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Chapter 5: National-Income Accounting
Chapter 5: National-Income Accounting
Multiple Choice Questions
MEASURES OF OUTPUT
1. The primary purpose of the national-income accounts is to assist:
A) Market investors in making more profitable investments.
B) Wage earners in maximizing their incomes.
C) Economic historians to better understand the economic past.
D) Government policy makers in formulating economic policies and evaluating performance.
Answer: D Type: Definition Page: 93
2. Prices are used in national accounting to:
A) Add the values of output from different sectors of the economy.
B) Compare the value of output of one period with that of another.
C) Provide an index to measure the rate of inflation.
D) All of the above.
Answer: D Type: Basic Understanding Page: 93
3. The GDP is:
A) C + I + G + (X - IM).
B) The sum of value added at every stage of the production process.
C) The total market value of final goods and services.
D) All of the above.
Answer: D Type: Definition Page: 93
4. The total market value of all final goods and services produced in an economy during a given time period is
the definition of:
A) Gross domestic product. B) Net domestic product. C) National income. D) Personal income.
Answer: A Type: Definition Page: 93
5. GDP can be calculated by:
A) Adding up the spending on goods and services by business, government, households, and foreigners, and
subtracting imports.
B) Adding up the "value added" at every stage of production in the economy.
C) Adding up all of the receipts of households, government, and business.
D) All of the above.
Answer: D Type: Definition Page: 94
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6. The GDP can be calculated as:
A) The sum of value added and intermediate goods.
B) The sum of final transactions in the production process.
C) NI plus depreciation.
D) PI plus depreciation.
Answer: B Type: Definition Page: 94
7. The measure of the production of new goods and services in the United States is:
A) GDP. B) GNP. C) NI. D) DI.
Answer: A Type: Complex Understanding Page: 94
8. DVD players can be added to bicycles to compute the GDP by:
A) Multiplying output by price and adding dollar values.
B) Dividing output by price and adding dollar values.
C) Multiplying dollar values of output by price and adding the result.
D) Dividing dollar values of output by price and adding the result.
Answer: A Type: Analytical Page: 94
9. The value of goods that have been produced but not sold during a given time period:
A) Increases business inventories and GDP for the period.
B) Decreases GDP by preventing resources from being used in their best alternative use.
C) Increases government stockpiles but leaves the GDP unchanged.
D) Is included in the next period's GDP when the goods are sold.
Answer: A Type: Definition Page: 93
10. Suppose autos cost consumers $30,000 and trucks cost consumers $15,000. What contribution does the
production of 200 autos and 200 trucks make to the GDP?
A) $45,000. B) $3,000,000. C) $9,000,000. D) $450,000.
Answer: C Type: Analytical Page: 94
11. Suppose DVD players cost consumers $100 and computers cost consumers $600. What contribution does the
production of 100 DVD players and 100 computers make to the GDP?
A) $70,000. B) $7,000. C) $6,000. D) $700.
Answer: A Type: Analytical Page: 94
12. Which of the following are treated differently in computations of the GNP as compared with the GDP?
A) Sales in the underground economy.
B) Goods produced by U.S. firms located in foreign countries.
C) Intermediate goods.
D) The value of service performed by housewives.
Answer: B Type: Complex Understanding Page: 94
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13. One difference between GDP and GNP results from sales:
A) In the underground economy.
B) Of goods that are produced by foreign firms in the United States.
C) Of exports from the United States to foreign countries.
D) In the United States which arrive as imports.
Answer: B Type: Complex Understanding Page: 94
14. Which of the following would be included in GNP but not in GDP?
A) The unpaid services of family members performing household chores.
B) Salaries paid to foreign employees working for U.S. firms in foreign countries.
C) Sales of used homes.
D) Sales of stock in the stock market.
Answer: B Type: Definition Page: 94
15. The GDP per capita:
A) Measures a country's productivity.
B) Permits international comparisons of the economic welfare of different nations.
C) Is nominal GDP corrected for price-level changes.
D) Indicates the distribution of output.
Answer: B Type: Basic Understanding Page: 94
16. A commonly used measure of a country's standard of living is:
A) Nominal GDP. B) Real GDP. C) GDP per capita. D) NDP.
Answer: C Type: Basic Understanding Page: 94
17. The GDP per capita is the most practical way to:
A) Measure how much income households receive.
B) Measure how much output can be consumed on a sustainable basis.
C) Make international comparisons of the standard of living.
D) Analyze the growth rate of the economy through time.
Answer: C Type: Basic Understanding Page: 94
18. If the real U.S. GDP was $7,214.6 billion in 1997 and the U.S. population was 289 million, the per capita real
GDP would have been approximately:
A) $2,085,019 per person. B) $14,429 per person. C) $6,925 per person. D) $24,964 per person.
Answer: D Type: Analytical Page: 94
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19. If the real U.S. GDP was $7,636.4 billion in 1998 and the U.S. population was 295 million, the per capita real
GDP would have been approximately:
A) $2,252,738 per person. B) $25,886 per person. C) $15,272 per person. D) $7,341 per person.
Answer: B Type: Analytical Page: 94
Use the following to answer questions 20-21:
INDEX OF REAL OUTPUT AND POPULATION
Figure 5.1
800
Population
700
600
500
Real GDP
400
300
200
100
1970
1980
1990
2000
YEAR
20. According to Figure 5.1 from 1990 to 2000 the standard of living in this hypothetical economy:
A) Improved because the population increase in the 1970s and 1980s caused the labor force to increase.
B) Decreased because the level of inflation caused the value of output to fall.
C) Decreased because the population growth exceeded the output growth.
D) Stayed about the same because real GDP was fairly constant.
Answer: C Type: Analytical Page: 94
21. According to Figure 5.1, when we compare the standards of living in 1970 and 1990 in this hypothetical
economy:
A) The standard of living is higher in 1990 because real GDP is higher in 1990 than 1970.
B) The standard of living is higher in 1990 because real GDP grew faster than population during the
1970-1990 period.
C) The standards of living are approximately the same in 1970 and 1990.
D) The standard of living is higher in 1970 than 1990 because real GDP per capita declined.
Answer: C Type: Analytical Page: 94
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22. Which of the following is excluded from calculations of GDP?
A) Goods that are produced but not sold during the time period.
B) Income received by managers of corporations.
C) The value of laundry services provided by a homemaker for their family.
D) All of the above.
Answer: C Type: Definition Page: 95
23. Suppose you volunteer to help clean up your neighborhood and the only payment you receive is the sense of
goodwill that develops with your neighbors. Your efforts cause the GDP of the economy to:
A) Remain unchanged.
B) Fall by the opportunity cost of the time you spend doing volunteer work.
C) Rise by the opportunity cost of the time spent by all of the people in the neighborhood on the volunteer
project.
D) Rise by the value of increased cleanliness of the neighborhood.
Answer: A Type: Definition Page: 95
24. Suppose a friend claims he is helping the economy by throwing trash on the street rather than in trash cans
because the extra expenditures necessary to clean up the streets will increase GDP. Your friend is:
A) Wrong. GDP will not be affected because nothing new is being produced.
B) Right. GDP will increase, ceteris paribus.
C) Wrong. GDP will not be affected because this is not a socially desirable use of resources and will
therefore not be included in GDP.
D) Wrong. GDP will decline because cleaning the streets will take resources away from more productive
work.
Answer: B Type: Complex Understanding Page: 95
25. Which of the following is directly included in the calculation of the GDP?
A) The final sales of wheat sold to other countries. C) The sales of flour to a bakery.
B) The appreciation in value of buildings.
D) The services of homemakers.
Answer: A Type: Complex Understanding Page: 96
26. Which of the following might not be included in the calculation of GDP?
A) Cash income received by a self-employed worker.
B) Tips in the form of cash.
C) Cash received by someone who mows yards.
D) All of the above.
Answer: D Type: Complex Understanding Page: 96
27. Which of the following items is definitely part of the underground economy?
A) Payments to family members for performing household tasks.
B) Income from legal pursuits.
C) Unreported income.
D) Babysitting services.
Answer: C Type: Basic Understanding Page: 96
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28. When an individual makes repairs to her own home instead of hiring a company to make the repairs, the
activity is:
A) Included in GDP because it represents production.
B) Productive but excluded from GDP because it is a nonmarket activity.
C) Excluded from GDP because it is an intermediate goods.
D) Included in GDP but not included in GNP.
Answer: B Type: Complex Understanding Page: 96
29. The underground economy exists because:
A) People wish to avoid taxes.
B) Illegal activities are often highly profitable.
C) It is difficult to trace transactions in the underground economy.
D) All of the above are reasons.
Answer: D Type: Complex Understanding Page: 96
30. Which of the following is not a final good or service?
A) A printing press purchased by a printing company.
B) Automobile batteries purchased by an car manufacturer.
C) Gasoline purchased for personal use by a car owner.
D) The preparation of your tax return by a CPA.
Answer: B Type: Basic Understanding Page: 96
31. The total value of intermediate goods is:
A) Equal to the total value added.
B) Equal to the GDP.
C) Included in the value of final goods in the GDP.
D) Included in the underground economy.
Answer: C Type: Definition Page: 96
32. Leather sold to a furniture manufacturer is excluded from the calculation of GDP because:
A) It is an intermediate good.
B) It is an input of the final product.
C) Its value will be included in the price of the final good.
D) All of the above.
Answer: D Type: Complex Understanding Page: 96
33. To avoid counting the same output more than once the calculation of GDP includes:
A) Intermediate goods plus final goods.
B) Only the value of final goods.
C) The value added at each stage of production plus intermediate goods.
D) Only the output produced by U.S. factors of production.
Answer: B Type: Basic Understanding Page: 96
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Chapter 5: National-Income Accounting
34. Which of the following is an intermediate good?
A) The purchase of a computer by an accountant for use in his accounting firm.
B) The purchase of a computer by a college student for use in studying.
C) The purchase of tires by an individual for a car that he is about to sell.
D) The unreported baby sitting services of a teenager.
Answer: A Type: Basic Understanding Page: 96
35. The sum of value added:
A) Measures the intangible quality of goods and services produced in the economy.
B) Equals the sum of the value of intermediate goods.
C) Is a way to compute the GDP.
D) Equals net domestic product.
Answer: C Type: Basic Understanding Page: 96
36. A computer manufacturer sells PCs for $895 each. If the manufacturer pays $600 for the components in each
computer, the value added to each computer by manufacturing is:
A) $895. B) $600. C) $1,495. D) $295.
Answer: D Type: Definition Page: 96
37. A manufacturer sells CD players for $50 each. If the manufacturer pays $27 for components in each CD
player, the value added to each CD player by manufacturing is:
A) $50. B) $77. C) $23. D) $27.
Answer: C Type: Definition Page: 96
38. Which of the following statements about real GDP and nominal GDP is correct?
A) Nominal GDP is the value of output measured in constant prices.
B) Real GDP is the value of output measured in constant prices.
C) Real GDP is the value of output measured in current prices.
D) Real GDP can give a distorted view of economic activity because of price level changes.
Answer: B Type: Basic Understanding Page: 98
39. When using the GDP from two consecutive years to determine the economic growth rate of the economy,
adjustments should be made for:
A) Price-level changes.
C) Changes in the interest rate.
B) The level of employment.
D) The consumption of capital equipment.
Answer: A Type: Basic Understanding Page: 98
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40. Real GDP is more accurate than nominal GDP in making comparisons of output over time because:
A) Nominal GDP can increase simply because of price increases over time.
B) Real GDP is not affected by output changes.
C) Nominal GDP is the hypothetical output that would be produced at full employment.
D) Real GDP is not affected by changes in productivity or the size of the labor force.
Answer: A Type: Definition Page: 98
41. Real GDP measures changes in:
A) Prices. B) Production. C) Prices and production.
D) Wages.
Answer: B Type: Basic Understanding Page: 98
42. Suppose the total market value of all the final goods and services produced in the country of GDPLAND was
$10 billion in 1999 (measured in 1999 prices) and $12 billion in the year 2000 (measured in 2000 prices).
Which of the following statements is definitely correct?
A) Production increased in GDPLAND between 1999 and 2000.
B) Average price levels increased in GDPLAND between 1999 and 2000.
C) Nominal GDP increased in GDPLAND between 1999 and 2000.
D) All of these statements are definitely correct.
Answer: C Type: Complex Understanding Page: 98
43. Suppose the total market value of all the final goods and services produced in the country of GDPWORLD
was $12 billion in 2000 (measured in 2000 prices) and $14 billion in the year 2001 (measured in 2001 prices).
Which of the following statements is definitely correct?
A) Production increased in GDPWORLD between 2000 and 2001.
B) Average price levels increased in GDPWORLD between 2000 and 2001.
C) Real GDP increased in GDPWORLD between 2000 and 2001.
D) Nominal GDP increased in GDPWORLD between 2000 and 2001.
Answer: D Type: Complex Understanding Page: 98
44. The market value of final output produced in a given period measured in the prices of that period is:
A) Real GDP. B) GDP per capita. C) Nominal GDP. D) Potential GDP.
Answer: C Type: Definition Page: 98
45. Real GDP is used most effectively to:
A) Measure how much income households receive.
B) Measure how much output can be consumed on a sustainable basis.
C) Make international comparisons of the standard of living.
D) Analyze the growth rate of the economy over time.
Answer: D Type: Basic Understanding Page: 98
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46. If both the prices and the quantities of all final goods and services produced doubled from one year to the next
and population remained constant, then:
A) Nominal GDP would be four times as large in the second year as in the first.
B) Real GDP would be twice as large in the second year as in the first.
C) On average, the population could be twice as well-off in the second year as in the first.
D) All of the above.
Answer: D Type: Complex Understanding Page: 98
47. In periods of rising prices, percentage increases in nominal GDP will:
A) Exceed percentage increases in real GDP.
C) Be less than percentage increases in real GDP.
B) Equal percentage increases in real GDP.
D) Not change in relationship to real GDP.
Answer: A Type: Complex Understanding Page: 98
48. If real GDP falls from one period to another and the price level stays the same we can conclude that:
A) Nominal GDP increased.
C) Nominal GDP decreased.
B) Inflation increased.
D) NDP decreased.
Answer: C Type: Complex Understanding Page: 98
49. If nominal GDP was $9,300 billion in 1999 and the price level in 1999 was 104.8, then real GDP would have
been approximately:
A) $8,874 billion. B) $9,746.4 billion. C) $9,195.2 billion D) $9,404.8 billion.
Answer: A Type: Analytical Page: 98
50. If the GDP deflator is 104.8 for 1999 and the GDP deflator is 107.3 in 2000, a nominal GDP in 2000 of
$10,000 billion would mean that the real GDP in 2000 would be closest to:
A) $9892.7 billion. B) $10,730 billion. C) $10,107.3 billion. D) $9319.7 billion.
Answer: D Type: Analytical Page: 99
51. If the price level is 100 for 1996 and the price level is 103.3 in 1998, a nominal GDP in 1998 of $8,800 billion
would mean that real GDP in 1998 (in 1996 prices) would be closest to:
A) $9,090.4 billion. B) $8,518.9 billion. C) $8,800 billion. D) $8696.7 billion.
Answer: B Type: Analytical Page: 99
52. If nominal GDP was $6,126.3 billion in 1993 and the price level in 1993 was 142.5, then real GDP would
have been approximately:
A) $4,299.2 billion. B) $6,268.8 billion. C) $5,983.8 billion. D) $872,997.8 billion.
Answer: A Type: Analytical Page: 99
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Chapter 5: National-Income Accounting
53. Assume that nominal GDP is $3,000 in period 1 and $6,000 in period 2. If prices in period 2 are twice as high
as in period 1, real GDP in period 2 is:
A) $6,000 measured in period 1 prices.
C) $9,000 measured in period 1 prices.
B) $3,000 measured in period 1 prices.
D) $12,000 measured in period 1 prices.
Answer: B Type: Analytical Page: 99
Use the following to answer questions 54-57:
Figure 5.2
GDP (billons of dollars per year)
2200
2000
1800
1600
Nominal GDP
Real
GDP
1400
1200
1000
1960
1970
1980
1990
2000
YEAR
54. According to the hypothetical economy in Figure 5.2, between 1960 and 1970 real GDP declined but nominal
GDP continued to rise. The decrease in real GDP was due to:
A) A decrease in the dollar value of output produced.
B) A decrease in the quantity of output produced.
C) A decrease in inflation.
D) An increase in the standard of living.
Answer: B Type: Complex Understanding Page: 100
55. The base year for the calculation of real GDP for the hypothetical economy in Figure 5.2 is closest to:
A) 1960. B) 1980. C) 1990. D) 2000.
Answer: D Type: Analytical Page: 100
56. In Figure 5.2, during the period between the early 1970s and 1980, real GDP grew at a faster rate than
nominal GDP. This is an indication that:
A) Average price levels decreased.
B) Production increased at a faster rate than average price.
C) Production increased at a slower rate than average price.
D) Average price levels increased.
Answer: A Type: Analytical Page: 100
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Chapter 5: National-Income Accounting
57. In Figure 5.2, during the 1980-1990 time period real GDP was relatively constant but nominal GDP
increased. This can be explained by:
A) Lower average price levels.
C) Higher levels of production.
B) Inflation.
D) A decrease in production per capita.
Answer: B Type: Analytical Page: 100
Use the following to answer questions 58-61:
Figure 5.3
GDP (billons of dollars per year)
3400
3200
3000
Nominal GDP
2800
2600
Real GDP
2400
2200
1960
1970
1980
1990
2000
YEAR
58. According to the hypothetical economy in Figure 5.3, real GDP differs from nominal GDP from 1980 to 2000
because:
A) Price level increases caused real GDP to increase.
B) Population growth exceed output growth.
C) Inflation caused the dollar value of output to decrease.
D) Inflation caused the dollar value of output to increase.
Answer: D Type: Complex Understanding Page: 100
59. The base year for the calculation of real GDP for the hypothetical economy in Figure 5.3 is closest to:
A) 1960. B) 1980. C) 1990. D) 2000.
Answer: B Type: Analytical Page: 100
60. In Figure 5.3, during the period between 1980 and 1990, real GDP declined but nominal GDP increased. This
is an indication that:
A) Average price levels decreased.
B) Production increased at a faster rate than average price.
C) Per capita GDP must have decreased.
D) Average price levels increased.
Answer: D Type: Complex Understanding Page: 100
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Chapter 5: National-Income Accounting
61. In Figure 5.3, the fact that real GDP is greater than nominal GDP during the 1960-1980 period implies that:
A) Average price levels during this period must have been lower than during the base period.
B) Per capita GDP must have increased.
C) Average price levels must have decreased during this period.
D) Production must have decreased during this period.
Answer: A Type: Complex Understanding Page: 100
62. The purpose of chain-weighted price adjustments in the calculation of GDP is to:
A) Adjust for changes in relative prices.
C) Adjust for changes in production.
B) Adjust for changes in average prices.
D) Convert NDP to GDP.
Answer: A Type: Basic Understanding Page: 100
63. "GDP less depreciation" is the definition of:
A) Net investment. B) Net domestic product.
C) National income.
D) Personal income.
Answer: B Type: Definition Page: 101
64. Net domestic product is:
A) Equal to GDP minus indirect business taxes.
B) The total market value of all goods produced in the period.
C) Equal to national income minus depreciation.
D) The net market value of goods and services produced in the economy after adjusting for depreciation.
Answer: D Type: Definition Page: 101
65. Net domestic product is defined as:
A) Personal income plus corporate taxes.
B) The amount of new output currently available for use without reducing the economy's stock of capital.
C) The amount of new output currently available for gross investment.
D) GDP plus depreciation.
Answer: B Type: Definition Page: 101
66. The account that gives the most accurate understanding of the economy's potential for growth over the
long-term is:
A) GDP. B) NDP. C) NI. D) GNP.
Answer: B Type: Definition Page: 101
67. The national-income aggregate calculated by subtracting capital consumption (depreciation) from GDP is
known as:
A) Net investment. B) Net domestic product. C) Gross investment. D) Value added.
Answer: B Type: Definition Page: 101
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Chapter 5: National-Income Accounting
68. NDP is the best measure of:
A) Our future production possibilities.
B) The incomes earned by the factors of production in producing GDP.
C) The incomes received by households.
D) The relative standard of living of the populations of different countries.
Answer: A Type: Basic Understanding Page: 101
69. Depreciation represents:
A) The consumption of capital in the production process.
B) A loss of productive capability as a result of the inefficient use of resources.
C) Wasted capital.
D) Gross investment plus net investment.
Answer: A Type: Definition Page: 101
70. An economy's production possibilities are most likely to expand if:
A) Net investment is negative.
C) Gross investment is greater than depreciation.
B) Gross investment is less than depreciation.
D) Depreciation is greater than gross investment.
Answer: C Type: Basic Understanding Page: 101
71. A nation's production-possibilities curve should, ceteris paribus:
A) Shift inward if gross investment exceeds depreciation.
B) Shift inward if net investment is zero.
C) Shift outward if net investment is positive.
D) Shift outward if gross investment is positive.
Answer: C Type: Complex Understanding Page: 101
72. A nation's capital stock will decline, ceteris paribus, if:
A) The value of depreciation exceeds the growth in the value of real GDP.
B) Net investment is negative.
C) Depreciation exceeds gross investment.
D) All of the above.
Answer: D Type: Complex Understanding Page: 101
73. The stock of capital in the United States can grow only if:
A) Depreciation is positive.
B) Gross investment minus depreciation is positive.
C) GDP-NDP is positive.
D) All of the above.
Answer: B Type: Basic Understanding Page: 101
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Chapter 5: National-Income Accounting
74. If net investment is negative:
A) Gross investment exceeds depreciation.
B) The economy's production possibilities are expanding, ceteris paribus.
C) Imports exceed exports.
D) Depreciation exceeds gross investment.
Answer: D Type: Basic Understanding Page: 101
75. If depreciation exceeds gross investment:
A) Net investment exceeds depreciation.
B) Gross investment is negative.
C) The difference between GDP and NDP is smaller than gross investment.
D) The nation's capital stock is being depleted.
Answer: D Type: Basic Understanding Page: 101
76. If depreciation is smaller than gross investment:
A) Net investment exceeds depreciation.
B) Gross investment is negative.
C) Net investment is positive.
D) The nation's capital stock is getting smaller.
Answer: C Type: Basic Understanding Page: 101
77. The addition to the economy's capital stock can be found by:
A) Subtracting NDP from GDP.
B) Subtracting depreciation from GDP.
C) Subtracting depreciation from gross investment.
D) Subtracting net income from gross investment.
Answer: C Type: Definition Page: 101
78. If depreciation equals gross investment then:
A) Net exports are equal to zero.
B) Net domestic product is expanding.
C) The economy is contracting.
D) Net investment is equal to zero.
Answer: D Type: Definition Page: 101
79. If for a given year gross investment is $190 billion and depreciation is $210 billion, then for that year the
capital stock:
A) Increased by $190 billion.
C) Decreased by $210 billion.
B) Increased by $20 billion.
D) Decreased by $20 billion.
Answer: D Type: Analytical Page: 101
80. If for a given year gross investment is $210 billion and depreciation is $200 billion, then for that year the
capital stock:
A) Increased by $10 billion.
C) Decreased by $200 billion.
B) Increased by $210 billion.
D) Decreased by $10 billion.
Answer: A Type: Analytical Page: 101
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THE USES OF OUTPUT
81. Which of the following typically purchases the most goods and services in the U.S. economy?
A) Foreigners. B) Households. C) Federal, state and local governments combined. D) Businesses.
Answer: B Type: Basic Understanding Page: 102
82. The economic definition of investment includes:
A) Residential construction.
B) Net changes in inventory.
C) Spending for plant and capital equipment.
D) All of the above.
Answer: D Type: Definition Page: 102
83. Which of the following is part of investment in the national-income accounts?
A) The purchase of land for speculative purposes.
B) The purchase of a used delivery van by a small business.
C) The purchase of U.S. government bonds.
D) The purchase of new taxicabs to expand taxicab service.
Answer: D Type: Complex Understanding Page: 102
84. Which of the following is investment, according to an economist?
A) The purchase of U.S. savings bonds.
C) An increase in business inventories.
B) A collection of rare coins.
D) The purchase of a new family car.
Answer: C Type: Complex Understanding Page: 102
85. An increase in business inventories during a time period, ceteris paribus, will:
A) Decrease GDP during that period.
B) Increase GDP during that period.
C) Not affect GDP during that period but will increase GDP in later periods when the inventory is sold.
D) Never affect GDP because changes in inventories are not included in the calculation of GDP.
Answer: B Type: Basic Understanding Page: 102
86. Which of the following types of government spending is included in the calculation of GDP?
A) Federal spending only.
B) Federal, state and local government spending for any purpose.
C) Federal, state and local government spending on goods and services only.
D) Federal, state and local spending on transfer payments only.
Answer: C Type: Basic Understanding Page: 102
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Chapter 5: National-Income Accounting
87. In the United States GDP accounts, imports:
A) Include smuggled goods.
B) Include black-market goods.
C) Are the total of U.S. goods sent abroad.
D) Are goods purchased from foreign sources.
Answer: D Type: Definition Page: 102
88. Exports minus imports is the definition of:
A) Gross investment. B) Net investment.
C) Saving.
D) Net exports.
Answer: D Type: Definition Page: 102
89. In calculating GDP:
A) Imports are subtracted from exports because they are part of another country's GDP.
B) Imports are added to exports because both represent purchases of final goods.
C) Imports are subtracted from exports to obtain gross exports.
D) Imports are subtracted from exports and included in gross investment.
Answer: A Type: Basic Understanding Page: 102
Use the following to answer question 90:
Figure 5.4
800
700
EXPORTS AND IMPORTS
Exports
600
500
400
Imports
300
200
100
1970
1980
1990
2000
YEAR
90. According to the hypothetical economy in Figure 5.4, net exports:
A) Made a positive contribution to GDP from 1990 to 2000.
B) Were a positive number from 1970 to 1990.
C) Reduced the standard of living from 1970 to 1990.
D) All of the above.
Answer: A Type: Complex Understanding Page: 102
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MEASURES OF INCOME
91. Which of the following is used to measure GDP according to the income approach?
A) Interest. B) Investment. C) Personal savings. D) Consumption expenditures.
Answer: A Type: Definition Page: 103
92. Which of the following is an income item in the computation of the GDP?
A) Consumer goods and services. B) Investment in plant and equipment.
C) Rents.
D) Imports.
Answer: C Type: Definition Page: 103
93. National income is a measure of:
A) How well the economy is doing on a gross basis.
B) The incomes earned by the factors of production in producing GDP.
C) The incomes received by the factors of production in producing GDP.
D) The country's future productive capacity.
Answer: B Type: Definition Page: 104
94. "Income received by households before payment of personal taxes" is known as:
A) Disposable personal income.
C) National income.
B) Net domestic product.
D) Personal income.
Answer: D Type: Definition Page: 105
95. Personal income is:
A) Less than GDP but more than national income.
B) Less than national income but more than disposable income.
C) Equal to consumption spending plus personal saving.
D) Equal to consumption spending plus personal saving plus indirect business taxes.
Answer: B Type: Basic Understanding Page: 105
96. Transfer payments are part of personal income but not national income because:
A) They are a payment for which no goods or services are exchanged.
B) Personal income is an earnings concept.
C) National income is a receipts concept.
D) They represent a payment to factors of production.
Answer: A Type: Definition Page: 105
97. Transfer payments are:
A) Included in the personal income account.
B) Included in the net domestic product account.
Answer: A Type: Basic Understanding Page: 106
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C) Excluded from the disposable income account.
D) Included in nominal GDP but not real GDP.
Chapter 5: National-Income Accounting
98. Social security payments to retired persons are included in:
A) Both GDP and personal income.
B) Personal income and disposable income.
C) National income but not personal income.
D) National income and subtracted to get personal income.
Answer: B Type: Basic Understanding Page: 106
99. Which of the following best measures the household sector's contribution to the support of the public sector?
A) GDP minus depreciation.
B) The difference between personal income and disposable income.
C) Government transfer payments.
D) Corporate profits taxes plus undistributed corporate profits.
Answer: B Type: Complex Understanding Page: 106
100. Personal income minus personal taxes is the definition of:
A) National income. B) Personal income. C) Consumption.
D) Disposable income.
Answer: D Type: Definition Page: 106
101. Disposable income is:
A) The amount households have to spend or to save.
B) The amount the household sector earns in producing the GDP.
C) The amount households have left to spend after savings are subtracted.
D) Personal income plus income taxes.
Answer: A Type: Definition Page: 106
102. The measure of what households receive after personal income tax is deducted is:
A) GDP. B) PI. C) NI. D) DI.
Answer: D Type: Definition Page: 106
103. Disposable income is:
A) Personal income - personal taxes.
B) National income - personal taxes.
C) Personal income - indirect business taxes.
D) Consumption - saving.
Answer: A Type: Basic Understanding Page: 106
104. Disposable income less consumption is the definition of:
A) Business saving. B) Personal saving. C) Gross investment.
Answer: B Type: Definition Page: 106
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D) Net investment.
Chapter 5: National-Income Accounting
105. The measure of the part of DI that is not consumed is:
A) GDP. B) Net investment. C) Saving. D) Depreciation.
Answer: C Type: Definition Page: 106
Use the following to answer questions 106-113:
Table 5.1
National income accounts
Expenditures for consumer goods and services
Exports
Government purchases of goods and services
Social security taxes
Net investment
Indirect business taxes
Imports
Gross investment
Corporate income taxes
Personal income taxes
Corporate retained earnings
Net foreign factor income
Government transfer payments to households
Net interest payments to households
$4,265
740
1,465
510
225
520
825
865
185
750
45
20
690
0
106. On the basis of Table 5.1, gross domestic product is:
A) $6,680 billion. B) $7,335 billion. C) $6,510 billion.
D) $7,420 billion.
Answer: C Type: Analytical Page: 102
107. On the basis of Table 5.1, net domestic product is:
A) $6,040 billion. B) $5,870 billion. C) $6,695 billion.
D) $6,780 billion.
Answer: B Type: Analytical Page: 104
108. On the basis of Table 5.1, national income is:
A) $5,540 billion. B) $6,195 billion. C) $6,280 billion.
D) $5,370 billion.
Answer: D Type: Analytical Page: 101
109. On the basis of Table 5.1, personal income is:
A) $5,320 billion. B) $5,490 billion. C) $6,230 billion.
Answer: A Type: Analytical Page: 106
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D) $6,145 billion.
Chapter 5: National-Income Accounting
110. On the basis of Table 5.1, disposable income is:
A) $4,470 billion. B) $5,480 billion. C) $5,395 billion.
D) $4,570 billion.
Answer: D Type: Analytical Page: 106
111. On the basis of Table 5.1, personal saving is:
A) $1,215 billion. B) $1,130 billion. C) $305 billion.
D) $205 billion.
Answer: B Type: Analytical Page: 106
112. On the basis of Table 5.1, depreciation is:
A) $640 billion. B) $50 billion. C) $85 billion.
D) $690 billion.
Answer: A Type: Analytical Page: 101
113. On the basis of Table 5.1, net exports are:
A) $740 billion. B) $825 billion. C) -$85 billion.
D) $85 billion.
Answer: C Type: Analytical Page: 102
Use the following to answer questions 114-120:
Table 5.2
National income accounts
Expenditures for consumer goods and services
Exports
Government purchases of goods and services
Social security taxes
Net investment
Indirect business taxes
Imports
Gross investment
Corporate income taxes
Personal income taxes
Corporate retained earnings
Government transfer payments to households
114. On the basis of Table 5.2, GDP is:
A) $2,040 billion. B) $4,160 billion.
$2,850
250
810
295
510
425
450
700
190
875
210
780
C) $4,350 billion.
D) $3,970 billion.
115. On the basis of Table 5.2, net domestic product is:
A) $4,350 billion. B) $2,040 billion. C) $4,160 billion.
D) $3,970 billion.
Answer: B Type: Analytical Page: 102
Answer: D Type: Analytical Page: 104
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Chapter 5: National-Income Accounting
116. On the basis of Table 5.2, national income is:
A) $3,545 billion. B) $3,735 billion. C) $2,425 billion.
D) $1,615 billion.
Answer: A Type: Analytical Page: 104
117. On the basis of Table 5.2, personal income is:
A) $2,757billion. B) $2,935 billion. C) $2,070 billion.
D) $3,630 billion.
Answer: D Type: Analytical Page: 106
118. On the basis of Table 5.2, disposable personal income is:
A) $3,440 billion. B) $2,755 billion. C) $4,430 billion.
D) $3,630 billion.
Answer: B Type: Analytical Page: 106
119. On the basis of Table 5.2, depreciation (capital consumption allowance) is:
A) $425 billion. B) $125 billion. C) -$125 billion. D) $190 billion.
Answer: D Type: Analytical Page: 101
120. On the basis of Table 5.2, personal saving is:
A) $190 billion. B) -$190 billion. C) $95 billion.
Answer: D Type: Analytical Page: 106
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D) -$95 billion.
Chapter 5: National-Income Accounting
Use the following to answer questions 121-127:
Table 5.3
National income accounts
Expenditures for consumer goods and services
Exports
Government purchases of goods and services
Social security taxes
Net investment
Indirect business taxes
Imports
Gross investment
Corporate income taxes
Personal income taxes
Corporate retained earnings
Government transfer payments to households
Net interest payments to households
$8,200
1,700
2,500
1,900
1,400
1,300
1,900
1,800
600
1,500
130
1,600
500
121. On the basis of Table 5.3, the value of the income aggregate that is defined as "the total market value of all
final goods and services produced in a given time period" is:
A) $10,700 billion. B) $12,400 billion. C) $11,900 billion. D) $12,300 billion.
Answer: D Type: Definition Page: 102
122. On the basis of Table 5.3, the value of the income aggregate that is defined as "the amount of output we could
consume without reducing our stock of capital" is:
A) $10,700 billion. B) $12,400 billion. C) $12,300 billion. D) $11,900 billion.
Answer: D Type: Definition Page: 104
123. On the basis of Table 5.3, the value of the income aggregate that is defined as "total income earned by current
factors of production" is:
A) $10,700 billion. B) $12,300 billion. C) $11,900 billion. D) $10,600 billion.
Answer: D Type: Definition Page: 104
124. On the basis of Table 5.3, the value of the income aggregate that is defined as "income received by
households before payment of personal taxes" is:
A) $5,870 billion. B) $10,070 billion. C) $9,570 billion. D) $10,600 billion.
Answer: B Type: Definition Page: 105
125. On the basis of Table 5.3, the value of the income aggregate that is defined as "after-tax income of
consumers" is:
A) $8,570 billion. B) $10,070 billion. C) $11,570 billion. D) $10,600 billion.
Answer: A Type: Definition Page: 106
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Chapter 5: National-Income Accounting
126. On the basis of Table 5.3, the value of the income aggregate that is defined as "the part of disposable income
not spent on current consumption" is:
A) -$500 billion. B) $500 billion. C) $370 billion. D) $8,570 billion.
Answer: C Type: Definition Page: 106
127. On the basis of Table 5.3, the net addition to the capital stock is:
A) $1,000 billion. B) $400 billion. C) $1,400 billion. D) $370 billion.
Answer: C Type: Definition Page: 101
THE FLOW OF INCOME
128. The value of total output must equal the value of total income in an economy because:
A) One person's expenditures on goods and services is another person's income.
B) Income earned is spent on goods and services which creates additional production.
C) Of the circular nature of the economy.
D) All of the above are reasons.
Answer: D Type: Basic Understanding Page: 107
129. Businesses return purchasing power to the circular flow in the form of:
A) Retained earnings. B) Depreciation. C) Business investment. D) Profit.
Answer: C Type: Basic Understanding Page: 107
130. The social well-being of a country:
A) Is best measured by per capita GDP.
B) Always increases when real GDP increases.
C) Decreases when real GDP decreases.
D) Is measured by more than changes in real GDP.
Answer: D Type: Basic Understanding Page: 108
The following multiple-choice questions require critical thinking about In the News and World View headlines and
articles that appeared in the text.
131. An article titled "Global Inequities" reports that people living in low-income countries have “comparatively
few goods and services.” Which of the following is used to measure standard of living?
A) Real GDP. B) Nominal GDP. C) GDP per capita. D) NDP.
Answer: C Type: Complex Understanding Page: 95
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Chapter 5: National-Income Accounting
132. An In the News article reports "…residents of the world's low-income nations have comparatively few goods
and services." The standard of living for residents can be measured using:
A) GDP per capita. B) Real GDP. C) NDP. D) National income.
Answer: A Type: Complex Understanding Page: 95
133. One article titled "A Lot Going on Under the Table" reports that 83 percent of households make untaxed or
unmeasured purchases. This is an example of:
A) An intermediate good. B) The underground economy. C) Market activity. D) Value added.
Answer: B Type: Complex Understanding Page: 97
134. One In the News article states that the underground economy includes transactions that are untaxed or
unaccounted for in GDP. According to this article, the underground economy:
A) Impacts the amount of tax dollars collected.
C) Results in unreported income.
B) Includes more than illegal transactions.
D) All of the above.
Answer: D Type: Complex Understanding Page: 97
135. One article in the text reports that "The underground economy . . . involves a lot more than nannies and drug
deals." Based on this article, the underground economy:
A) Includes only illegal activity.
C) Involves transactions which are easily traced.
B) Has no impact on tax revenue.
D) May distort perceptions of economic activity.
Answer: D Type: Complex Understanding Page: 97
136. A cartoon in the text shows two people watching television. On the screen are the words "Economic growth
indicators are up, led by car repairs, divorce costs, open-heart surgeries, and toxic waste cleanups." The
cartoon illustrates the:
A) Difficulty in measuring social welfare.
B) Difference between GDP and national income.
C) Problem of measuring the difference in wealth between the United States and other nations.
D) Difference between GDP and NDP.
Answer: A Type: Complex Understanding Page: 109
True/False Questions
MEASURES OF OUTPUT
T
F 137. GDP is the sum of all final goods and services produced for the market in a given time period, plus
all intermediate goods.
Answer: False Type: Definition Page: 93
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Chapter 5: National-Income Accounting
T
F 138. GDP is the total market value of all goods produced in the economy.
Answer: False Type: Definition Page: 93
T
F 139. Comparisons of per capita GDP across international boundaries provide information on the
distribution of GDP within each country.
Answer: False Type: Basic Understanding Page: 94
T
F 140. To use per capita GDP as a measure of the standard of living in different countries requires that the
countries have similar production, institutions, and income distribution.
Answer: True Type: Basic Understanding Page: 94
T
F 141. The GDP is geographically focused, including all output produced within a nation's borders.
Answer: True Type: Definition Page: 94
T
F 142. If domestic help is hired to substitute for family members in doing housework, then GDP will
increase.
Answer: True Type: Basic Understanding Page: 95
T
F 143. If a friend helps you with your homework, it will not be calculated in the GDP accounts, but if you
hire a tutor, who reports the income, the services will be counted in the GDP.
Answer: True Type: Basic Understanding Page: 95
T
F 144. GDP can be calculated by summing up the "value added" at every stage of production.
Answer: True Type: Definition Page: 96
T
F 145. Eliminating intermediate goods from the calculation of GDP results in double counting of resources
in the GDP.
Answer: False Type: Basic Understanding Page: 96
T
F 146. In the calculation of real GDP, goods and services are valued at price levels that prevailed in same
base period.
Answer: True Type: Definition Page: 98
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Chapter 5: National-Income Accounting
T
F 147. In the calculation of real GDP for each year, the value of goods and services is measured in the
actual prices of each year.
Answer: False Type: Definition Page: 98
T
F 148. Nominal GDP rises faster than real GDP as a result of inflation.
Answer: True Type: Complex Understanding Page: 98
T
F 149. Nominal GDP is not used to determine recessions because inflation can disguise the occurrence of
recessions.
Answer: True Type: Basic Understanding Page: 98
T
F 150. The base period is the time period used for comparative analysis.
Answer: True Type: Basic Understanding Page: 98
T
F 151. Net domestic product corrects the GDP for inflation.
Answer: False Type: Basic Understanding Page: 101
T
F 152. NDP provides information about future production possibilities.
Answer: True Type: Basic Understanding Page: 101
T
F 153. For the nation's capital stock to grow, net investment must be positive.
Answer: True Type: Basic Understanding Page: 101
THE USES OF OUTPUT
T
F 154. Government spending in the national-income accounts refers only to expenditures at the federal
level.
Answer: False Type: Definition Page: 102
T
F 155. When imports exceed exports, net exports are negative.
Answer: True Type: Definition Page: 102
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Chapter 5: National-Income Accounting
T
F 156. When net exports to the United States are negative, the United States consumes more output than it
produces.
Answer: True Type: Basic Understanding Page: 102
MEASURES OF INCOME
T
F 157. The expenditure approach to GDP looks at who is being paid to produce output, while the income
approach to GDP looks at who is buying the output.
Answer: False Type: Definition Page: 103
T
F 158. National income is what households have to spend or to save.
Answer: False Type: Definition Page: 104
T
F 159. National income is a measure of the total income earned by the factors of production.
Answer: True Type: Basic Understanding Page: 104
T
F 160. Disposable income is what households have to spend or to save.
Answer: True Type: Definition Page: 106
T
F 161. Disposable income minus depreciation is saving.
Answer: False Type: Definition Page: 106
T
F 162. Saving equals the difference between disposable income and consumption.
Answer: True Type: Definition Page: 106
THE FLOW OF INCOME
T
F 163. The dollar value of output for an economy must always equal the dollar value of income.
Answer: True Type: Basic Understanding Page: 106
T
F 164. Ultimately, the dollars used to buy goods and services return to the circular flow as consumption,
investment and government spending.
Answer: True Type: Basic Understanding Page: 106
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Chapter 5: National-Income Accounting
T
F 165. Ultimately, the dollars used to buy goods and services leave the circular flow of spending and do not
return to it.
Answer: False Type: Basic Understanding Page: 106
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