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CHAPTER 7
TAKING THE NATION’S ECONOMIC PULSE
QUESTIONS 1 THROUGH 10 ARE A SUGGESTED CHAPTER QUIZ.
1.
Which of the following would be included in this year’s GDP?
a. the value of a used car, at its sale price
b. the value of a new domestic automobile, at its sale price
c. a sale of Microsoft stock from one individual to another
d. the face value of a life insurance policy paid to a woman at the death of her husband
2.
When the expenditure approach is used to measure GDP, the major components of GDP are
a. consumption, investment, indirect business taxes, and depreciation.
b. employee compensation, rents, interest, self-employment income, and corporate profits.
c. employee compensation, corporate profits, depreciation, and indirect business taxes.
d. consumption, investment, government consumption and gross investment, and net exports.
3.
If you wanted to measure whether the output of an economy was increasing or decreasing across
time periods, you would use the real GDP data rather than the nominal GDP data because
a. exports are excluded from real GDP but not nominal.
b. real GDP incorporates the impact of federal budget deficits and surpluses; nominal GDP does
not.
c. real GDP reflects the impact of transfer payments on the economy, but nominal GDP does not.
d. real GDP adjusts for changes in the general level of prices, but nominal GDP does not.
4.
Which of the following is GDP designed to measure?
a. the total market value of goods and services produced domestically during the year
b. changes in the cost of purchasing the typical consumer market basket of goods from one year
to another
c. the total size of the domestic underground economy
d. the standard of living of the average citizen
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The GDP deflator is designed to
a. adjust nominal GDP for changes in the unemployment rate.
b. adjust nominal GDP so as to include the problem of externalities.
c. adjust nominal GDP for changes in the price level.
d. calculate changes in the price of food and other consumer goods.
6.
A real estate salesperson sells a house in 1999 that was built in 1990. How does this transaction get
counted in the GDP statistics?
a. The price of the house and the real estate salesperson's commission are both included in 1999's
GDP.
b. Neither the price of the house or the commission is included in 1999's GDP.
c. The real estate salesperson's commission but not the price of the house is included in 1999's
GDP.
d. The price of the house would be included in both 1990's GDP and the GDP for 1999.
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7.
Suppose that the nominal value of GDP increased by approximately 2 percent during a given year,
but real GDP decreased by 3 percent. Which of the following best explains these events?
a. The money supply decreased by approximately 5 percent.
b. Prices fell by approximately 5 percent.
c. Prices increased by approximately 5 percent.
d. The real productive capacity of the economy increased by approximately 5 percent.
8.
If national income accountants fail to make an adequate adjustment for increases in the quality of
goods and services over time,
a. real GDP will overstate the growth rate of real output.
b. the GDP deflator will underestimate inflation.
c. the GDP deflator will overestimate inflation.
d. real GDP will overstate the growth of real output, and the GDP deflator will understate
inflation.
9.
The primary value of real GDP is its ability to measure year to year changes in
a. real output.
b. income inequality.
c. real social welfare.
d. the general level of prices.
10.
Last year your job at the university cafeteria paid you $9 an hour and the price of a ten-minute long
distance call to your girlfriend in California was $4. This year your cafeteria job pays $9.90 per hour
and the ten-minute phone call now costs $4.10. You are clearly
a. worse off because of inflation.
b. worse off because the phone call is now relatively more expensive.
c. better off because your wage rate went up.
d. better off because the phone call now costs less work.
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*1. (b), 2. (d), 3. (d), 4. (a), 5. (c), 6. (c), 7. (c), 8. (c), 9. (a), 10. (d)
GDP—A MEASURE OF OUTPUT
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Gross domestic product is
a. the market value of all goods and services exchanged within a country during a time period.
b. the market value of all domestic assets, regardless of whether they are owned by citizens or
foreigners.
c. the compensation received during a period for labor services plus interest, rents, and corporate
profits.
d. the market value of final goods and services produced within a country during a time period.
Gross domestic product is equal to the market value of all goods and services
a. exchanged during a period.
b. produced domestically during a period.
c. produced by the citizens of a nation during a period.
d. produced domestically during a period minus the depreciation of productive assets.
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Gross domestic product is a measure of both
a. the market value of a nation’s capital assets (physical capital) and the costs that were incurred
producing those assets.
b. the expenditures on and sales revenues derived from all goods and services exchanged during a
period.
c. the market value of the output produced during a period and the cost of producing that output.
d. the asset holdings of people and the happiness that they derived from the ownership of those
assets.
Gross domestic product is the expenditures on
a. all goods and services exchanged during the period.
b. all final goods and services produced domestically during the period.
c. all goods and services produced during the period minus depreciation of productive assets
during the period.
d. all retail sales during the period.
Gross domestic product
a. is the sum of all exchanges of goods and services during a period.
b. includes financial transactions such as the purchase of stocks or bonds traded during a period.
c. is the sum of expenditures for both intermediate and final user goods.
d. is the sum of the total spending on all final-user goods and services produced domestically
during a period.
Gross domestic product is the sum of the purchase price multiplied by the quantity of
a. goods and services exchanged during the period.
b. final goods and services produced domestically during the period.
c. goods and services produced domestically during the period minus the depreciation of
productive assets.
d. final goods and services plus intermediate goods produced domestically during the period.
The economist responsible for developing the basic concepts of the national income accounting
system is
a. John Maynard Keynes.
b. Alfred Marshall.
c. Simon Kuznets.
d. Adam Smith.
Simon Kuznets, winner of the 1971 Nobel Prize in economics, is famous for his contributions in
a. changing the United States from gross national product to gross domestic product accounting.
b. explaining the importance of international trade in determining output.
c. pointing out the superiority of the expenditure approach to measuring GDP.
d. developing the basic concepts and measurement procedures used in national income
accounting.
A firm purchases $600,000 worth of raw materials and pays wages and salaries of $100,000 and
dividends of $200,000. If the firm sells its output for $1 million, the firm’s value added to GDP is
a. $300,000.
b. $400,000.
c. $900,000.
d. $1,000,000.
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A firm purchases $400,000 worth of raw materials and pays wages and salaries of $300,000 and
dividends of $100,000. If the firm sells its output for $1 million, the firm’s value added to GDP is
a. $400,000.
b. $600,000.
c. $800,000.
d. $1,000,000.
Which one of the following transactions would be included in GDP?
a. Ms. Kim pays $50 for a used picture frame at a neighborhood garage sale.
b. Mr. Doe donates $500 to his town’s junior college scholarship fund.
c. Ms. Bartolini pays $500 to fix the front end of her car damaged in a recent accident.
d. Ms. Smith pays $5,000 to purchase 100 shares of Microsoft stock.
A professional gambler moves from a state where gambling is illegal to a state where gambling is
legal. Most of his income was, and continues to be, from gambling. His move
a. necessarily raises GDP.
b. necessarily decreases GDP.
c. doesn't change GDP because gambling is never included in GDP.
d. doesn't change GDP because in either case his income is included.
General Motors Corporation (a U.S.-based firm) produces a Saab vehicle in Sweden, and sells it in
the United States. In which country's GDP is it included?
a. Sweden and the United States
b. The United States because it was sold there
c. The United States because GM is a U.S. company
d. Sweden because it was produced there
If Honda (a Japan-based firm) produces a car in Ohio and exports it to Japan, in which country's
GDP will the car be counted?
a. Japan's, because Honda is a Japanese company
b. Japan's because that is where the car is purchased
c. The GDP of the United States because that is where it was built
d. Both Japan and the United States
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In computing GDP, market prices are used to value final goods and services because
a. market prices reflect the values of goods and services to the buyer.
b. market prices do not change much over time, so it is easy to make comparisons between years.
c. if market prices are out of line with how people value goods, the government sets price ceilings
and price floors.
d. None of the above is correct; market prices are not used in computing GDP.
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U.S. GDP and U.S. GNP are related as follows:
a. GNP = GDP - Income earned by foreigners in the U.S. + Income earned by U.S. citizens
abroad.
b. GNP = GDP + Income earned by foreigners in the U.S. - Income earned by U.S. citizens
abroad.
c. GNP = GDP + Value of exported goods - Value of imported goods.
d. GNP = GDP - Value of exported goods + Value of imported goods.
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Suppose a country had $2.4 billion of net exports and bought $4.8 billion of goods and services
from foreign countries. This country would have
a. $7.2 billion of exports and $4.8 billion of imports.
b. $7.2 billion of imports and $4.8 billion of exports.
c. $4.8 billion of exports and $2.4 billion of imports.
d. $4.8 billion of imports and $2.4 billion of exports.
Suppose a country had net exports of $8.3 billion and sold $52.4 billion of goods and services
abroad. This country had
a. $60.7 billion of imports and $52.4 billion of imports.
b. $60.7 billion of exports and $52.4 of imports.
c. $52.4 billion of imports and $44.1 billion of exports.
d. $52.4 billion of exports and $44.1 billion of imports.
Which of the following expenditures are not included in the consumption component of GDP?
a. maid service
b. purchase of a new home
c. a new videocassette recorder
d. a restaurant meal
e. tax preparation service
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U.S. imports are
a. not added to U.S. GDP because they are produced abroad
b. added to U.S. GDP because they are consumed domestically
c. added to U.S. GDP because they represent an increase in inventories
d. added to U.S. GDP as government purchases because the government decides what goods may
be imported
e. not added to U.S. GDP because they are intermediate goods
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U.S. exports are
a. not included in U.S. GDP because they are consumed abroad
b. included in U.S. GDP because they are produced domestically
c. included in U.S. GDP because they represent an increase in inventories
d. included in U.S. GDP as government purchases because the government decides what goods
may be exported
e. not included in U.S. GDP because they are not subject to a tariff
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If U.S. net exports are negative,
a. U.S. consumers are spending less on foreign goods than foreign consumers are spending on
U.S. goods
b. U.S. consumers are spending more on foreign goods than foreign consumers are spending on
U.S. goods
c. the government must promote imports to balance international trade
d. U.S. consumers are spending more on foreign goods than they are spending on U.S. goods
e. U.S. disposable income is low
The amount of U.S. exports purchased by the rest of the world is primarily determined by
a. real disposable income in the United States
b. real disposable income in other nations
c. the real interest rate in other nations
d. the real interest rate in the United States
e. the government budget deficits in other nations
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Gross private domestic investment
a. excludes all investment in the United States by foreign firms.
b. includes all capital in the United States.
c. includes net additions to the capital stock plus all new corporate stocks and bonds.
d. includes business expenditures on new factories, tools, and machinery.
Gross private domestic investment includes business
a. purchases of capital goods, all new construction, and purchases of consumer durable
goods.
b. purchases of capital goods, all new construction, and inventory investment.
c. purchases of capital goods, all new commercial construction, and inventory investment.
d. purchases of capital goods, all new residential construction, and inventory investment.
e. purchases of all types of durable goods, all new construction, and inventory investment.
New residential housing is counted in GDP as a(n)
a. durable consumption good.
b. household durable good.
c. investment good.
d. inventory expansion.
e. long-term durable good.
Which of the following would increase the GDP of the United States?
a. A Californian buys a case of wine from a winery in France.
b. A Frenchman buys a case of wine from a winery in California.
c. A Californian spends $3,000 on a vacation in the French Alps.
d. A French investor purchases 100 shares of a computer company located in Silicon Valley.
Which of the following transactions would be included in this year’s GDP?
a. Johnson purchases a five-year-old house from Smith.
b. Johnson rents a five-year-old house from Smith.
c. Johnson purchases 100 shares of AT&T stock from Smith.
d. Johnson purchases an antique at Smith’s garage sale.
Which of the following would not affect this year’s GDP?
a. the paint you purchased when painting your house
b. the new car your parents purchased and gave to you as a birthday present
c. a Gateway computer purchased by the U.S. government
d. the value of a used car you purchased, at its sale price
Which of the following would be included in 2007 GDP?
a. the purchase price of a 2001 Honda bought in 2007
b. damages sustained due to a hurricane
c. the 2007 expenditures on repairs required as the result of a hurricane
d. the purchase price of 100 shares of Microsoft stock bought in 2007
A business produced $10 million of goods in 2007 but sold only $9 million. Is the $1 million
increase in inventory counted as part of the 2007 gross domestic product?
a. No, because inventories are intermediate goods.
b. No, because if these inventories were sold in 2008, they would be counted twice.
c. Yes, because these inventories are part of the output of the economy in 2007.
d. Yes, but they will be added to the 2007 GDP only if they are sold in 2008.
Chapter 7/Taking the Nation’s Economic Pulse
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Which of the following would count as an investment expenditure in national income accounting?
a. General Motors hires 10 electrical engineers.
b. Boeing purchases a new metal stretching machine used to produce airplane wings.
c. Ms. Quantum buys 100 shares of Microsoft stock.
d. A large corporation spends $10,000 per month on long-distance phone charges.
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Which of the following does not contribute to GDP?
a. You lose $50 playing cards with friends.
b. You pay a doctor $200 to treat an arm that you broke in an accident.
c. You pay $300 for this month’s rent on your apartment.
d. Your economics textbook is revised, and you buy the new edition.
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Which of the following will contribute to GDP?
a. Your spouse cleans your house every Thursday.
b. You sell an old bicycle for $100.
c. You find your lost economics textbook.
d. You pay a doctor $200 to treat an arm that you broke in an accident.
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Which of the following transactions would enter directly into the determination of GDP?
a. a bicycle you purchased at a garage sale
b. the retirement check your uncle received for spending 25 years in the Marine Corps
c. the DVD player you purchased from Best Buy
d. the five shares of Microsoft stock your grandparents gave you for making an A in economics
If a used car dealer purchases a used car for $3,000, refurbishes it, and sells it for $8,000, the
a. dealer contributes value added equal to $5,000, but nothing is added to GDP.
b. dealer contributes value added equal to $5,000, and consequently $5,000 is added to GDP.
c. dealer contributes nothing to production because only existing goods are involved.
d. dealer contributes value added equal to $8,000, but only $5,000 is added to GDP.
If a local shop buys a used motorcycle for $1,000, refurbishes it, and resells it for $2,500, the
a. shop contributes value added equal to $1,500, but nothing is added to GDP.
b. shop contributes value added equal to $1,500, and consequently $1,500 is added to GDP.
c. shop contributes nothing to production because only existing goods are involved.
d. shop contributes value added equal to $2,500, but only $1,500 is added to GDP.
Which of the following would increase GDP?
a. buying a used car
b. buying a newly constructed house
c. buying an imported rug
d. giving a domestically produced rug to charity
Which of the following would increase GDP?
a. buying a 10-year-old house
b. purchasing 100 shares of McDonald’s stock
c. a $1,000 expenditure on roof repairs after a Florida hurricane
d. a $1,000 contribution to the Red Cross to assist the victims of a Florida hurricane
Which of the following transactions would increase GDP?
a. a new tricycle purchased at a department store sale by the parents of a three-year-old child
b. the retirement check your uncle received for spending 25 years in the Marine Corps
c. the five shares of Microsoft stock your grandparents gave you for making an A in economics
d. the $200 you lost when your wallet was stolen
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Which of the following will increase GDP?
a. You buy an old tricycle at a garage sale.
b. You buy a dead bolt to protect your home against burglars.
c. The price of the Microsoft shares you own increases by $10.
d. The face value of a life insurance policy paid to a woman upon the death of her husband.
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Which of the following transactions would increase GDP?
a. a $500 bill to repair the transmission of your car
b. a television you purchased at a garage sale
c. 100 shares of Citibank stock that you purchased
d. the Social Security retirement check your grandmother received
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Which of the following events will increase GDP?
a. losing $500 playing blackjack in your dorm
b. selling an antique writing desk for $500 cash
c. a burglar stealing your CD player
d. the police department hiring an extra detective to track down the burglar who stole your CD
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Which of the following would increase GDP?
a. You buy 100 shares of Wal-Mart stock.
b. Your car is destroyed by a fire, and you purchase a two-year-old car to replace it.
c. Your car is damaged by a fire, and you hire a mechanic to repair it.
d. Your car is damaged by a fire, and you reduce the number of hours you work to repair the car
yourself.
Which of the following events will reduce GDP?
a. A hurricane destroys your house.
b. You lose $500 playing poker.
c. You pay $500 to repair the damage done to your house by a hurricane.
d. You work 15 hours less this month so that you can repair the damage done to your home by a
hurricane.
Which one of the following events will reduce GDP?
a. Mrs. Lee hires a housekeeper.
b. You buy the ingredients to bake a loaf of bread, but you burn the bread and throw it away.
c. You decide to work five more hours per week at your bookkeeper job, even though you need
more time to study.
d. An automobile manufacturer lays off 200 workers as the result of a fire in the paint shop.
Which of the following activities is not counted in our calculations of GDP?
a. the purchase of a hammer for household repairs
b. the labor services of a volunteer group building a home for a poor widow
c. the purchase of new, domestically-produced tires for your old foreign car
d. a haircut received and paid for at a beauty salon
Which of the following would not be included in GDP?
a. the real estate commission on the sale of a used home
b. an attorney’s fee for handling the sale of a used home
c. the value of a used home, at its sale price
d. fees paid to have the house cleaned
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You buy 100 shares of IBM stock at $100 per share and pay $150 commission. How much will this
transaction add to GDP?
a. zero
b. $150
c. $10,000
d. $10,150
You buy 50 shares of stock in a telecommunications company for $20 a share and pay $100
commission. How much will this transaction add to GDP?
a. zero
b. $100
c. $1,000
d. $1,100
Which one of the following transactions would be included in this year’s GDP?
a. Todd purchases a used CD at a neighborhood garage sale.
b. Mrs. Rock purchases $500 of common stock of Quick-Gro Foods, Inc.
c. Mr. I.V. League donates $300 to his town’s junior college scholarship fund.
d. An American buys a Honda manufactured at a plant in Ohio.
Which of the following will increase this year’s GDP?
a. the sale of a used economics textbook to the college bookstore
b. family lawn services provided by a 16-year-old son or daughter
c. $60,000 of income earned by an American college professor teaching in England
d. a $100 sales commission to a broker for a purchase of 100 shares of stock
e. $10 billion of damage caused by a hurricane that hit the coast of Florida
The Liebowitz family purchased a used two-year-old sofa at Swanson’s Used Furniture Store in
March of 2007. How will this affect the 2007 GDP?
a. Only the sale value of the used sofa will be included in the 2007 GDP.
b. Only the commission received by the salesman will be included in the 2007 GDP.
c. The sale will have no effect on the 2007 GDP.
d. Both the sale value of the sofa and the commission will be included in the 2007 GDP.
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Which of the following events will leave GDP unchanged?
a. You purchase 100 shares of Wal-Mart stock.
b. You pay $500 to repair the damage done to your car by an uninsured motorist.
c. You decide to work five more hours per week at your job to pay for the repairs performed on
your car.
d. You purchase a new car at an auction.
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Which one of the following events will leave GDP unchanged?
a. You pay $500 to repair your car damaged in an accident.
b. You buy a new domestic car to replace one that was stolen.
c. You lose $500 playing blackjack with friends.
d. You work extra hours this month to help make up for the money you lost playing blackjack.
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Which of the following would contribute to GDP?
a. An American company buys stock in another American company.
b. An American company produces goods in Canada.
c. A Canadian company buys stock in an American company.
d. A Canadian company produces goods in the United States.
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Which of the following transactions would be included in this year’s GDP for the United States?
a. Jennifer buys a rug imported from Mexico.
b. Melissa buys stock in an American textile company.
c. Jennifer purchases a table over the Internet from a North Carolina furniture manufacturer.
d. Melissa purchases a table over the Internet from a Mexican manufacturer.
Which of the following transactions would be included in this year’s GDP for the United States?
a. Deion sends $100 to a hotel in Costa Rica as a deposit for his vacation.
b. Deion buys a travel guide written by a Costa Rican woman living in the United States.
c. Deion buys a shirt while on vacation in Costa Rica.
d. Deion spends money in an American-owned restaurant in Costa Rica.
Which of the following would increase GDP?
a. The state of Florida buys paper from a German paper mill.
b. A German buys stock in Citibank.
c. Honda produces cars in Ohio.
d. An American buys art on a trip to Japan.
Which of the following would increase GDP for the United States?
a. A Colombian citizen buys a can of coffee produced in Colombia.
b. An individual buys a 19th-century mansion formerly owned by a famous American mystery
writer.
c. An American buys a Big Mac at a McDonald’s in Moscow, Russia.
d. An American buys a Honda manufactured at a plant in Tennessee.
Which of the following would increase GDP?
a. buying a used car
b. buying 100 shares of General Motors
c. buying a new, domestically-produced car from a foreign-owned dealership
d. donating a car to the Red Cross
A wealthy stamp collector recently sold a rare stamp for $80,000 that he purchased two years earlier
for only $10,000. What impact will this transaction have on GDP?
a. GDP increases by $80,000.
b. GDP increases by $70,000.
c. GDP declines by $70,000.
d. There is no change in GDP.
Which of the following would be counted in this year’s GDP?
a. your donation today of $100 to the Red Cross
b. the rental payment you made today on a house built last year
c. your purchase today of a house built last year
d. your purchase of 100 shares of Wal-Mart stock
Which one of the following will not be included in 2007 GDP?
a. buying a new 2007 Chevrolet
b. rent on a 2004 Chevrolet leased from an automobile dealer during 2007
c. the sale of a 2007 Chevrolet produced in the United States but sold to a Mexican
d. the price of a used 2002 Chevrolet purchased in 2007
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One bag of flour is sold for $1.50 to a bakery, which uses the flour to bake bread that is sold for
$4.00 to consumers. A second bag of flour is sold to a consumer in a grocery store for $2.00. Taking
these three transactions into account, what is the effect on GDP?
a. GDP increases by $1.50.
b. GDP increases by $3.50.
c. GDP increases by $6.00.
d. GDP increases by $7.50.
Until recently, George lived in a home that was newly constructed in 2005. In 2005, he paid
$200,000 for the brand new house. He sold the house in 2006 for $225,000. Which of the following
statements is correct regarding the sale of the house?
a. The 2006 sale increased 2006 GDP by $225,000 and had no effect on 2005 GDP.
b. The 2006 sale increased 2006 GDP by $25,000 and had no effect on 2005 GDP.
c. The 2006 sale increased 2006 GDP by $225,000; furthermore, the 2006 sale caused 2005 GDP
to be revised upward by $25,000.
d. The 2006 sale affected neither 2005 GDP nor 2006 GDP.
Greg, a U.S. citizen, works only in Canada. The value that his labor contributes to U.S. output is
a. included in both U.S. GDP and U.S. GNP.
b. included in U.S. GDP, but it is not included in U.S. GNP.
c. included in U.S. GNP, but it is not included in U.S. GDP.
d. included in neither U.S. GDP nor U.S. GNP.
Anna, a U.S. citizen, works only in Germany. The value she adds to production in Germany is
included
a. in U.S. GDP, but it is not included in German GDP.
b. in German GDP, but it is not included in U.S. GDP.
c. in both German GDP and U.S. GDP.
d. in neither German GDP nor U.S. GDP.
Government purchases include spending on goods and services by
a. the federal government only.
b. state and federal governments only.
c. local, state and federal governments.
d. local, state and federal governments, as well household spending by employees of those
governments.
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A Minnesota farmer buys a new tractor made in Iowa by a German company. As a result,
a. U.S. investment and GDP increase, but German GDP is unaffected.
b. U.S. investment and German GDP increase, but U.S. GDP is unaffected.
c. U.S. investment, U.S. GDP, and German GDP are unaffected, because tractors are intermediate
goods.
d. U.S. investment, U.S. GDP, and German GDP all increase.
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To encourage formation of small businesses, the government could provide subsidies; these
subsidies would be
a. included in GDP because they are part of government expenditures.
b. included in GDP because they are part of investment expenditures.
c. omitted from GDP because they are transfer payments.
d. omitted from GDP because the government raises taxes to pay for them.
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In 2006 in the U.S., the four components of GDP matched up with their relative importance as
follows:
a. C: 50 percent of GDP; I: 18 percent of GDP; G: 27 percent of GDP; X: 5 percent of GDP.
b. C: 60 percent of GDP; I: 9 percent of GDP; G: 33 percent of GDP; X: -2 percent of GDP.
c. C: 70 percent of GDP; I: 17 percent of GDP; G: 19 percent of GDP; X: -6 percent of GDP.
d. C: 77 percent of GDP; I: 14 percent of GDP; G: 17 percent of GDP; X: -8 percent of GDP.
Double counting in the resource cost-income approach to GDP refers to
a. corporate income being taxed twice
b. the amount of income taxes paid to states that is taxable by the federal government
c. calculating GDP twice using the income and expenditures methods
d. adding the value of exports to GDP and subtracting the value of imports
e. counting the total value of a final output in addition to the value of the inputs used to make it
Double counting in the resource cost-income approach to GDP statistics is avoided by
a. correct accounting of the values of exports and imports
b. choosing only one method to calculate GDP--either the income or the expenditures method
c. counting only the value added at each stage of a good's production process
d. counting the value of final and intermediate goods and services
e. subtracting the total value of intermediate goods and services from the total value of final
goods and services
Using the resource cost-income approach, indirect business taxes have to be added to get gross
domestic product because the
a. selling price of a product includes these taxes, which are income to the government .
b. selling price of a product includes these taxes, which are resource payments.
c. selling price of a product excludes these taxes and therefore they have to be added.
d. selling price includes these taxes which are actually not income to any sector of the economy.
86.
*
The GDP of a country can be derived by summing
a. the expenditures on final user goods and services produced domestically during the year.
b. the payments to employees and owners of capital resources and then subtracting depreciation
and indirect business taxes.
c. the market value of all goods and services produced domestically during the period and then
subtracting net exports from that figure.
d. the income payments to the resource suppliers and net exports.
87.
Gross domestic product during a period is measured by adding
a. incomes received by households minus the sale of factor services supplied domestically.
b. factor payments made by domestic firms minus retained earnings and indirect business taxes.
c. expenditures on new final goods and services produced domestically.
d. the market value of all goods and services produced domestically and then subtracting net
exports from that figure.
*
88.
*
GDP during a period can be calculated by summing either
a. the purchases of domestically produced final goods and services or the cost incurred in the
production of those goods.
b. the amount received by business firms for consumer goods and services or the spending of
business firms on investment goods and services.
c. all household expenditures on final goods and services or all business purchases of factors of
production.
d. sales of goods and services to foreigners or the purchase of goods and services from foreigners
Chapter 7/Taking the Nation’s Economic Pulse
89.
*
90.
*
91.
*
291
Gross domestic product equals the sum of
a. all income earned by domestic producers of goods and services minus indirect business taxes
and depreciation during the year.
b. the purchases of final goods and services produced domestically during a year.
c. the amount received by firms for consumer goods and services.
d. incomes received by households minus the sale of factor services supplied domestically.
The largest component of GDP as measured by the expenditure approach is
a. wages and salary earnings.
b. personal consumption.
c. net profits of corporations.
d. gross private investment.
Which one of the following would count as investment in the national income accounts?
a. buying a U.S. government bond
b. buying 100 shares of Wal-Mart stock
c. buying an existing house
d. a freight-hauling firm buying a new domestically produced truck
92.
*
Which one of the following would count as investment in the national income accounts?
a. purchase of a new airplane by an airline
b. purchase of a U.S. government bond
c. purchase of 100 shares of Wal-Mart stock
d. purchase of an existing house
93.
Geri purchases a newly constructed house built by a private contractor. Her spending on the house is
included in GDP as a part of
a. personal consumption expenditures.
b. depreciation.
c. gross private investment.
d. personal saving.
*
94.
*
95.
*
96.
*
If an economy’s capital stock is greater at the end of the year than at the beginning of the year, over
this period,
a. net investment has been positive.
b. depreciation has exceeded net investment.
c. depreciation has exceeded gross investment.
d. net investment has exceeded gross investment.
A business spends $10 million on new capital equipment, and during the same year, $7 million of its
existing capital wears out. Which of the following is correct?
a. The firm’s gross investment is $7 million, and its net investment is $10 million.
b. The firm’s gross investment is $3 million, and its net investment is $7 million.
c. The firm’s gross investment is $7 million, and its net investment is $3 million.
d. The firm’s gross investment is $10 million, and its net investment is $3 million.
Which of the following about inventory changes and GDP is true?
a. Inventory investment adds to GDP because it represents goods produced during the current
period.
b. Inventory investment is subtracted from GDP because the goods were not sold during the
period.
c. Inventory investment does not affect GDP because the goods were not sold during the period.
d. Inventory investment does not affect GDP because it does not represent goods produced during
the period.
292
97.
*
98.
*
99.
*
Chapter 7/Taking the Nation’s Economic Pulse
If inventory investment during a year was minus $6 billion, producers must have
a. produced only $6 billion of new capital assets during the year.
b. sold $6 billion more goods and services during the year than they produced.
c. added goods valued at $6 billion to their stock of unsold goods and raw materials.
d. produced new capital assets that exceeded the depreciation allowance by $6 billion.
Which of the following is included as government consumption and gross investment in the national
income accounts?
a. tanks bought for use by the U.S. army
b. interest on public debt
c. unemployment insurance payments
d. social security benefit payments
Which of the following would be included in the government consumption and investment
component of GDP?
a. the export of 100 fighter jets to Japan
b. construction costs of a new public school building
c. food stamps used by the Smith family
d. a $1,000 check issued by the federal government as part of the Pell Grant program to help
college students pay for school
100. If a small municipal government buys $5,000 worth of business supplies, spends $55,000 to hire an
administrator, and spends $26,000 for a new automobile used by the administrator, this municipal
government’s contribution to GDP is
a. $0.
b. $55,000.
c. $60,000.
*
d. $86,000.
101. Which of the following would be included as a government purchase in the national income
accounts?
a. the government’s interest payments on the national debt
*
b. the purchase of baggage screening machines by the FBI
c. unemployment insurance payments
d. the Social Security tax revenues minus Social Security benefits paid to the elderly
Use the table below to choose the correct answer.
Employee compensation
Rents
Government consumption and gross investment
Depreciation
Gross private investment
Personal income taxes
Net exports
Personal consumption
Interest income
102. Given the above information, the GDP equals
*
a. $1,140.
b. $1,330.
c. $1,650.
d. $2,670.
$800
90
50
200
400
140
50
640
100
Chapter 7/Taking the Nation’s Economic Pulse
293
Consider the following information for the U.S. economy (figures in billions).
Personal Consumption
$7,761
Gross private investment
1,666
Government consumption and gross investment
2,075
Net exports
–498
Indirect business taxes
339
Depreciation
1,380
Self-employment Income
834
103. Gross domestic product is equal to
a. $7,761.
*
b. $11,004.
c. $13,557.
d. $14,055
Use the table below to choose the correct answer.
Personal consumption expenditures
Government consumption and gross investment
Rent income
Net investment expenditures
Gross imports
Personal savings
Gross exports
Depreciation (private sector)
$600
230
150
200
30
250
20
100
104. Gross domestic product equals
a. $1,100.
*
b. $1,120.
c. $1,190.
d. $1,220.
Use the table below to choose the correct answer.
Government consumption and gross investment
Employee compensation
Depreciation
Gross private investment
Personal consumption
Net exports
Indirect business taxes
$850
3,200
600
800
2,500
–150
300
105. Gross domestic product equals
a. $3,550.
*
b. $4,000.
c. $4,150.
d. $8,100.
106. The Department of Commerce sums the payments made to resources to arrive at GDP in the form of
wages, self-employment income, rents, interest, profits, indirect taxes, and depreciation. This
method of deriving GDP is called the
a. opportunity cost approach.
*
b. resource cost-income approach.
c. expenditure approach.
d. monetarist approach.
294
Chapter 7/Taking the Nation’s Economic Pulse
107. From the producer’s viewpoint, GDP is best thought of as an indicator of the
a. good things consumed during the period.
b. wealth of a nation.
*
c. costs incurred producing goods and services during the period.
d. social welfare of the nation.
108. If depreciation and indirect business taxes (including business transfers) were added to national
income, the result would be equal to
a. gross domestic product (GDP).
*
b. gross national product (GNP).
c. net national product (NNP).
d. personal income.
109. If a country has attracted a relatively large number of foreign workers and a large amount of foreign
investment,
a. national income will generally exceed gross national product.
b. gross national product will generally exceed gross domestic product.
c. net domestic product will generally exceed gross domestic product.
*
d. gross domestic product will generally exceed gross national product.
110. Which of the following best illustrates the difference between GDP and GNP?
a. GDP measures the goods consumed by the citizens of a country, while GNP measures output
exported to other countries.
b. GDP measures the output produced by the citizens within a country, while GNP measures
output produced by noncitizens within a country.
c. GDP measures the output produced by the citizens of a country, while GNP measures output
produced within the borders of a country.
*
d. GDP measures the output produced within the borders of a country, while GNP measures
output produced by the citizens of a country.
111. Which of the following statements about gross domestic product and gross national product is true?
*
a. Gross domestic product includes income payments to foreigners for their work domestically;
gross national product does not.
b. Gross domestic product includes the income earned abroad by domestic citizens; gross national
product does not.
c. Gross domestic product includes exports; gross national product does not.
d. GDP and GNP are equal.
112. Which of the following correctly states the relationship between GDP and GNP for the U.S.?
a. GDP equals GNP minus the net income of foreigners.
*
b. GDP equals GNP plus the net income of foreigners.
c. GDP equals GNP minus indirect business taxes.
d. GDP equals GNP.
113. An automobile manufacturing plant opens in Indiana, and its owner, all of the workers, and all raw
materials are from Japan. How would your purchase of an automobile from this plant change
domestic GDP and GNP?
a. It would increase GNP and GDP.
b. It would increase GNP and leave GDP unchanged.
*
c. It would increase GDP and leave GNP unchanged.
d. It would leave both GDP and GNP unchanged.
Chapter 7/Taking the Nation’s Economic Pulse
114. An American-owned McDonald’s opens in Russia. How would the net revenue earned by this
restaurant affect the GDP and GNP of the United States?
a. It would increase GNP and GDP.
*
b. It would increase GNP and leave GDP unchanged.
c. It would increase GDP and leave GNP unchanged.
d. It would leave both GDP and GNP unchanged.
115. Which of the following transactions would be included in U.S. GDP but not in GNP?
a. An American tourist spends money in Mexico City.
b. The U.S. government hires an American economist to evaluate United States/Mexico trade
policy.
c. A car is produced in Detroit and exported to Mexico.
*
d. A salary is paid to a Canadian engineer employed in the California computer industry.
Use the table below to answer the following questions.
Corporate profits
Interest income
Indirect business taxes
Depreciation
Employee compensation
Proprietors’ income
Rents
Personal consumption
Government consumption and gross investment
Net exports
Income received by citizens for factors of production supplied abroad
Income paid to foreigners for their contribution to domestic output
116. Gross domestic product equals
*
a. $1,860.
b. $1,380.
c. $1,910.
d. $4,170.
117. Gross national product equals
a. $1,860.
*
b. $1,910.
c. $1,380.
d. $4,170.
118. National income equals
a. $1,380.
*
b. $1,530.
c. $1,860.
d. $4,170.
$100
200
180
200
1,110
100
20
1,300
400
10
300
250
295
296
Chapter 7/Taking the Nation’s Economic Pulse
Consider the following information for the U.S. economy (figures in billions).
Employee Compensation
$6,289
Proprietors’ Income
834
Rents
154
Corporate Profits
1,021
Interest Income
543
Indirect business taxes
339
Depreciation
1,380
Net Income of Foreigners
–55
119. What was the value of national income?
a. $7,123
b. $7,666
*
c. $8,841
d. $11,004
Use the table below to choose the correct answer.
Corporate profits
Interest income
Indirect business taxes
Depreciation
Employee compensation
Proprietors’ income
Rents
Personal consumption
Government consumption and gross investment
Net income earned abroad
$300
200
360
400
3,000
200
40
2,700
800
20
120. Gross domestic product equals
a. $3,700.
b. $3,900.
c. $4,080.
*
d. $4,480.
Use the table below to choose the correct answer.
Corporate profits
Interest income
Indirect business taxes
Depreciation
Employee compensation
Proprietors’ income
Rents
Personal consumption
Government consumption and gross investment
Net exports
Income received by citizens for factors of production supplied abroad
Income paid to foreigners for their contribution to domestic output
121. Gross domestic product equals
a. $5,500.
*
b. $5,650.
c. $5,800.
d. $6,650.
$1,000
200
400
300
3,200
600
100
2,950
1,200
100
300
150
Chapter 7/Taking the Nation’s Economic Pulse
297
ADJUSTING FOR PRICE CHANGES AND DERIVING REAL GDP
122. Inflation
a. reduces the cost-of-living of the typical worker.
*
b. is measured by changes in the cost of a typical market basket of goods between time periods.
c. causes the purchasing power of a dollar to rise.
d. has no effect on real resources.
123. Which of the following is true of inflation?
*
a. It is an increase in the general price level of goods and services.
b. The purchasing power of money increases as the result of inflation.
c. Inflation is similar to interest payments on future money income, such as pensions and receipts
from outstanding loans.
d. Inflation has no effect on real resources.
124. Suppose that the consumer price index at year-end 2004 was 180 and by year-end 2005 had risen to
189. What was the inflation rate during 2005?
a. 4.8 percent
*
b. 5 percent
c. 6 percent
d. 9 percent
125. Suppose that the consumer price index of a country was 160 at year-end 2004 and 168 at the end of
2005. What was the country’s inflation rate during 2005?
*
a. 5 percent
b. 8 percent
c. 60 percent
d. 68 percent
126. If the consumer price index (CPI) at the end of year one was 100 and was 108 at the end of year
two, the inflation rate during year two was
a. zero; the CPI of 100 indicates that prices were stable.
*
b. 8 percent.
c. 5 percent.
d. 108 percent.
127. Suppose that the consumer price index (CPI) was 160 in 2004 and 166 in 2005, inflation during
2005 was
a. zero; prices were stable.
*
b. 3.8 percent.
c. 6 percent.
d. 66 percent.
128. If the consumer price index (CPI) was 180 at year-end 2004 and 189 at year-end 2005, inflation
during 2005 was
a. zero; prices were stable during 2005.
b. 4.8 percent.
*
c. 5 percent.
d. 9 percent.
298
Chapter 7/Taking the Nation’s Economic Pulse
129. If the consumer price index (CPI) was 120 at year-end 2004 and 126 at year-end 2005, inflation
during 2005 was approximately
a. 4 percent.
*
b. 5 percent.
c. 6 percent.
d. 7 percent.
The nominal salary paid to the president of the United States and the Consumer Price Index (CPI) are
given for various years below.
Year
Presidential salary
CPI (2000 = 100)
1920
$75,000
11.6
1940
75,000
8 .1
1960
100,000
17.2
1980
200,000
47.9
2000
400,000
100.0
130. During which of the above years was the purchasing power of the president’s salary highest?
a. 1920
*
b. 1940
c. 1960
d. 1980
e. 2000
131. The salary of the president of the United States in 2000 was $400,000. In 1940, the president’s
salary was $75,000. If the Consumer Price Index was 8.1 in 1940 and 100 in 2000, the 1940
presidential salary measured in terms of the purchasing power of the dollar in 2000 would be
a. less than $75,000.
b. less than $400,000.
c. approximately $668,850.
d. approximately $750,000.
*
e. approximately $926,000.
132. If hot dogs cost $2 this year and $3 next year, then 100 hotdogs will contribute
a. $200 to this year's nominal GDP and $166 to next year's nominal GDP.
b. $200 to this year's real GDP and $300 to next year's real GDP.
c. the same dollar amount to each year's nominal GDP because hotdogs are intermediate goods.
*
d. $200 to this year's nominal GDP and $300 to next year's nominal GDP.
133. If ten years ago the price of a movie ticket was $5 and the average hourly wage was $10, and today
the price of a movie ticket is $8 and the average hourly wage is $20, then
*
a. movies are now relatively cheaper in terms of work hours.
b. movies are now relatively more expensive in terms of work hours.
c. the relative price of movies has remained constant.
d. workers now need to work longer hours to earn one movie ticket.
134. If the price of pizzas has risen from $4 to $5 at the same time that the price of an hour of spinning
class has risen from $20 to $30, then
a. pizzas have become relatively more expensive.
*
b. aerobics' classes have become relatively more expensive.
c. the relative prices of pizzas and aerobics classes have remained constant.
d. workers' real income must have decreased.
Chapter 7/Taking the Nation’s Economic Pulse
299
135. If nominal GDP rises from one year to the next, then
a. the economy must be producing a larger output of goods and services.
b. prices at which goods and services are sold must be higher.
*
c. either output, or the general level of prices, or both must be rising.
d. employment and productivity must be rising.
136. Which statement represents most correctly the relationship between nominal GDP and real GDP?
a. Nominal GDP measures base-year production using base-year prices, whereas real GDP
measures current production using current prices.
b. Nominal GDP measures current production using base-year prices, whereas real GDP measures
current production using current prices.
*
c. Nominal GDP measures current production using current prices, whereas real GDP measures
current production using base-year prices.
d. Nominal GDP measures current production using current prices, whereas real GDP measures
base-year production using base-year prices.
137. When the consumer price index rises, the typical family
*
a. has to spend more dollars to maintain the same standard of living.
b. can spend fewer dollars to maintain the same standard of living.
c. finds that its standard of living is not affected.
d. can offset the effects of rising prices by saving more.
138. What basket of goods is used to construct the CPI?
a. a random sample of all goods and services produced in the economy
*
b. the goods and services that are typically bought by consumers as determined by government
surveys
c. only food, clothing, transportation, entertainment, and education
d. the least expensive and the most expensive goods and services in each major category of
consumer expenditures
139. In computing the consumer price index, a base year is chosen. Which of the following statements
about the base year is correct?
a. The base year is always the first year among the years for which computations are being made.
b. It is necessary to designate a base year only in the simplest case of two goods; in more realistic
cases, it is not necessary to designate a base year.
*
c. The value of the consumer price index is always 100 in the base year.
d. All of the above are correct.
140. If this year the CPI is 110 and last year it was 100, then
a. the cost of the CPI basket of goods and services has increased this year by 110 percent.
*
b. the price level as measured by the CPI has increased by 10 percent.
c. the inflation rate for this year has increased by 10 percent over last year’s inflation rate.
d. All of the above are correct.
141. If the price index was 90 in year 1, 100 in year 2, and 95 in year 3, then the economy experienced
a. 10 percent inflation between years 1 and 2 ,and 5 percent inflation between years 2 and 3.
b. 10 percent inflation between years 1 and 2, and 5 percent deflation between years 2 and 3.
c. 11.1 percent inflation between years 1 and 2, and 5 percent inflation between years 2 and 3.
*
d. 11.1 percent inflation between years 1 and 2, and 5 percent deflation between years 2 and 3.
300
Chapter 7/Taking the Nation’s Economic Pulse
142. The price index in the first year is 110, in the second year is 100, and in the third year is 96. The
economy experienced
*
a. 9.1 percent deflation between the first and second years, and 4 percent deflation between the
second and third years.
b. 9.1 percent deflation between the first and second years, and 9.6 percent deflation between the
second and third years.
c. 10 percent deflation between the first and second years, and 4 percent deflation between the
second and third years.
d. 10 percent deflation between the first and second years, and 8.7 percent deflation between the
second and third years.
143. Assume an economy experienced a higher inflation rate, as measured by the CPI, between 2006 and
2007 than it experienced between 2005 and 2006. Which of the following scenarios is consistent
with this assumption?
a. The CPI was 100 in 2005, 110 in 2006, and 120 in 2007.
*
b. The CPI was 100 in 2005, 110 in 2005, and 124 in 2007.
c. The CPI was 110 in 2005, 150 in 2006, and 200 in 2007.
d. All of the above are correct.
144. Which of these changes in the price index produces the greatest rate of inflation: 100 to 110, 150 to
165, or 180 to 198?
a. 100 to 110
b. 150 to 165
c. 180 to 198
*
d. All three changes show the same rate of inflation.
145. One of the widely-acknowledged problems with the consumer price index (CPI) as a measure of the
cost of living is that the CPI
a. fails to account for consumer spending on housing.
b. accounts only for consumer spending on food, clothing, and energy.
c. fails to account for the fact that consumers spend larger percentages of their incomes on some
goods and smaller percentages of their incomes on other goods.
*
d. fails to account for the introduction of new goods.
146. When the quality of a good improves, the purchasing power of the dollar
*
a. increases, so the CPI overstates the change in the cost of living if the quality change is not
accounted for.
b. increases, so the CPI understates the change in the cost of living if the quality change is not
accounted for.
c. decreases, so the CPI overstates the change in the cost of living if the quality change is not
accounted for.
d. decreases, so the CPI understates the change in the cost of living if the quality change is not
accounted for.
147. When the quality of a good deteriorates, the purchasing power of the dollar
a. increases, so the CPI overstates the change in the cost of living if the quality change is not
accounted for.
b. increases, so the CPI understates the change in the cost of living if the quality change is not
accounted for.
c. decreases, so the CPI overstates the change in the cost of living if the quality change is not
accounted for.
*
d. decreases, so the CPI understates the change in the cost of living if the quality change is not
accounted for.
Chapter 7/Taking the Nation’s Economic Pulse
301
148. An important difference between the GDP deflator and the consumer price index is that
a. the GDP deflator reflects the prices of goods and services bought by producers, whereas the
consumer price index reflects the prices of goods and services bought by consumers.
*
b. the GDP deflator reflects the prices of all final goods and services produced domestically,
whereas the consumer price index reflects the prices of some goods and services bought by
consumers.
c. the GDP deflator reflects the prices of all final goods and services produced by a nation's
citizens, whereas the consumer price index reflects the prices of final goods and services
bought by consumers.
d. the GDP deflator reflects the prices of all goods and services bought by producers and
consumers, whereas the consumer price index reflects the prices of final goods and services
bought by consumers.
149. The price of CD players increases dramatically, causing a 1 percent increase in the CPI. The price
increase will most likely cause the GDP deflator to increase by
a. more than 1 percent.
*
b. less than 1 percent.
c. 1 percent.
d. None of the above is correct; this particular price increase will not affect the GDP deflator.
150. The primary purpose of measuring the overall level of prices in the economy is to
a. allow for the measurement of GDP.
b. allow consumers to know what kinds of prices to expect in the future.
*
c. allow for the comparison of dollar figures from different points in time.
d. allow for the comparison of dollar figures from the same point in time.
151. Babe Ruth's 1931 salary was $80,000. Government statistics show a consumer price index of 15.2
for 1931 and 195 for 2005. Ruth's 1931 salary was equivalent to a 2005 salary of about
a. $536,000.
b. $828,000.
*
c. $1,026,000.
d. $1,216,000.
152. Suppose the CPI was 95 in 1955, and suppose currently the CPI is 475. According to the CPI, $100
today purchases the same amount of goods and services as
*
a. $20.00 purchased in 1955.
b. $33.33 purchased in 1955.
c. $47.50 purchased in 1955.
d. None of the above is correct.
153. Suppose the CPI was 104 in 1967, and suppose currently the CPI is 390. According to the CPI, $10
in 1967 purchased the same number of goods and services as
a. $28.88 purchases today.
*
b. $37.50 purchases today.
c. $42.64 purchases today.
d. $104.00 purchases today.
154. Andrew is offered a job in Little Rock, where the CPI is 80, and a job in New York, where the CPI
is 125. Andrew's job offer in Little Rock is for $42,000. How much does the New York job have to
pay in order for the two salaries to represent about the same purchasing power?
a. $74,667
*
b. $65,625
c. $60,900
d. $52,500
302
Chapter 7/Taking the Nation’s Economic Pulse
155. Real GDP per person
a. minus real GDP per person from the previous period equals the growth rate of real GDP per
person.
*
b. provides more meaningful comparisons across time and countries than real GDP.
c. provides a less useful measure of the standard of living than nominal GDP per person.
d. All of the above are correct.
156. A professor of economics gets a $100 a month raise. She figures that even with her new monthly
salary she will be unable to buy as many goods and services as she could 12 months ago.
a. Her real and nominal salary have risen.
b. Her real and nominal salary have fallen.
c. Her real salary has risen and her nominal salary has fallen.
*
d. Her real salary has fallen and her nominal salary has risen.
157. Your boss gives you an increase in the number of dollars you earn per hour. This increase in pay
makes
*
a. your nominal wage increase. If your nominal wage rose by a greater percentage than the price
level, then your real wage also increased.
b. your nominal wage increase. If your nominal wage rose by a greater percentage than the price
level, then your real wage decreased.
c. your real wage increase. If your real wage rose by a greater percentage than the price level,
then your nominal wage also increased.
d. your real wage decrease. If your real wage rose by a greater percentage than the price level,
then your nominal wage decreased.
158. If nominal GDP increases by 4 percent, then
a. real output has increased by 4 percent
b. the price level has increased by 4 percent
c. consumer spending must have increased by 4 percent
*
d. it is possible that all of the increase was caused by an increase in the price level
e. net exports increased by 4 percent
159. If the real GDP equals $100 billion this year and nominal GDP is $200 billion, the price level since
the base year has increased
a. $200 billion
b. 50 percent
c. $100 billion
*
d. 100 percent
e. 200 percent
160. In an economy with persistent inflation,
a. real GDP will grow faster than nominal GDP.
*
b. nominal GDP will grow faster than real GDP.
c. nominal and real GDP will grow at the same rate.
d. nominal and real GDP will both fall.
161. Suppose the consumer price index (CPI) for Year X is 130. This means the average price of goods
and services is
a. currently $130.
b. 130 percent more in Year X than in the base year.
c. 130 percent more in the base year than in Year X.
*
d. priced at 30 percent more in Year X than in the base year.
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303
162. Suppose the consumer price index (CPI) stands at 250 this year. If the inflation rate is 10 percent, then
next year's CPI will equal
a. 250.
b. 260.
*
c. 275.
d. 500.
163. As inflation drives up prices, people attempt to find substitutes and adjust what they buy. The resulting
substitution bias problem causes the CPI to
*
a. overstate the impact of higher prices on consumers.
b. consistently underestimate the true inflation rate.
c. omit the benefits of product quality improvements.
d. have larger fluctuations than other price indexes.
164. Suppose a market basket of goods and services costs $1,000 in the base year and the consumer price
index (CPI) is currently 110. This indicates the price of the market basket of goods and services is now
a. $110.
b. $1,000.
*
c. $1,100.
d. $1,225.
165. Suppose we shopped for a basket of goods in Year 1 and it cost $350. Suppose the same basket of
goods costs $385 in Year 2. If the CPI in Year 1 is 100, the CPI in Year 2 will be
a. 35.
b. 90.
c. 100.
*
d. 110.
e. 135.
166. Suppose we shopped for a basket of goods in Year 1 and it cost $350. Suppose the same basket of
goods costs $420 in Year 2. If the CPI in Year 1 is 100, the CPI in Year 2 will be
a. 70.
b. 80.
c. 110.
*
d. 120.
e. 170.
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167. The Consumer Price Index compares the
a. prices of all goods and services in the economy compared to the prices of those goods and
services in a base year.
*
b. prices of consumer goods and services that a household purchases to the prices of those goods
and services purchased in a base year.
c. prices of producer goods and services that are made for consumers to the prices of those goods
and services in a base year.
d. prices of goods and services that are purchased by producers to the prices of those goods and
services in a base year.
e. prices of goods and services that are purchased by consumer manufacturers to the prices of
those goods and services in a base year.
168. Last year the Jones family earned $40,000. This year their income is $42,000. In an economy with
an inflation rate of 10 percent, which of the following is correct?
a. The Jones' nominal income and real income have both fallen.
b. The Jones' nominal income and real income have both risen.
*
c. The Jones' nominal income has increased and their real income has fallen.
d. The Jones' nominal income has decreased and their real income has risen.
169. Your father tells you he earned $1.50 per hour when he was 16 in 1969. Given that the CPI was 36.0
in 1969 and 180.0 in 2005, how much would you have to earn in 2005 in order to have the same real
wage as your father in 1969?
a. $1.50
b. $5.00
*
c. $7.50
d. $15.00
170. Your brother graduated from college 10 years ago and started to work at a salary of $20,000. You
expect to graduate this year and start to work for $35,000. If the consumer price index was 80 ten
years ago and is 120 this year, who will have received the higher real starting salary?
*
a. You will have.
b. Your brother did.
c. You and your brother both will have started at the same real salary level.
d. Not enough information is supplied to answer the question.
171. Over time, GDP may increase as the result of either (i) expansion in the quantities of goods
produced or (ii) higher prices. Which of the following is true?
*
a. (i) will generally increase living standards, but (ii) will not.
b. (ii) will generally increase living standards, but (i) will not.
c. Both (i) and (ii) will generally increase living standards.
d. Neither (i) nor (ii) will generally increase living standards.
172. Why is it important to use real rather than nominal GDP figures when making comparisons of
output across time periods?
a. The real GDP figures are a better measure of changes in the general level of prices.
*
b. The real figures will reflect changes in the quantity of output and not changes in the general
level of prices.
c. The real figures will reflect changes in the general level of prices as well as changes in the
quantity of output.
d. The real GDP figures adjust for changes in the level of employment.
Chapter 7/Taking the Nation’s Economic Pulse
305
173. “The U.S. standard of living will continue to rise as long as per capita money income continues to
increase.” This statement
a. is essentially correct.
b. is correct only if prices are increasing at a rate greater than the increase in money income.
c. is incorrect if prices are stable.
*
d. may be incorrect because it fails to distinguish between money and real income.
174. “The U.S. standard of living will continue to rise as long as real per capita income continues to
increase.” This statement
*
a. is essentially correct.
b. is correct only if prices are increasing at a rate greater than the increase in money income.
c. is incorrect if prices are stable.
d. is incorrect if prices are declining.
175. A price index is designed to measure
a. changes in the general level of employment across time periods.
b. changes in the quantity of output produced across time periods.
c. the market value of output produced during the current period with the value of output
produced during an earlier time period.
*
d. the cost of buying a market basket of goods at a point in time relative to the cost of buying the
same market basket during an earlier time period.
176. The consumer price index is
a. a measure of the increase in the average price of all of the goods that are included in the
calculation of GDP.
*
b. a comparison of the cost of buying a typical bundle of goods during a given period with the
cost of buying the same bundle during an earlier base period.
c. the ratio of the average price of a typical market basket of goods compared to the cost of
producing those goods during the previous year.
d. a comparison of the cost of the typical bundle of goods consumed in period 1 with the cost of a
different bundle of goods typically consumed in period 2.
177. The consumer price index (CPI) is calculated
a. using a fixed basket of goods and, therefore, will tend to understate inflation.
*
b. using a fixed basket of goods and, therefore, will tend to overstate inflation.
c. using a constantly changing basket of goods and, therefore, will tend to understate inflation.
d. using a constantly changing basket of goods and, therefore, will tend to overstate inflation.
178. The consumer price index is designed to measure the extent to which
*
a. the cost of a typical bundle (market basket) of consumer goods has changed over time.
b. consumers have increased their spending over time.
c. GDP is allocated to consumers, rather than to business or government, over time.
d. prices paid by employers to resource owners have changed over time.
179. A price index like the CPI, which uses a fixed basket of goods from one year to the next, will tend
to overstate inflation because
a. producers are likely to change the number of goods they sell from year to year.
b. producers will generally reduce the quality of goods as prices increase over time.
*
c. consumers will tend to substitute away from goods that become more expensive.
d. consumers will usually reduce their consumption of goods when they become relatively
cheaper.
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Chapter 7/Taking the Nation’s Economic Pulse
180. The CPI is based on
a. a basket of goods that is updated every year.
b. a broader range of goods and services than the GDP deflator.
c. the same set of goods and services as the GDP deflator.
*
d. a fixed basket of goods purchased during an earlier base period.
181. An increase in the Consumer Price Index indicates that
a. the real income of households is increasing.
b. the purchasing power of the dollar is increasing.
*
c. the cost of buying the typical bundle of goods consumed by households is increasing.
d. the real net worth of consumers is increasing.
182. The 2006 box office receipts for the movie Pirates of the Caribbean: Dead Man’s Chest were
$1,060.6 million. By way of comparison, the 1975 receipts for Jaws were $470.6 million. If the
Consumer Price Index was 53.8 in 1975 and 201.6 in 2006, which of the following is true?
a. The real receipts of Pirates of the Caribbean: Dead Man’s Chest were almost four times
greater than those for Jaws.
*
b. The real receipts of Jaws were about 66 percent greater than those for Pirates of the
Caribbean: Dead Man’s Chest.
c. The real receipts of Pirates of the Caribbean: Dead Man’s Chest were more than three times
those for Jaws.
d. The real receipts of Jaws were about 33 percent greater than twice those for Pirates of the
Caribbean: Dead Man’s Chest.
183. The price of a gallon of gasoline was $2.01 in May 2004 compared to 39 cents in 1973. However,
the Consumer Price Index was 44.4 in 1973 compared to 189.1 in May 2004 (1980 – 1984 = 100).
In terms of the purchasing power of the dollar in 2004, the 1973 price of gasoline was
a. $0.39.
b. $0.44.
*
c. $1.66.
d. $2.15.
184. In 1980, the price of a gallon of gasoline was $1.25. The Consumer Price Index was 82.4 in 1980
compared to 184.0 in 2003 (1983 – 1984 = 100). Measured in 2003 dollars, the price of gasoline in
1980 was
a. $0.56.
b. $1.25.
c. $2.30.
*
d. $2.79.
185. Your brother graduated from college 10 years ago and started to work at a salary of $20,000. You
expect to graduate this year and start to work for $35,000. If the consumer price index was 80 ten
years ago and is 140 this year, who will have received the higher real starting salary?
a. You will have.
b. Your brother did.
*
c. You and your brother both will have started at the same real salary level.
d. Not enough information is supplied to answer the question.
Chapter 7/Taking the Nation’s Economic Pulse
307
186. Your brother graduated from college 10 years ago and started to work at a salary of $30,000. You
expect to graduate this year and start to work for $47,250. If the consumer price index was 90 ten
years ago and is 150 this year, who will have received the higher real starting salary?
a. You will have.
*
b. Your brother will have.
c. The real starting salaries will the same.
d. Your brother’s salary will have been higher in nominal dollars, but your salary will have been
higher in real dollars.
187. Your father tells you he earned $2.00 per hour when he was 16 in 1969; you remember making
$10.00 per hour in 2003. Given that the CPI was 36.7 in 1969 and 184.0 in 2003, how does your
father’s 1969 wage (measured in 2003 dollars) compare with your wage in 2003?
a. Your real wage was more than four times your father’s.
b. You made about $1.00 more in real wages than your father.
*
c. The real wages of you and your father were about equal.
d. The real wages of your father were about $1.00 more than yours.
188. Your father tells you he earned $1.50 per hour when he was 16 in 1969; you remember making
$6.00 per hour when you were 16 in 2003. Given that the CPI was 36.7 in 1969 and 184.0 in 2003,
which of the following is the 2003 real equivalent of your father’s hourly earnings when he was 16?
a. $2.76.
b. $5.01.
c. $6.23.
*
d. $7.52.
189. Your grandfather tells you he earned $0.65 per hour at his job when he was a boy in 1929. Given
that the CPI was 17.1 in 1929 and 201.6 in 2006, how much would you have had to make in 2006 to
have the same real hourly wage as your grandfather?
a. $0.65
b. $6.50
*
c. $7.66
d. $10.76
190. Between 1991 and 20073, the federal minimum wage increased from $4.25 per hour to $5.85 per
hour, while the CPI increased from 136.2 to 206.3. We can conclude from this that
a. the minimum wage increased in nominal and in real terms.
b. the minimum wage decreased in nominal terms but increased in real terms.
*
c. the minimum wage increased in nominal terms but decreased in real terms.
d. more information is needed to determine what happened to the real minimum wage over the
period.
191. Given the following figures, by approximately what percentage did Mike’s real income increase
between 2004 and 2005?
*
Mike’s 2004 money income = $50,000
Mike’s 2005 money income = $55,000
2004 CPI = 120.0
2005 CPI = 128.0
a. zero
b. 3.1 percent
c. 6.7 percent
d. 10 percent
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Chapter 7/Taking the Nation’s Economic Pulse
192. Given the following figures, by approximately what percentage did Jeff’s real income increase
between 2004 and 2005?
*
Jeff’s 2004 money income = $60,000
Jeff’s 2005 money income = $72,000
2004 CPI = 120.0
2005 CPI = 128.0
a. zero
b. 6.7 percent
c. 12.5 percent
d. 20 percent
193. Given the following figures, by approximately what percentage did Henry’s real income change
between 1995 and 1999?
Henry’s 1995 money income = $50,000
Henry’s 1999 money income = $60,000
2004 CPI = 150.0
2005 CPI = 165.0
a. zero
b. 2.5 percent
c. 5 percent
d. 7.5 percent
*
e. 9 percent
194. The GDP deflator is designed to adjust nominal GDP for changes in
a. the level of transfer payments.
b. the quality of goods over time.
c. the costs of economic bads such as pollution and crime.
*
d. the general level of prices over time.
195. The GDP deflator is designed to adjust nominal GDP
a. for changes in the unemployment rate.
*
b. for changes in prices.
c. for problems that arise because of externalities.
d. for changes in interest rates.
196. The typical bundle of goods and services on which the GDP deflator is based
a. is narrower than the one used to calculate the CPI.
b. is updated once every decade.
c. is the same as the one used to calculate the CPI.
*
d. is updated every year.
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309
197. If the GDP deflator in 2006 was 130 compared to a value of 100 during the 2000 base year, this
would indicate that
a. the inflation rate during 2006 was 30 percent.
*
b. the general level of prices during 2006 was 30 percent higher than during 2000.
c. the inflation rate during 2006 was 130 percent.
d. nominal GDP grew by 30 percent during 2006.
e. real GDP was 30 percent higher in 2006 than 2000.
198. If the base year for the GDP deflator is 2000 and the value of the deflator during 2005 is 115, this
indicates that the general level of prices
a. declined by 15 percent between 2000 and 2005.
b. increased by 15 percent each year during 2000–2005.
*
c. was approximately 15 percent higher in 2005 than in 2000.
d. was approximately 115 percent higher in 2005 than in 2000.
199. When adjusting nominal GDP for price changes, it is preferable to use the GDP deflator rather than
the consumer price index because the GDP deflator is
*
a. calculated for a more general market basket of goods than the consumer price index.
b. always less than the consumer price index and, thus, is a more stable index.
c. the sum of the consumer price index and the wholesale price index.
d. the only price index adjusted annually for changes in the quality of products.
200. When adjusting nominal GDP for price changes, it is preferable to use the GDP deflator rather than
the consumer price index because
a. the GDP deflator is calculated for a narrow market basket of goods, approximating those items
included in our measure of consumption expenditures.
*
b. the GDP deflator calculates changes in the prices of items that more closely approximate those
included in GDP.
c. the GDP deflator is always less than the consumer price index, and therefore, it is a more stable
index.
d. the GDP deflator is the sum of the consumer price index and the wholesale price index.
201. Real GDP equals nominal GDP
a. minus exports.
*
b. corrected for changes in the price level.
c. minus personal income taxes.
d. minus retail sales taxes.
202. In contrast with nominal GDP, real GDP refers to nominal GDP
a. minus exports.
b. minus personal income taxes.
*
c. corrected for price changes.
d. corrected for depreciation.
203. Real GDP in the current year is equal to nominal GDP in the current year multiplied by the
a. GDP deflator.
*
b. GDP deflator in the base year divided by the GDP deflator in the current year.
c. GDP deflator in the current year divided by the GDP deflator in the base year.
d. consumer price index.
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Chapter 7/Taking the Nation’s Economic Pulse
204. Real GDP equals nominal GDP multiplied by the
*
a. GDP deflator in the base year divided by the GDP deflator in the current year.
b. GDP deflator in the base year divided by the consumer price index in the current year.
c. GDP deflator in the current year divided by the GDP deflator in the base year.
d. consumer price index in the base year.
205. If you wanted to compare the quantity of output of a country across time periods, which of the
following would you use?
a. the consumer price index
b. nominal GDP
c. the GDP deflator
*
d. real GDP
206. When economists speak of changes in GDP measured in constant dollars, they mean that
a. money GDP is constant.
b. the price level is constant.
*
c. a price index has been used to adjust money GDP for the effects of inflation.
d. the growth rate of money GDP has been adjusted for changes in population.
207. The reporter on one broadcast network says 2005 GDP increased to an all-time high. Commenting
on the same figure, a second reporter says GDP in 2006 was less than in 2005. Which of the
following explanations is consistent with the statements of both reporters?
a. The first reporter was referring to real GDP, and the second was referring to nominal GDP.
*
b. The first reporter was referring to nominal GDP, and the second was referring to real GDP.
c. The first reporter was referring to GDP as measured by the expenditure approach, and the
second was referring to GDP as measured by the income cost approach.
d. The first reporter was referring to GDP as measured by the income cost approach, and the
second was referring to GDP as measured by the expenditure approach.
208. If nominal GDP increases 4 percent during a year, and real GDP increases 7 percent during the
same year, which of the following must by true?
a. The total value of GDP must have increased 11 percent during the year.
*
b. The general level of prices as measured by the GDP deflator decreased by approximately 3
percent during the year.
c. The general level of prices as measured by the GDP deflator increased by approximately 3
percent during the year.
d. Imports must have been about 3 percent larger than exports during the year.
209. If nominal or money GDP increases 6 percent in 2006 (compared to 2005), and real GDP increases
4 percent over the same period, which of the following must be true?
a. Exports exceeded imports.
b. The general price level as measured by the GDP deflator fell during 2006.
c. The economy entered a recession in 2006.
*
d. Inflation during 2006 was 2 percent.
210. The change in nominal GDP will always exceed the change in real GDP when nominal GDP is
a. increasing and prices are unchanged.
b. increasing and prices are decreasing.
c. decreasing and prices are decreasing.
*
d. increasing and prices are increasing.
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311
211. Suppose, in dollar terms, nominal GDP increased approximately 4 percent during a given year, and
real GDP decreased 1 percent. Which of the following best explains these events?
a. The money supply increased approximately 4 percent.
b. Prices decreased approximately 3 percent.
c. Prices increased approximately 4 percent.
*
d. Prices increased approximately 5 percent.
212. Suppose the dollar value of GDP increased approximately 2 percent between November 2006 and
August 2007, but real GDP fell 1 percent during the period. Which of the following best explains
these data?
a. The real capacity of the economy increased more rapidly than money output during the period.
b. In the international sector, net exports fell by approximately 3 percent during the period.
c. The money supply decreased by approximately 3 percent during the period.
*
d. Prices increased approximately 3 percent during period.
213. If nominal GDP increased 2 percent during a year, while real GDP increased 4 percent, the
a. price level must have increased approximately 2 percent compared to the prior year.
*
b. price level must have decreased approximately 2 percent compared to the prior year.
c. price level must have decreased approximately 50 percent compared to the prior year.
d. unemployment rate must have increased during the year.
214. Assume that between 1995 and 2005, nominal GDP increased from $7 trillion to $12 trillion and
that the price index rose from 100 to 133.3. Which of the following expresses GDP for 2005 in
terms of 1995 prices?
a. $7.5 trillion
*
b. $9.0 trillion
c. $9.5 trillion
d. $16.0 trillion
Use the table below to choose the correct answer.
Year
1993
2003
Nominal GDP
(billions)
6,657
11,004
GDP deflator
(2000 = 100)
88.4
106.0
215. Measured in 1993 prices, real GDP in 2003 was
a. $7,982 billion.
*
b. $9,177 billion.
c. $10,381 billion.
d. $11,624 billion.
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Chapter 7/Taking the Nation’s Economic Pulse
Use the table below to choose the correct answer.
Year
2000
2003
Nominal GDP
(billions)
GDP deflator
3,000
100.0
5,000
150.0
216. Measured in 2000 prices, indicate the increase in real GDP between 2000 and 2003.
a. There was no change in real GDP.
*
b. Real GDP increased by $333 billion.
c. Real GDP increased by $1,000 billion.
d. Real GDP increased by $2,000 billion.
Use the table below to answer the following questions.
Year
2000
2005
Nominal GDP
(billions)
GDP deflator
600
100.0
1,000
133.3
217. Between 2000 and 2005, the general level of prices increased by approximately
a. 16.7 percent.
*
b. 33.3 percent.
c. 66.7 percent.
d. 133.3 percent.
218. Measured in terms of 2000 prices, real GDP in 2005 was
a. 600.
*
b. 750.
c. 900.
d. 1,333.
Use the table below to answer the following questions.
Year
2001
2002
Nominal GDP
(in billions)
10,128
10,487
Real GDP
(billions of 2000 dollars)
9,891
10,074
219. Between 2001 and 2002, the real output of this economy increased by approximately
*
a. 1.9 percent.
b. 2.4 percent.
c. 4.1 percent.
d. 6.7 percent.
PROBLEMS WITH GDP AS A MEASURING ROD
220. One difficulty of computing the value of GDP is that there are no market prices for
a. exports and imports.
b. business investments.
*
c. government goods and services.
d. resource values.
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313
221. Over the last few decades, Americans have chosen to cook less at home and eat more at restaurants.
This change in behavior, by itself, has
a. reduced measured GDP.
b. not affected measured GDP.
c. increased measured GDP only to the extent that the value of the restaurant meals exceeded the
value of meals previously cooked at home.
*
d. increased measured GDP by the full value of the restaurant meals.
222. Over time, people have come to rely more on market-produced goods and less on goods that they
produce for themselves. For example, busy people with high incomes, rather than cleaning their
own houses, hire people to clean their houses. By itself, this change has
a. caused GDP to fall.
b. not caused any change in GDP.
*
c. caused GDP to rise.
d. probably changed GDP, but in an uncertain direction; the direction of the change depends on
the difference in the quality of the cleaning that has resulted.
223. GDP is not a perfect measure of welfare because it
*
a. treats a dollar spent on guns the same as a dollar spent on education
b. treats a dollar spent on exports the same as a dollar spent on imports
c. double counts the value of leisure time
d. double counts depreciation
e. counts illegal activities in the underground economy
224. Which of the following is a shortcoming of GDP?
a. GDP excludes changes in inventories.
b. GDP includes an estimate of illegal transactions.
*
c. GDP excludes nonmarket transactions.
d. GDP excludes business investment spending.
225. In recent years, people have benefited from greater amounts of leisure time. This trend
a. has caused GDP to rise.
b. has caused GDP to fall.
c. made GDP fluctuate randomly
*
d. is not accounted for in GDP.
226. If the underground economy is sizable, then GDP will
*
a. understate the economy's performance.
b. overstate the economy's performance.
c. fluctuate unpredictably.
d. accurately reflect this subterranean activity.
227. Because of transactions which take place in the underground economy, the
a. GDP calculation tends to overstate the actual value of goods sold in the economy.
b. GDP calculation tends to accurately portray the value of goods sold in the economy.
*
c. GDP calculation tends to understate the actual value of goods sold in the economy.
d. value of the GDP calculation will be equal to the value of the national income calculation.
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314
e.
value of the GDP calculation through the expenditure approach will be greater then the value
calculated through the income approach.
228. Because GDP does not fully account for improvements in the quality of goods, the GDP calculation
a. tends to overstate the true value of output in the United States.
*
b. tends to understate the true value of output in the United States.
c. provides an accurate value of output in the United States.
d. measures the value correctly because price changes always capture the value of quality
changes.
229. Because GDP does not fully account for improvements in the quality of goods,
a. the inflation rate is understated and real GDP is overstated.
*
b. the inflation rate is overstated and real GDP is understated.
c. both the inflation rate and real GDP are overstated.
d. both the inflation rate and real GDP are understated.
230. Generally, the greater the amount of productive activities generated by the household sector,
a. the more likely it is that the current GDP will be overstated.
*
b. the more likely it is that the current GDP will be understated.
c. the more accurately GDP will measure current productive activity.
d. the greater the GDP deflator.
231. Use of real GDP to measure changes in national output from one period to another can be
misleading if
a. the price level is different for the two periods.
*
b. the share of production carried out in the nonmarket sector is different for the two periods.
c. the bundle of goods produced during the periods is quite similar.
d. the size of the export-import sector differs for the two periods.
232. Comparisons of GDP between developed and underdeveloped countries are often misleading
because underdeveloped countries produce
*
a. a greater share of their total production in the household sector, which understates their GDP
relative to developed countries.
b. a smaller share of their total production in the household sector, which understates their GDP
relative to developed countries.
c. a greater share of their total production in the household sector, which overstates their GDP
relative to developed countries.
d. a smaller share of their total production in the household sector, which overstates their GDP
relative to developed countries.
233. Which of the following is the most likely side effect of an increase in the relative size of the
underground economy with the passage of time?
*
a. The growth rate of real GDP will tend to understate the growth rate of total output.
b. The growth rate of real GDP will tend to overstate the growth rate of total output.
c. The GDP deflator will tend to overstate any increase in inflation.
d. The GDP deflator will tend to understate any increase in inflation.
234. If waitresses and taxi drivers do not report all of their income to the government, GDP will be
understated. This is because the unreported income
a. involves the introduction of new goods.
*
b. is part of the underground economy.
c. is an example of nonmarket production.
d. represents an increase in leisure time.
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315
235. If the safety of the work environment has improved over time,
*
a. real GDP will understate the growth rate of real income.
b. real GDP will overstate the growth rate of real income.
c. the GDP deflator will overestimate inflation.
d. real GDP will overstate the growth rate of real income, and the GDP deflator will understate
inflation.
236. If national income accountants fail to make an adequate adjustment for increases in the quality of
goods and services over time,
a. increases in real GDP will understate the growth rate of real output.
b. increases in real GDP will overstate the growth rate of real output.
c. the GDP deflator will overstate the rate of inflation.
d. the GDP deflator will understate the rate of inflation.
*
e. both a and c are correct.
237. GDP will tend to overstate the productive capacity of a country when
*
a. economic bads like pollution are produced and then must be cleaned up.
b. there is a sizable underground economy.
c. nonmarket production represents a large portion of the economy.
d. working conditions improve, allowing jobs to be completed safer and faster.
238. Crime currently affects the measurement of GDP such that
*
a. expenditures on police protection and detention centers contribute to GDP.
b. the loss to victims due to crime is subtracted from GDP.
c. crime is completely ignored because it does not express the economic well-being indicated by
GDP.
d. expenditures on police protection and detention centers are subtracted from GDP.
239. In 2004, four major hurricanes struck Florida and left a wide area of severe damage. Which of the
following most accurately indicates how GDP was influenced by the hurricanes?
*
a. The expenditures on repair services and new construction necessary to restore damaged
structures were added to GDP.
b. The expenditures on repair services and new construction necessary to restore damaged
structures were subtracted from GDP.
c. Since the expenditures on repair services and new construction would merely leave the nation’s
wealth in the same position as it was prior to the hurricanes, they were excluded from GDP.
d. The expenditures on new construction to replace structures destroyed by the hurricanes were
added to GDP, but expenditures on repair services were excluded.
DIFFERENCES IN GDP OVER TIME
240. Which of the following would be most appropriate for the measurement of differences in the
average standard of living of people at different points in time?
a. nominal GDP
b. real GDP
c. nominal GDP per capita
*
d. real GDP per capita
241. As per capita GDP has risen over time in the United States and other countries, the
*
a. life expectancy has increased.
b. rate of illiteracy has increased.
c. rate of infant mortality has increased.
d. amount of leisure time has declined.
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242. As per capita GDP has risen over time in the United States and other countries, the
a. life expectancy has decreased.
b. rate of illiteracy has increased.
c. rate of infant mortality has increased.
*
d. amount of leisure time has increased.
THE GREAT CONTRIBUTION OF GDP
243. The primary value of data for real GDP lies in its ability to
a. reflect the welfare of a society relative to a previous period.
b. compare a nation’s productivity during two periods widely separated in time.
*
c. indicate short-term changes in the output rate of a nation.
d. indicate how hard the people of a nation are working.
244. Gross domestic product (measured in real dollars) is an important social tool because it provides
a. observers with a reasonably good index of social progress.
b. policy makers with a measure of the nation’s total wealth.
*
c. policy makers with information about the economy’s current rate of output and the direction of
recent changes.
d. economists with a reasonably good measure of income inequality.
245. The real GDP data could be properly thought of as a(n)
a. index of our economic well-being.
b. measure of the total wealth of a nation.
*
c. index of total output or productive activity.
d. index that measures the size of government.
246. Economists generally use gross domestic product to measure a nation’s total output because it
a. equals the sales value of all transactions conducted during a period and, thus, can be easily
calculated.
*
b. is the best available measure of the market value of all final goods and services produced
during a period.
c. is unaffected by changes in the prices of products over time.
d. is a reliable indicator of the social progress of a nation over time.
ADDENDUM
247. Given the following information about a simple three-good economy, what would be the
approximate 2007 consumer price index using a 2000 base year?
2000
*
video game cartridges
Nike T-shirts
bubble gum
a. 50
b. 200
c. 222
d. 302
Q
200
1,000
10,000
2007
P
$50.00
10.00
0.25
Q
200
500
8,000
P
$75.00
30.00
0.50
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317
248. Given the following information about quantity purchased and the price for each good in this simple
three-good economy, what would be the 2007 consumer price index using a 2000 base year?
2000
*
video game cartridges
Nike T-shirts
bubble gum
a. 50
b. 200
c. 210
d. 225
e. 250
Q
20
100
50
2007
P
$50.00
10.00
0.25
Q
20
50
80
P
$100.00
25.00
0.50
COURSEBOOK: MULTIPLE CHOICE QUESTIONS
249. Real GDP refers to nominal GDP
a. minus gifts to other countries.
b. minus total unemployment compensation.
*
c. adjusted for price changes.
d. adjusted for unemployment changes.
250. Assume that between 1995 and 2000 nominal GDP increased from $1,000 to $2,500, and the index
of prices increased from 100 to 200. Which of the following expresses GDP for 2000 in terms of
1995 prices?
a. $1,000
*
b. $1,250
c. $2,500
d. $5,000
251. Which of the following transactions would be counted toward this year’s GDP?
a. General Motors purchases 10,000,000 tires from Firestone.
b. A 300-year-old painting is sold for $12 million.
c. A street gang earns $2 million from selling illegal drugs.
*
d. Your real estate agent earns $5,000 commission when you sell your 100-year-old house for
$100,000.
252. The consumer price index (CPI) and the GDP deflator are designed to measure the degree to which
a. there have been changes in the proportions of national income generated by (and thus earned
by) the rich relative to the poor.
*
b. the cost of purchasing a bundle of goods has changed over time.
c. consumption patterns have changed with time.
d. consumer prices have risen over and above increases in worker wages.
253. If you wanted to take 2000 nominal GDP and convert it to 1995 prices, you would take 2000
nominal GDP and
*
a. multiply it by (GDP deflator1995 4 GDP deflator2000).
b. multiply it by (GDP deflator2000 4 GDP deflator1995).
c. divide it by GDP deflator2000.
d. divide it by (GDP deflator2000 + GDP deflator1995).
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254. Which of the following would not be counted as part of this year’s GDP?
a. the increase in the value of an antique automobile that was restored this year
b. the value of a new automobile at its sale price
*
c. the value of a used car at its sale price
d. a family’s replacement of a worn-out washing machine with a new one
255. Jim, a U.S. citizen, gets a summer job working in Germany. His summer earnings
a. would count as part of U.S. GDP and German GNP.
*
b. would count as part of U.S. GNP and German GDP.
c. would count as part of U.S. GDP but would have no effect on Germany’s GNP or GDP.
d. would be double-counted, raising both U.S. GDP and German GDP.
Use the following information to answer the next two questions.
Personal consumption expenditures
$900
Personal taxes
180
Government consumption and gross investment
300
Interest income
60
Exports
40
Imports
75
Depreciation
60
Gross investment
200
256. What is this country’s net exports?
a. 35
*
b. –35
c. 115
d. –115
257. What is this country’s gross domestic product?
a. 1,225
b. 1,305
*
c. 1,365
d. 1,440
258. Which of the following is not a problem or shortcoming of GDP?
*
a. Goods produced in one period that are sold in the following period fail to get counted in any
period.
b. It tends to understate the growth of economic welfare because it does not fully and accurately
account for improvements in the quality of products.
c. GDP is not an accurate measure of welfare because it makes no adjustment for harmful side
effects (such as pollution) or destructive acts of nature.
d. GDP understates output because it fails to include nonmarket production such as that which
takes place in the household or in illegal markets.
259. If you were required to write a paper for your history class (or a report for your job) in which you
were using dollar valued data across different years, you would
*
a. use a price index to remove the effects of inflation to have reliable data measuring changes in
the real value of things.
b. never attempt to correct for inflation because inflation is a key indicator of economic activity.
c. tell your teacher or boss that you never learned how to correct data for inflation.
d. assume that prices did not change during the period you are studying.
Chapter 7/Taking the Nation’s Economic Pulse
319
260. Suppose that nominal GDP increased by 3 percent, but the real GDP increased by only 1 percent
during that same period. Which of the following best explains the phenomenon?
a. Prices increased by approximately 1 percent.
*
b. Prices increased by approximately 2 percent.
c. Prices increased by approximately 3 percent.
d. Prices increased by approximately 4 percent.
261. If tax rates were raised substantially, we would expect which of the following scenarios to result?
*
a. Measured GDP would fall relative to the actual amount of true economic activity.
b. Measured GDP would come closer to reflecting the actual amount of true economic activity.
c. GDP would increase by the amount of the new tax revenue because of the higher level of
government spending it allows.
d. Personal consumption expenditures would rise, while government spending would fall.
262. Which of the following would increase U.S. GDP?
a. The city government of New York buys file cabinets directly from a Mexican company.
b. A Mexican citizen buys stock in a U.S. company.
*
c. A Japanese automobile company produces cars within the U.S.
d. A U.S. automobile company produces cars in a foreign country.
263. You buy one hundred shares of IBM stock at $100 per share and pay $250 commission. How much
will this transaction add to GDP?
a. zero
*
b. $250
c. $10,000
d. $10,250
264. If a used-car dealer purchases a used car for $1,000, restores it, and resells it for $1,500, the dealer
contributes
a. value added equal to $500, but nothing is added to GDP.
*
b. value added equal to $500, and consequently $500 is added to GDP.
c. nothing to production because only existing goods are involved.
d. value added equal to $1,500, but only $500 is added to GDP.
265. Gross domestic product is the sum of
a. the purchase price of all goods and services exchanged during the period.
*
b. the purchase price of all final goods and services produced domestically during the period.
c. the purchase price of all goods and services produced during the period minus depreciation of
productive assets during the period.
d. the purchase price of all final goods and services produced by a country’s citizens during the
period.
266. If the base year for the GDP deflator is 1996, the value of the GDP deflator for 1996
a. is 10.
*
b. is 100.
c. is 150.
d. cannot be determined from the data given.
267. If the base year for the GDP deflator is 1996 and the value of the GDP deflator in 2000 was 107, this
indicates that the general level of prices
a. declined between 1996 and 2000.
b. was approximately 7 percent lower in 2000 than in 1996.
*
c. was approximately 7 percent higher in 2000 than in 1996.
d. was approximately 107 percent higher in 2000 than in 1996.
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268. Your grandfather tells you he earned $0.65 per hour at his job when he was a boy in 1929. Given
that the CPI was 17.1 in 1929 and 177.1 in 2001, how much would you have had to make in 2001 to
have the same real hourly wage as your grandfather?
a. $0.65
b. $3.80
*
c. $6.73
d. $11.12
269. Assume that between 1990 and 2000 the money GDP of an economy increased from $3 trillion to
$8 trillion and that the appropriate index of prices increased from 100 to 200. Which of the
following expresses GDP for 1990 in terms of 2000 prices?
a. $1 trillion
b. $3 trillion
c. $4 trillion
*
d. $6 trillion
270. Suppose that Mike earned $15,000 in 2000 and $15,600 in 2001. If the consumer price index was
100 in 2000 and 103 in 2001, by approximately what percent did Mike’s real salary increase?
*
a. 1 percent
b. 3 percent
c. 4 percent
d. 5 percent
271. In a country where many families make their own clothes, GDP will be understated because the
clothes making represents
a. economic bads.
b. leisure.
c. the underground economy.
*
d. nonmarket production.
272. The primary value of GDP lies in its ability to
a. reflect the welfare of a society relative to a previous period.
b. compare the quality of a nation’s products between two periods widely separated in time.
*
c. indicate short-term changes in the output rate of a nation.
d. indicate how much leisure time the people of a nation have.
273. If the Consumer Price Index in 2006 was 150 and the CPI in 2007 was 165, the rate of inflation
between 2006 and 2007 would be:
a. 9.09 percent.
*
b. 10 percent.
c. 15 percent.
d. 110 percent.
ON-LINE PRACTICE QUESTIONS
274. Accurate measurement of GDP is important to business decision-makers because this information
will help them better determine the
a. general happiness of a country's citizens.
*
b. course of the economy and the direction of demand for their products.
c. economic well-being of a particular group within a country.
d. amount of leisure time available and the quality of life in a country.
Chapter 7/Taking the Nation’s Economic Pulse
321
275. Which of the following would increase U.S. GDP?
a. Ford Motor Company begins to produce and sell cars in China.
*
b. Mercedes-Benz begins to produce and sell cars in Mississippi.
c. An American investor buys 100 shares of Ford stock.
d. An American investor purchases 100 shares of Mercedes-Benz stock.
276. As per capita GDP has risen in the United States and other countries,
*
a. life expectancy and leisure time have also risen and infant mortality and illiteracy have gone
down..
b. life expectancy has risen but leisure time has gone down, while infant mortality and illiteracy
have remained the same.
c. various quality of life variables have been unaffected.
d. most quality of life variables such as life expectancy and expenditures on leisure time activities
have fallen.
277. National income is
*
a.
b.
c.
d.
personal income of individuals minus the taxes they pay.
gross national product minus depreciation.
employee compensation, self-employment income, interest, rents, plus corporate
profits.
consumption, investment, government expenditures, and net exports.
278. Economists generally use GDP to measure a nation's total output because it is
a. equal to the sales value of all transactions conducted during a period and thus can be easily
calculated.
b. the best available measure of the true costs of producing consumer goods.
c. unaffected by changes in the prices of products over time.
*
d. a relatively reliable measure of the value of all final product goods and services produced
during a specific time period.
279. Per capita GDP is
a. real GDP divided by the GDP deflator
*
b. a measure of income per person
c. a measure of resources available to each person
d. an indicator of the overall production of a government
280. Your father tells you he earned $3.00 per hour when he was 16 in 1977; you remember making
$6.00 per hour when you were 16 in 1999. Given that the CPI was 36.7 in 1969 and 166.1 in 2007,
which of the following is the 2007 real equivalent of your father's hourly earnings when he was 16?
a. $4.48
b. $6.78
*
c. $13.58
d. $15.01
281. The dollar value of GDP increased approximately 4 percent during the year, but real GDP fell 2
percent. Which of the following best explains this data?
a. The real capacity of the economy increased more rapidly than money output.
b. In the international sector, there was a balance of trade deficit of approximately 2 percent of
GDP.
*
c. The inflation rate was approximately 6 percent during the year.
d. The general level of prices rose approximately 2 percent.
Chapter 7/Taking the Nation’s Economic Pulse
322
282. Which of the following accurately indicates how the recent outbreaks of terrorism have influenced
the GDP of western nations?
a.
*
b.
c.
d.
Additional expenditures on security designed to protect individuals from terrorist
attacks are subtracted from GDP.
Additional expenditures on security designed to protect individuals from terrorist
attacks are added to GDP as part of output.
Since expenditures on the prevention of terrorism do not contribute to the well-being of
individuals, they exert no impact on GDP.
Since terrorism is merely a redistribution of output, expenditures on the prevention of
terrorism do not contribute to GDP.
283. If the GDP deflator in 2005 was 120 compared to a value of 100 during the 2000 base year, this
would indicate that
a. the inflation rate during 2005 was 20 percent.
*
b. the general level of prices during 2005 was 20 percent higher than during 2000.
c. the inflation rate during 2005 was 120 percent.
d. real GDP was 20 percent higher in 2005 than 2000.
284. Use the table below to choose the correct answer.
Personal consumption expenditures
Government consumption and gross investment
Rent income
Net investment expenditures
Gross imports 15
Personal savings
Gross exports 10
Depreciation
*
$300
115
75
100
125
50
Gross domestic product equals
a. $550.
b. $510.
c. $595.
d. $610.
285. Which of the following would be counted in the calculation of GDP?
a. the sale of a rare, old coin to a coin collector
b. the damage to a house caused by a hurricane
*
c. the brokerage commission from the sale of 100 shares of Microsoft stock
d. the sale of cocaine in the black market
286. How much would be added to this year’s GDP if you sold your four-year-old automobile for $4,000
and purchased a two-year-old model from an acquaintance for $10,000.
*
a. nothing
b. $6,000
c. $10,000
d. $14,000
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323
287. If on-the-job working conditions have improved over time,
*
a. real GDP will understate the growth rate of real income.
b. real GDP will overstate the growth rate of real income.
c. the GDP deflator will overestimate inflation.
d. real GDP will overstate the growth rate of real income, and the GDP deflator will understate
inflation.
288. Assume that between 1995 and 2005 nominal GDP increased from $7 trillion to $12 trillion and that
the GDP deflator rose from 100 to 150. Which of the following expresses GDP for 2005 in terms of
1995 prices?
a. $7.5 trillion
*
b. $8.0 trillion
c. $9.0 trillion
d. $18.0 trillion
CRITICAL THINKING QUESTIONS
289. a. What does GDP measure, and why is it a useful tool for economists, business decision makers,
and government policy makers?
b. Explain at least two important things GDP does not measure.
Answer
a. GDP measures the productive output of a country’s economy. It is a measure of the market
value of all domestically produced final goods and services during a specific period. It gives
economists and other interested parties a way to gauge the health of the economy and to
forecast the economy.
b. Although GDP is generally a good measure of the productive capacity of an economy, it
cannot measure the quality of goods and the introduction of new goods through time. It also is
incapable of measuring the underground economy (both legal and illegal transactions) or the
extent of nonmarket production in a country. In addition, it excludes leisure and the human
cost associated with the production of goods and services. Lastly, it does not make an
adjustment for the harmful side effects that arise from production and consumption and the
events of nature.
290. Explain the two approaches to calculating GDP.
Answer
One approach involves adding up the expenditures on goods and services produced during the year.
This figure would be the sum of personal consumption expenditures, government consumption and
gross expenditures, gross private domestic investment, and net exports to foreigners. The other
approach is calculated by adding up the income payments to resource suppliers and the other costs
of producing those goods and services. Specifically, this method would sum employee
compensation, proprietors’ income, interest, rents, corporate profits, indirect business taxes, cost of
depreciation, and the net income of foreigners.
291. What is the difference between real and nominal GDP? If the president of the United States (or your
instructor) asked you to evaluate the economy over the past five years, which one would you use
and why?
Answer
Real GDP is nominal GDP adjusted for the effects of inflation. Mathematically, real GDP (in
constant base-year dollars) equals nominal GDP multiplied by 100 divided by the GDP deflator. An
increase in nominal GDP may be due to increases in production of goods and services, or it may
simply be due to an increase in prices. For this reason, real GDP is a better variable for evaluating
the performance of the economy over several years.
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Chapter 7/Taking the Nation’s Economic Pulse
292. The consumer price index is calculated using a fixed basket of goods. Will this always give an
accurate representation of the changing cost of living to consumers? Why or why not?
Answer
The CPI tends to overstate inflation because it uses a fixed basket of goods. The fixed basket does
not allow the CPI to take into account the fact that consumers will substitute cheaper goods for
goods whose price is rising. When faced with rising prices, consumers are likely to alter the basket
of goods that they consume.
293. a. In 2004, four major hurricanes hit Florida. Explain how this destruction of property, and the
rebuilding that went on afterward, affected GDP.
b. Explain how GDP has trouble accounting for other parts of the economy as well.
Answer
a. The goods that are destroyed are not subtracted from GDP, and there is no way to account for
the loss in productive capacity to the economy. The rebuilding that occurs after a natural
disaster, however, is counted in GDP; for this reason, disasters like hurricanes and
earthquakes can actually end up increasing GDP.
b. GDP also cannot account for production of goods outside of the market system, like household
production. Also, unreported and illegal transactions (the underground economy) are not
counted in GDP. These factors will cause GDP to understate the true level of production in the
economy.
294. Indicate whether the following transactions would be included in GDP. If they are included, indicate
which component (consumption, investment, government consumption and gross investment, or net
exports) of GDP would be affected.
a. A Czech student attending school in Florida takes a summer job as a lifeguard.
b. A New York company buys welding equipment from a St. Louis firm to help it build jet
fighters.
c. The IRS purchases a new computer from the GATS computer company (an American-owned
business producing and operating in Germany) that will allow it to better detect income tax
evasion.
Answer
a. This counts as production of consumption services (life saving) in GDP.
b. This counts as an investment expenditure in GDP.
c. This counts as government gross investment in GNP but does not affect GDP.
295. Nominal gross domestic product for the United States was $7,661.6 billion in 1996 and $8,110.9
billion in 1997. The GDP deflator was 109.5 in 1996 and 111.6 in 1997.
a. What was the 1997 real GDP expressed in 1996 prices?
b. What were the 1996 and 1997 GDPs expressed in base-year prices?
c. What was the percent change in the nominal GDP between 1996 and 1997?
d. What was the percent change in real GDP between 1996 and 1997?
e. What was inflation between 1996 and 1997?
Answer
a. $7,958.3 billion
b. $6,996.9 billion; $7,267.8 billion
c. 5.86 percent
d. 3.87 percent
e. 1.92 percent
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325
296. Your grandfather tells you that he earned $.50 per hour at his job when he was a boy in 1929.
a. Given that the CPI was 17.1 in 1929 and 184.0 in 2003, how much would you have to make in
2003 to have the same real hourly wage?
b. You made $5.50 an hour working during 2003. Were you better off than your grandfather in
terms of purchasing power? Explain.
c. Your grandfather also tells you that a soda cost $.05 in 1929, and you know a soda cost $.55 in
2003. You decide to use the price of a soda as the price index. How much would the 2003
“soda equivalent” of $.50 per hour in 1929 be?
Answer
a. $5.38
b. Yes, $5.50 had more purchasing power than $.50 did in 1929.
c. $5.50 in 2003 would buy the same number of sodas (10) that $.50 would have in 1929.
297. a. What is the difference between gross domestic product and gross national product?
b. Give an example of a transaction that would be counted in GDP but not in GNP.
c. Give an example of a transaction that would be counted in GNP but not GDP.
Answer
a. GDP is a measure of output produced within domestic borders, while GNP is a measure of
output produced by domestic citizens. Specifically, GNP equals GDP plus income received by
citizens for factors of production supplied abroad minus income paid to foreigners for their
contribution to domestic output.
b. the production of a good or service by a foreign citizen within the domestic borders
c. the production of a good or service by a domestic citizen outside of the domestic borders
298. Discuss the problems with GDP as a measure of a country’s current production and income.
Answer
First, GDP does not count nonmarket production or the underground economy. It fails to take
leisure and human costs into account. Its use is complicated by the variation that exists in the
quality of goods through time and by the introduction of new goods. Lastly, GDP does not account
for harmful side effects and economic bads.
299. What is meant by a final good or service as opposed to an intermediate good or service? Why are
only final goods and services included in the calculation of GDP?
Answer
A final good is a good purchased by its final user, while an intermediate good is a good used in the
production of a final good. Only final goods are included to avoid double counting. The price of a
tire purchased by Ford, for example, is reflected in the final cost of the vehicle and will be counted
at that point. If Ford’s purchase was also counted, the tire would be counted twice.
300. Determine whether each of the following transactions will be counted in the 2005 GDP of the
United States. If the transaction is counted, identify which expenditure component (personal
consumption, gross investment, government consumption and gross investment, or net exports) will
be affected.
a. Norm, a frequent visitor to a local bar, purchases a Budweiser beer. (Budweiser beer is
domestically produced.)
b. The owner of the local bar purchases a new domestically made cooler unit in which to store his
beer.
c. Carla, a U.S. foreign exchange student, works her way through college in Germany as a
waitress in a bar.
d. On her night off, Carla purchases a Budweiser beer for her friend in the German bar.
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Answer
a. This is counted in U.S. GDP as a personal consumption expenditure.
b. This is counted in U.S. GDP as an investment expenditure.
c. This is not counted in U.S. GDP (but would be counted in U.S. GNP).
d. This is counted in U.S. GDP as an export.