts: Production = Expenditure = Income
47) In the United States, calculation of gross domestic product is conducted by the ________.
A) Census bureau
B) Chief Financial Officer's Council
C) Council of Economic Advisors
D) Bureau of Economic Analysis
Answer: D
Difficulty: Easy
AACSB: Analytical Thinking
Topic: National Income Accounts: Production = Expenditure = Income
48) Per-capita income of a country is determined by ________.
A) dividing its gross domestic product by the total number of goods produced during that year.
B) dividing its gross domestic product by the total population of the country during that year.
C) multiplying its gross domestic product by the total number of goods produced during that
year.
D) multiplying its gross domestic product by the total population of the country during that year.
Answer: B
Difficulty: Easy
AACSB: Analytical Thinking
Topic: Evidence-Based Economics: GDP and Expenditures
14
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49) Which of the following forms the largest share of gross domestic product in the United
States, when measured using the expenditure method?
A) Investment expenditure
B) Government expenditure
C) Expenditure on consumption
D) Foreign expenditure on domestic goods
Answer: C
Difficulty: Easy
AACSB: Analytical Thinking
Topic: Evidence-Based Economics: GDP and Expenditures
50) What is the per capita income of Genovia if its gross domestic product is $4,000,000 and
total population is 20,000?
A) $100
B) $200
C) $400
D) $120
Answer: B
Difficulty: Easy
AACSB: Application of Knowledge
Topic: Evidence-Based Economics: GDP and Expenditures
51) Which of the following is true?
A) The share of consumption expenditure in the GDP of US has increased over the last 80 years.
B) The share of government expenditure in the GDP of US has fallen over the last 80 years.
C) The share of exports in the GDP of US has fallen over the last 80 years.
D) The share of exports in the GDP of US has grown over the last 80 years.
Answer: D
Difficulty: Easy
AACSB: Analytical Thinking
Topic: Evidence-Based Economics: GDP and Expenditures
52) Which of the following is a reason behind the rise in US trade over the last 80 years?
A) Falling consumption expenditure
B) Rising government expenditure
C) Improved transportation technology
D) Improved bureaucracy
Answer: C
Difficulty: Easy
AACSB: Application of Knowledge
Topic: Evidence-Based Economics: GDP and Expenditures
15
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53) Which of the following will be included in the income-based method of national accounting?
A) A worker's retirement benefits
B) A firm's expenditure on raw materials
C) A consumer's expenditure on a imported car
D) A student's expenditure on education
Answer: A
Difficulty: Medium
AACSB: Analytical Thinking
Topic: National Income and Product Accounts: Income
54) Which of the following will be included in the calculation of GDP using the income-based
method?
A) Export of food grains to foreign countries
B) A health insurance provided to a worker by the employer
C) The value-added by a worker in the production of a good
D) Money paid to a pharmacist for medicines
Answer: B
Difficulty: Easy
AACSB: Analytical Thinking
Topic: National Income and Product Accounts: Income
55) Which of the following is an example of labor income?
A) Dividend received by shareholder
B) Rent paid to a landlord
C) Bonus paid to a worker
D) Profit earned by an entrepreneur
Answer: C
Difficulty: Easy
AACSB: Analytical Thinking
Topic: National Income and Product Accounts: Income
56) Which of the following is an example of capital income?
A) Wage paid to a worker
B) Interest earned on money lent out
C) Free lunch at work
D) Free parking space in a mall
Answer: B
Difficulty: Easy
AACSB: Analytical Thinking
Topic: National Income and Product Accounts: Income
16
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57) Which of the following will be included in the calculation of GDP using the income-based
method?
A) The sale of an old house
B) The money paid to a grocer
C) Earnings retained by corporations
D) The scholarship offered to a student by a university
Answer: C
Difficulty: Easy
AACSB: Analytical Thinking
Topic: National Income and Product Accounts: Income
58) Which of the following is an example of a financial capital?
A) A factory
B) A check book
C) A bond
D) A currency bill
Answer: C
Difficulty: Easy
AACSB: Analytical Thinking
Topic: National Income and Product Accounts: Income
59) Labor payments generally represent ________ of income payments.
A) one-fourth
B) two-thirds
C) one-third
D) three-fourths
Answer: B
Difficulty: Easy
AACSB: Analytical Thinking
Topic: National Income and Product Accounts: Income
60) Capital payments usually represent ________ of income payments.
A) one-fourth
B) two-third
C) one-third
D) three-fourths
Answer: C
Difficulty: Easy
AACSB: Analytical Thinking
Topic: National Income and Product Accounts: Income
17
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61) The production-based method of national accounting sums up:
A) the expenditure incurred by domestic and foreign economic agents on domestic products.
B) the value that is added by each domestic firm in the production process.
C) the income earned by each factor of production for participating in the production process.
D) the total revenue earned by all the firms in the economy.
Answer: B
Difficulty: Easy
AACSB: Analytical Thinking
Topic: National Income and Products Accounts: Production
Infi Corp. is a leading manufacturer of smart phones. Every year, customers spend $31 billion on
smart phones manufactured by Infi Corp. $10 billion of this sale comes from a leading retailer
while the remaining buy directly from Infi Corp. The retailer pays 70% of its revenue to Infi
Corp. and Infi Corp. pays $19 billion to its suppliers.
62) Refer to the scenario above. Infi Corp. adds a value of ________ to the production process.
A) $31 billion
B) $9 billion
C) $21 billion
D) $12 billion
Answer: B
Difficulty: Medium
AACSB: Application of Knowledge
Topic: National Income and Products Accounts: Production
63) Refer to the scenario above. The retailer adds a value of ________ to the production process.
A) $5 billion
B) $10 billion
C) $3 billion
D) $1 billion
Answer: C
Difficulty: Medium
AACSB: Application of Knowledge
Topic: National Income and Products Accounts: Production
64) A retailer buys goods worth $15,000 from a manufacturer and sells it for $18,250. He adds a
value of ________ to the production process.
A) $18,250
B) $15,000
C) $3,250
D) $33,250
Answer: C
Difficulty: Medium
AACSB: Application of Knowledge
Topic: National Income and Products Accounts: Production
18
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65) An apparel manufacturer bought raw materials worth $60,000 in a particular year and earned
a total revenue of $90,000. If he had no other expenditure, he added a value of ________ to the
production process.
A) $12,000
B) $30,000
C) $90,000
D) $150,000
Answer: B
Difficulty: Medium
AACSB: Application of Knowledge
Topic: National Income and Products Accounts: Production
66) In which of the following ways can national savings be calculated?
A) By deducting investment and government expenditure from total output
B) By deducting net exports and government expenditure from total output
C) By deducting consumption and government expenditure from total output
D) By deducting consumption and investment from total output.
Answer: C
Difficulty: Easy
AACSB: Analytical Thinking
Topic: Letting the Data Speak: Saving vs. Investment
67) Why are inputs not included in the calculation of the gross domestic product ?
Answer: Gross domestic product of a country is the final value of all goods and services
produced within the borders of the country during a particular year. Therefore, the value of raw
materials is implicitly counted when we value the final good. If the value of the input is counted
separately, it would result in double-counting.
Difficulty: Easy
AACSB: Analytical Thinking
Topic: National Income Accounts: Production = Expenditure = Income
68) Explain the concept of an accounting identity.
Answer: Two variables are related by an accounting identity when the two variables are
mathematically identical.
Difficulty: Easy
AACSB: Analytical Thinking
Topic: National Income Accounts: Production = Expenditure = Income
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69) What is a circular flow diagram?
Answer: Economists have designed a system of national accounts that measures GDP in four
equivalent ways - production, expenditure, income, and factors. The circular flow diagram
provides a simple visual way of remembering the relationships among these four equivalent
systems. Firms on the left produce goods and services (production). Households on the right pay
to buy those goods and services (expenditure). Firms pay households to use households' capital
and labor (income). Capital and labor are put to use by firms (factors of production). The
accounting system is set up so that all four sets of flows are equal in value.
Difficulty: Easy
AACSB: Analytical Thinking
Topic: Circular Flows
70) Why is home ownership a source of capital income?
Answer: Home ownership is one important source of (implicit) capital income. A person who
owns a home does not need to pay rent. Economists consider this "non-payment" to be a form of
capital income. The income from home ownership is the amount of money the owner would have
needed to spend had he or she been renting the same kind of home or apartment from a landlord.
Difficulty: Easy
AACSB: Analytical Thinking
Topic: National Income and Product Accounts: Income
71) What causes capital and labor shares of gross domestic product to remain consistent over the
years?
Answer: Economic forces keep the labor and capital shares of income almost perfectly constant.
Here is an example of how these forces work. Suppose that capital started to become scarce
relative to the amount of labor and the capital share of income consequently began to decline.
The growing scarcity of capital would cause capital's value to grow, leading to higher payments
to each unit of capital and greater subsequent investment in capital. Both of these mechanisms
would offset the decline in the capital share of income. Forces like this prevent the capital and
labor shares of income from moving around very much.
Difficulty: Medium
AACSB: Analytical Thinking
Topic: National Income and Product Accounts: Income
72) Why is the value added by each producer included in the calculation of GDP instead of his
sales revenue?
Answer: The revenue or final value of a good includes the value added at each stage of the
production process. It is not possible to find out the contribution of each producer in the
production process if only the revenue earned by the firm selling the final good is tracked.
Therefore, the value added by each producer is included in the calculation of GDP.
Difficulty: Medium
AACSB: Analytical Thinking
Topic: National Income and Products Accounts: Production
20
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5.3 What Isn't Measured by GDP?
1) Which of the following is omitted in the calculation of GDP?
A) Pension paid to retired workers
B) Interest paid on bank deposits
C) Capital depreciation
D) Export of goods
Answer: C
Difficulty: Easy
AACSB: Analytical Thinking
Topic: Physical Capital Depreciation
2) 10% of the total food grains produced in a country during a year got damaged due to poor
storage. Which of the following will happen in this case?
A) GDP will decrease.
B) GDP will remain unchanged.
C) Trade surplus will increase.
D) Imports will fall.
Answer: B
Difficulty: Easy
AACSB: Application of Knowledge
Topic: Physical Capital Depreciation
3) A bridge built by the government of Ritzland collapsed in the same year it was constructed. If
the total cost of building the bridge was $4 million, which of the following will happen as a
result of its collapse?
A) Ritzland's GDP will decrease.
B) Ritzland's GDP will remain unchanged.
C) Ritzland's trade deficit will increase.
D) Ritzland's trade surplus will increase.
Answer: B
Difficulty: Easy
AACSB: Application of Knowledge
Topic: Physical Capital Depreciation
4) Several houses built in a country during a certain year got damaged due to an earthquake.
Which of the following is likely to happen due to this damage?
A) The country's GDP will remain unchanged.
B) The country's GDP will decrease.
C) The trade deficit of the country will increase.
D) The trade surplus of the country will increase.
Answer: A
Difficulty: Easy
AACSB: Application of Knowledge
Topic: Physical Capital Depreciation
21
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5) 30% of the electric bulbs produced in a factory in Xenonia during a year were found to be
defective and could not be sold. Which of the following is likely to happen in this case?
A) Xenonia's GDP will decrease.
B) Xenonia's GDP will increase.
C) Xenonia's GDP will remain unchanged.
D) Xenonia's trade surplus will increase.
Answer: C
Difficulty: Easy
AACSB: Application of Knowledge
Topic: Physical Capital Depreciation
Jane stitched a prom dress which she could have bought for $180 from a store.
6) Refer to the scenario above. Which of the following will happen if she keeps the dress for
herself?
A) The GDP of her country will increase by $180.
B) The GDP of her country will remain unchanged.
C) The trade deficit of her country will decrease.
D) The trade surplus of her country will decrease.
Answer: B
Difficulty: Easy
AACSB: Application of Knowledge
Topic: Home Production
7) Refer to the scenario above. Which of the following will happen if she sells it for $200, and
the total cost incurred by her in making the dress was $150?
A) GDP will increase by $180.
B) GDP will increase by $50.
C) GDP will remain unchanged.
D) Trade surplus will increase by $200.
Answer: B
Difficulty: Medium
AACSB: Application of Knowledge
Topic: Home Production
Sarah takes care of her son instead of sending him to a day care which charges $12,000 annually.
8) Refer to the scenario above. Which of the following will happen if she puts him into a day
care?
A) The country's GDP will increase by $12,000.
B) The country's GDP will remain unchanged.
C) The country's GDP will decrease by $12,000.
D) The country's trade deficit will increase by $12,000.
Answer: A
Difficulty: Easy
AACSB: Application of Knowledge
Topic: Home Production
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9) Refer to the scenario above. Which of the following will happen if Sarah opens a day care
facility and takes care of 5 children, in addition to her son, charging $12,000 per year for each
child?
A) The country's trade surplus will increase by $12,000.
B) The country's GDP will decrease by $12,000.
C) The country's GDP will increase by $60,000.
D) The country's trade deficit will increase by $2,400.
Answer: C
Difficulty: Easy
AACSB: Application of Knowledge
Topic: Home Production
10) Refer to the scenario above. Which of the following will happen if her husband quits his job
to look after their son instead of Sarah?
A) The country's GDP will increase.
B) The country's GDP will remain unchanged.
C) The country's trade surplus will increase.
D) The country's trade deficit will increase.
Answer: B
Difficulty: Easy
AACSB: Application of Knowledge
Topic: Home Production
Mike's housekeeper charges $30 for mowing his lawn.
11) Refer to the scenario above. Which of the following will happen if Mike decides to mow his
lawn by himself?
A) GDP will increase.
B) GDP will decrease.
C) Per capita income will increase.
D) GDP will remain unchanged.
Answer: B
Difficulty: Easy
AACSB: Application of Knowledge
Topic: Home Production
12) Refer to the scenario above. Which of the following will happen if Mike starts charging $30
for mowing lawns that were earlier mowed by their owners?
A) GDP will increase.
B) GDP will decrease
C) Per capita income will remain unchanged
D) Per capita income will decrease.
Answer: A
Difficulty: Easy
AACSB: Application of Knowledge
Topic: Home Production
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Edwin grows potatoes on his farm. A part of the output is consumed by Edwin's family and
Edwin sells the remaining in the market.
13) Refer to the scenario above. Suppose Edwin consumes the total output produced. What is
likely to happen in this case?
A) GDP will increase.
B) GDP will decrease.
C) GDP will remain unchanged.
D) Trade surplus will increase by $200.
Answer: C
Difficulty: Easy
AACSB: Application of Knowledge
Topic: Home Production
14) Refer to the scenario above. Suppose besides consuming all the potatoes grown on his farm,
Edwin buys 5 pounds of potatoes at $0.80 per pound. What is likely to happen in this case?
A) GDP will increase by $4.
B) GDP will decrease by $0.80.
C) GDP will remain unchanged.
D) Trade surplus will increase by $4.
Answer: A
Difficulty: Easy
AACSB: Application of Knowledge
Topic: Home Production
15) Your electrician accepts payment only in cash in order to avoid taxes. If you pay him $100,
________.
A) the GDP of your country will increase
B) the GDP of your country will fall
C) the trade surplus of your country will increase
D) the GDP of your country will remain unchanged
Answer: D
Difficulty: Medium
AACSB: Application of Knowledge
Topic: The Underground Economy
16) A shoe retailer does not give a bill for shoes purchased from his store and does not report his
income correctly to evade taxes. If you pay him $50, ________.
A) the GDP of your country will increase
B) the GDP of your country will fall
C) the trade surplus of your country will increase
D) the GDP of your country will remain unchanged
Answer: D
Difficulty: Medium
AACSB: Application of Knowledge
Topic: The Underground Economy
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17) A drug dealer earned $85,000 during a year by selling illegal drugs. His income will:
A) cause the GDP of his country to increase.
B) cause the GDP of his country to decrease.
C) not affect the calculation of his country's GDP.
D) lead to an increase in his country's exports.
Answer: C
Difficulty: Medium
AACSB: Application of Knowledge
Topic: The Underground Economy
18) Jack exported a rare painting illegally. This transaction will:
A) cause the GDP of his country to increase.
B) cause the GDP of his country to decrease.
C) not affect the calculation of his country's GDP.
D) cause the GDP of the country he has exported it to increase.
Answer: C
Difficulty: Medium
AACSB: Application of Knowledge
Topic: The Underground Economy
19) ________ is the market value of production generated by the factors of production possessed
or owned by the residents of a particular nation.
A) Gross domestic product
B) Gross National Product
C) Net domestic product
D) Total Market Value
Answer: B
Difficulty: Easy
AACSB: Analytical Thinking
Topic: Gross Domestic Product (GDP) vs Gross National Product (GNP)
20) A Chinese worker started working in the U.S. and earned an income of $10,000 during a
certain year. This will lead to a(n) ________ in the same year.
A) increase in the GDP of U.S
B) increase in the GNP of U.S.
C) increase in the GDP of China
D) decrease in the GDP of China
Answer: A
Difficulty: Easy
AACSB: Application of Knowledge
Topic: Gross Domestic Product (GDP) vs Gross National Product (GNP)
25
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21) A Japanese businessman opened an automobile showroom in Singapore this year. His
income will lead to a(n) ________.
A) increase in the GDP of Japan
B) decrease in the GDP of Japan
C) increase in the GDP of Singapore
D) decrease in the GDP of Singapore
Answer: C
Difficulty: Easy
AACSB: Application of Knowledge
Topic: Gross Domestic Product (GDP) vs Gross National Product (GNP)
22) An Indian student paid $16,000 for a course in a university in the U.S. This transaction will
lead to a(n) ________.
A) increase in the GDP of India
B) decrease in the GDP of India
C) increase in the GDP of U.S.
D) decrease in the GDP of U.S.
Answer: C
Difficulty: Medium
AACSB: Application of Knowledge
Topic: Gross Domestic Product (GDP) vs Gross National Product (GNP)
23) A French tourist spent $1,200 in the U.S this year. This transaction will lead to a(n)
________.
A) increase in the GDP of France
B) decrease in the GDP of France
C) increase in the GDP of U.S.
D) decrease in the GDP of U.S.
Answer: C
Difficulty: Medium
AACSB: Application of Knowledge
Topic: Gross Domestic Product (GDP) vs Gross National Product (GNP)
24) John is a U.S. citizen who bought a house in Canada. This purchase will lead to a(n)
________.
A) increase in the GDP of Canada
B) decrease in the GDP of Canada
C) increase in the GDP of U.S.
D) decrease in the GDP of U.S.
Answer: A
Difficulty: Medium
AACSB: Application of Knowledge
Topic: Gross Domestic Product (GDP) vs Gross National Product (GNP)
26
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25) Rebecca, a citizen of U.S., imported a watch from Switzerland. This transaction leads to a(n)
________.
A) increase in the GDP of U.S.
B) increase in the GNP of U.S.
C) increase in the GDP of Switzerland
D) decrease in the GDP of Switzerland
Answer: C
Difficulty: Easy
AACSB: Application of Knowledge
Topic: Gross Domestic Product (GDP) vs Gross National Product (GNP)
26) Country X exports 10 million tonnes of wheat to Country Y. Which of the following will
happen in this case?
A) Country X's GNP will decrease.
B) Country X's GDP will increase.
C) Country Y's GDP will increase.
D) Country Y's GNP will increase.
Answer: B
Difficulty: Easy
AACSB: Application of Knowledge
Topic: Gross Domestic Product (GDP) vs Gross National Product (GNP)
27) Tom is a U.S. citizen. He took up a job and moved to the U.K. His income will lead to a(n)
________.
A) increase in the GNP of U.K.
B) decrease in the GDP of U.K.
C) increase in the GNP of U.S.
D) increase in the GDP of U.S.
Answer: C
Difficulty: Easy
AACSB: Application of Knowledge
Topic: Gross Domestic Product (GDP) vs Gross National Product (GNP)
28) Which of the following is likely to happen if a German company opens a production unit in
New York?
A) Germany's GDP will increase.
B) Germany's GNP will increase.
C) U.S.'s GDP will decrease.
D) U.S.'s GNP will increase.
Answer: B
Difficulty: Easy
AACSB: Application of Knowledge
Topic: Gross Domestic Product (GDP) vs Gross National Product (GNP)
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29) The GDP of Country X in a particular year was $820,000. If the value added by U.S. workers
in the production of various goods and services in Country X during that year was worth
$150,000 and the value added by the workers of Country X in the production of various goods
and services in other countries during that year was worth $130,000, the GNP of Country X
during that year was ________.
A) $135,000
B) $800,000
C) $1,140,000
D) $8,235,000
Answer: B
Difficulty: Hard
AACSB: Application of Knowledge
Topic: Gross Domestic Product (GDP) vs Gross National Product (GNP)
30) The gross national product of a country for a certain year was $340,000. If the contribution
of its factors of production in the production of various goods and services in other countries was
worth $140,000 and the contribution of foreign factors of production in the production of goods
and services in this country was worth $50,000, the gross domestic product of the country for
that year was ________.
A) $430,000
B) $160,000
C) $250,000
D) $480,000
Answer: C
Difficulty: Hard
AACSB: Application of Knowledge
Topic: Gross Domestic Product (GDP) vs Gross National Product (GNP)
31) If the value of the output generated by a country's factors of production within the borders of
foreign countries is higher than the value of output of foreign factors of production within its
borders, ________.
A) the GDP of the country is higher than its GNP
B) the GDP of the country is lower than its GNP
C) the GDP of the country equals its GNP
D) the GDP of the country equals its trade balance
Answer: B
Difficulty: Medium
AACSB: Analytical Thinking
Topic: Gross Domestic Product (GDP) vs Gross National Product (GNP)
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32) The value of production generated by a country's factors of production within the borders of
foreign countries during a particular year was $51,000 and the production of foreign factors of
production within the borders of the country during that year was worth $80,000. Which of the
following is likely to be true in this case?
A) The GDP of the country is higher than its GNP.
B) The GDP of the country is lower than its GNP.
C) The GDP of the country equals its GNP.
D) The GDP of the country equals its trade balance.
Answer: A
Difficulty: Hard
AACSB: Application of Knowledge
Topic: Gross Domestic Product (GDP) vs Gross National Product (GNP)
33) What are the different things that are not accounted for in the calculation of the GDP of a
country?
Answer: The first major drawback of GDP is the omission of depreciation. The second major
drawback is the omission of home production. Another drawback is that black market
transactions are not included in the GDP. Externalities and the value of leisure are also omitted
from the calculation of GDP.
Difficulty: Medium
AACSB: Analytical Thinking
Topic: What Does GDP Leave Out?
34) Genovia produced 10 million tonnes of wheat in a particular year. However, 1 million tonnes
got infested with pests and had to be thrown away. How will this affect the calculation of the
gross domestic product of the country for that year?
Answer: The quantity of wheat that had to be thrown away will not affect the calculation of
GDP since depreciation is not included in the calculation of GDP.
Difficulty: Medium
AACSB: Application of Knowledge
Topic: Physical Capital Depreciation
35) Rita cooked a meal for her family which is worth $100 in the nearest eatery. What will be the
impact of this activity on the calculation of GDP? Explain your answer.
Answer: This activity will not affect the calculation of GDP since home production is excluded
from the calculation of GDP. However, the value of the groceries she needs to cook the meal will
be included in the calculation of GDP.
Difficulty: Medium
AACSB: Application of Knowledge
Topic: Home Production
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36) How does the presence of negative externalities affect the calculation of GDP?
Answer: Negative externalities arise when one person's action makes somebody else worse off.
Externalities are also omitted from the calculation of GDP. Sometimes negative externalities
even get counted as positive contributors to economic output. For example, property crimes, like
theft, lead people to purchase locks and other security devices. In some cases, property owners
hire guards to safeguard their possessions. All of this preventive activity counts as a positive
contributor to GDP.
Difficulty: Easy
AACSB: Analytical Thinking
Topic: Negative Externalities
37) What is the relationship between the gross domestic product of a country and its gross
national product?
Answer: Gross domestic product of a country is the final value of all goods and services
produced within the borders of a country, while gross national product is the final value of all
goods and services produced by a country's factors of production during a particular year.
Therefore, in order to obtain gross national product, the production of domestic factors of
production within foreign borders needs to be added and the production of foreign factors of
production within domestic borders needs to be subtracted from gross domestic product.
Difficulty: Easy
AACSB: Analytical Thinking
Topic: Gross Domestic Product (GDP) vs Gross National Product (GNP)
38) How is leisure treated in the calculation of GDP of an economy? Does such a calculation
imply that GDP is good measure of well-being? Why or why not?
Answer: The GDP accounts give an economy no credit for producing leisure. However, most
people would agree that leisure is a key ingredient in human well-being. For example, in timeuse surveys, people report that they are happiest when they are with friends socializing.
Likewise, people report that they are the least happy when they are commuting to and from
work. Of course, the goal in life is not to maximize your income by working every moment that
you can. If that were our goal, nobody would ever retire or take a vacation. A more reasonable
goal is to maximize human well-being. This is another example of optimization. GDP tells us
how many material goods are being produced by an economy, but it does not tell us whether all
of those material achievements are being used to optimize human happiness.
Difficulty: Easy
AACSB: Analytical Thinking
Topic: Leisure
39) What is the relationship between the gross domestic product of a country and the level of life
satisfaction in the country?
Answer: GDP turns out to be an excellent predictor of life satisfaction. It has been found that
there exists a robust relationship between GDP and life satisfaction in a large sample of
countries. The countries with higher levels of per-capita GDP report higher levels of life
satisfaction.
Difficulty: Easy
AACSB: Analytical Thinking
Topic: Does GDP Buy Happiness?
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40) Billy is a plumber. He earns $15 per hour. One morning, just before he was leaving for work,
he found a pipe in his kitchen leaking. He spent two hours repairing the pipe.
i) How will this affect the calculation of GDP?
ii) If Billy had spent two hours working for one of his clients, what would have been the effect
of his activity on the calculation of GDP?
Answer:
i) If Billy spends two hours repairing a pipe in his kitchen, he does not receive any monetary
payment and his activity does not affect the calculation of GDP. This is because home
production is not included in the calculation of GDP.
ii) If Billy had spent two hours working for his clients, GDP would have increased by
$15 × 2 = $30.
Difficulty: Medium
AACSB: Application of Knowledge
Topic: Home Production
41) The total consumption expenditure in Polonia during a certain year was $135,000, total
expenditure on investment was $44,000 and total expenditure incurred by the government was
$50,000. Polonia exported goods worth $10,000 during that year and imported goods and
services worth $12,000. Calculate the gross national product of Polonia if foreign factors of
production added a value of $14,000 in the production of goods and services in Polonia while
Polonian workers living abroad added a value of $8,000 to the production process in those
countries.
Answer: The formula for calculating the Gross National Product of a country is:
GNP = GDP + production of domestic factors of production in foreign countries - production of
foreign factors within domestic borders.
The formula for calculating GDP is:
GDP = C + I + G + X - M where C denotes consumption expenditure, I denotes investment
expenditure, G denotes government expenditure, X denotes exports and M denotes imports.
Therefore, GDP = $135,000 + $44,000 + $50,000 + $10,000 - $12,000 = $227,000.
GNP = $227,000 + $8,000 - $14,000 = $221,000.
Difficulty: Hard
AACSB: Application of Knowledge
Topic: Gross Domestic Product (GDP) vs Gross National Product (GNP)
5.4 Real vs. Nominal
1) ________ is the total value of final goods and services produced within the borders of a
country, using current market prices to determine the value of each unit that is produced.
A) Nominal gross domestic product
B) Real gross domestic product
C) Gross national product
D) Total product
Answer: A
Difficulty: Easy
AACSB: Analytical Thinking
Topic: Real vs. Nominal
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2) Country X produces only one good. It produced 12,500 units of a good during a particular
year. If the price of the good during that year was $100 and the price of the good during the
previous year was $95, the nominal GDP of the country is ________.
A) $1,187,500
B) $1,250,000
C) $875,000
D) $2,450,000
Answer: B
Difficulty: Easy
AACSB: Application of Knowledge
Topic: Real vs. Nominal
3) ________ is the total value of final goods and services produced within the borders of a
country, using market prices from a specific base year to determine the value of each unit that is
produced.
A) Nominal gross domestic product
B) Real gross domestic product
C) Gross national product
D) Total product
Answer: B
Difficulty: Easy
AACSB: Analytical Thinking
Topic: Real vs. Nominal
A country produces only one good. It produced 5,000 units of the good during Year 1 and 6,000
units of the good in Year 2. The price of each unit of the good in Year 1 was $280 and it was
$320 in Year 2. Suppose Year 1 is taken as the base year for the calculation of GDP.
4) Refer to the scenario above. The real GDP of the country in Year 1 was ________.
A) $1,400,000
B) $280,000
C) $540,000
D) $2,200,000
Answer: A
Difficulty: Medium
AACSB: Application of Knowledge
Topic: Real vs. Nominal
5) Refer to the scenario above. The nominal GDP of the country in Year 1 was ________.
A) $540,000
B) $280,000
C) $1,400,000
D) $2,200,000
Answer: C
Difficulty: Easy
AACSB: Application of Knowledge
Topic: Real vs. Nominal
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6) Refer to the scenario above. The real GDP of the country in Year 2 was ________.
A) $1,680,000
B) $240,000
C) $32,000,000
D) $1,420,000
Answer: A
Difficulty: Hard
AACSB: Application of Knowledge
Topic: Real vs. Nominal
7) Refer to the scenario above. The nominal GDP of the country for Year 2 was ________.
A) $180,000
B) $1,920,000
C) $2,510,000
D) $174,000
Answer: B
Difficulty: Medium
AACSB: Application of Knowledge
Topic: Real vs. Nominal
8) Refer to the scenario above. Real GDP of the country has grown by ________.
A) 0.2%
B) 20%
C) 10%
D) 5%
Answer: B
Difficulty: Hard
AACSB: Application of Knowledge
Topic: Real vs. Nominal
9) Refer to the scenario above. The GDP deflator for Year 2 is ________.
A) 114.3
B) 0.14
C) 240
D) 87.5
Answer: A
Difficulty: Medium
AACSB: Application of Knowledge
Topic: The GDP Deflator
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10) The GDP deflator is 100 times the ratio of ________.
A) nominal GDP to real GDP
B) real GDP to nominal GDP
C) GDP to GNP
D) GNP to GDP
Answer: A
Difficulty: Easy
AACSB: Application of Knowledge
Topic: The GDP Deflator
11) In a particular year, if the real GDP of Country Y is $400,000 and the nominal GDP of
Country Y is $450,000, the GDP deflator is ________.
A) 115
B) 102
C) 112.5
D) 0.17
Answer: C
Difficulty: Easy
AACSB: Application of Knowledge
Topic: The GDP Deflator
12) The GDP deflator of a country in the base year was 100 and it is 130 in the current year.
This implies that the prices of final goods and services produced in the country have increased
by ________ between the two years.
A) 30%
B) 3%
C) 10%
D) 0.1%
Answer: A
Difficulty: Medium
AACSB: Application of Knowledge
Topic: The GDP Deflator
13) Prices of final goods and services in Eduland have increased by 23% between Year 1 and
Year 2. If the GDP deflator of Eduland in Year 1 was 100, the GDP deflator of Eduland in Year
2 is ________.
A) 103
B) 50
C) 123
D) 112
Answer: C
Difficulty: Medium
AACSB: Application of Knowledge
Topic: The GDP Deflator
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14) The price of a given basket of goods in Year 1 was $1,300. The price of the same basket of
goods in Year 2 was $1,560. The consumer price index for Year 2 taking Year 1 as the base year
is ________.
A) 101
B) 120
C) 156
D) 100
Answer: B
Difficulty: Medium
AACSB: Application of Knowledge
Topic: The Consumer Price Index
15) The consumer price index for a country in Year 1 was 129 and in Year 2, it was 133. The
inflation rate of the country between the two years is approximately ________.
A) 3.1 percent
B) 4 percent
C) 2.2 percent
D) 6 percent
Answer: A
Difficulty: Medium
AACSB: Application of Knowledge
Topic: Inflation
16) The price of a house in Year 1 was $50,000. If the price index for Year 1 is 101, and for Year
2 is 202, the value of the house in Year 2 is ________.
A) $55,000
B) $100,000
C) $150,000
D) $75,000
Answer: B
Difficulty: Medium
AACSB: Application of Knowledge
Topic: Adjusting Nominal Variables
17) Mr. Clooney inherited a sum of $30,000 in 1990. If the price index for 1990 was 100 and the
price index for 2014 is 188, the value of the money he inherited in 2014 dollars is ________.
A) $56,400
B) $45,200
C) $38,800
D) $48,000
Answer: A
Difficulty: Hard
AACSB: Application of Knowledge
Topic: Adjusting Nominal Variables
35
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18) Explain the differences between real GDP and nominal GDP.
Answer: The difference between real GDP and nominal GDP is that real GDP measures the final
value of a country's output, using the prices in a base year, while nominal GDP measures the
final value of a country's output, using current market prices.
Difficulty: Easy
AACSB: Analytical Thinking
Topic: Real vs. Nominal
19) Explain the difference between the GDP deflator and the Consumer Price Index.
Answer: There are three key differences between the two baskets:
1. The GDP basket includes things that households do not purchase, like coal fired power
plants, locomotives, subway stations, city buses, aircraft carriers, and nuclear submarines.
Consumers may use services provided by governments and firms that purchase these items, but
no consumer purchases them directly, so they appear in the GDP basket but not in the consumer
basket.
2. The consumer basket includes things that households purchase but are not counted in GDP.
For example, GDP only counts domestic production, so it does not count electronics products
manufactured abroad.
3. Even if a product is included in both the GDP basket and the consumer basket, it is likely to
have a different weight in the two baskets. For example, housing-related expenditures are in both
the GDP basket and the consumer basket, but housing has a larger role in the consumer basket.
Difficulty: Medium
AACSB: Analytical Thinking
Topic: The Consumer Price Index
20) Polonia produces two goods - X and Y. The quantity produced of the two goods and their
prices in two different years are given in the table below:
Year
1
2
Good X
Price
$10
$25
Good X
Quantity
100
120
Good Y
Price
$12
$22
Good Y
Quantity
250
300
i) Calculate the real GDP of Polonia in Year 2 taking Year 1 as the base year.
ii) What is the growth rate of Polonia's real GDP between Year 1 and Year 2?
Answer:
i) Real GDP is the total value of a country's output using base year prices. In this case, the base
year is Year 1. Therefore, real GDP of Polonia in Year 2 is 120 × $10 + 300 × $12 =
$1,200 + $3,600 = $4,800.
ii) Polonia's real GDP for Year 1 is 100 × $10 + 250 × $12 = $1,000 + $3,000 = $4,000 and for
Year 2 is $4,800. The growth rate of Polonia's GDP is ($4,800 - $4,000)/$4,000 = 0.2 or 20%.
Difficulty: Medium
AACSB: Application of Knowledge
Topic: The GDP Deflator
36
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21) Ritzland produces only one good. 10,000 units of the good were produced in Ritzland during
a certain year and were sold at $42 per unit. The price of each unit of the good two years back
was $37.
i) Find the real and nominal GDP of Ritzland taking $37 as the base price.
ii) Calculate the GDP deflator for Ritzland for the year in question.
Answer:
i) Real GDP is the total value of a country's output using base year prices. In this case, real
GDP is 10,000 × $37 = $370,000. Nominal GDP is the total value of a country's output at current
price. In this case, it is 10,000 × 42 = $420,000.
ii) GDP deflator is the ratio of nominal GDP to real GDP. In this case, it is
($420,000/$370,000) × 100 = 113.5.
Difficulty: Hard
AACSB: Application of Knowledge
Topic: The GDP Deflator
22) The table below shows a list of goods purchased by Susan in two different years:
Price of
Quantity of
Price of
Quantity of
Year
Apples
Apples
Oranges
Oranges
1 $1.40/pound 10 pounds $1.80/pound 5 pounds
2 $1.50/pound 10 pounds $2.00/pound 6 pounds
Price of
Pears
$2.00
$2.50
Quantity of
Pears
4 pounds
5 pounds
Calculate the consumer price index for Year 2 taking Year 1 as the base year.
Answer: The consumer price index for a particular year is calculated using the formula:
CPI(Year 2) = (Cost of buying a particular basket of goods using Year 2 prices / Cost of buying
the same basket of goods using Year 1 prices) × 100
Cost of buying the goods in Year 2 = 10 × $1.50 + 5 × $2 + 4 × $2.50 = $39.50.
Cost of buying the goods in Year 1 = 10 × $1.40 + 5 × $1.80 + 4 × $2 = $31.
Therefore, the consumer price index for Year 2 is ($35/$31) × 100 = 122.9
Difficulty: Hard
AACSB: Application of Knowledge
Topic: The Consumer Price Index
23) Mr. Smith earned a salary of $5,000 in in 1980 while his son earned a salary of $8,000 in
2010. If the price index for 1980 was 100 and that for 2010 was 198, whose salary was worth
more? Explain your answer.
Answer: In order to find out whose salary was higher, we need to convert Mr. Smith's salary
into 2010. The value of Mr. Smith's salary in 2010 can be obtained by using the formula:
Value in 2010 = (Price Index for 2010 / Price Index for Year 1980) × Value in 1980
= (198/100) × $5,000 = $9,900
Therefore, Mr.Smith's salary was worth more than his son's salary.
Difficulty: Medium
AACSB: Application of Knowledge
Topic: Adjusting Nominal Variables
37
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