Download Macro Chapter 7 study guide questions

Macro Chapter 7 study guide questions
Multiple Choice
Identify the choice that best completes the statement or answers the question.
____
1. 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.
____
2. 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
____
3. 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.
____
4. 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.
____
5. 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
____
6. 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.
____
7. 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.
____
8. 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.
____
9. 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.
____ 10. 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.
____ 11. 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
____ 12. 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.
____ 13. 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 215.3 in 2008, how much would you have had to make in 2008 to have the same real
hourly wage as your grandfather?
a. $0.65
b. $5.14
c. $8.18
d. $11.12
____ 14. Assume that between 2000 and 2010 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
2000 in terms of 2010 prices?
a. $1 trillion
b. $3 trillion
c. $4 trillion
d. $6 trillion
____ 15. Suppose that Mike earned $15,000 in 2008 and $15,600 in 2009. If the consumer price index was 100 in 2008
and 103 in 2009, by approximately what percent did Mike's real salary increase?
a. 1 percent
b. 3 percent
c. 4 percent
d. 5 percent
____ 16. 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.
____ 17. 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.
____ 18. If the Consumer Price Index in 2008 was 150 and the CPI in 2009 was 165, the rate of inflation between 2008
and 2009 would be
a. 9.09 percent.
b. 10 percent.
c. 15 percent.
d. 110 percent.
Critical Thinking and Application
19. Answer the following questions:
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.
20. Explain the two approaches to calculating GDP.
21. 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?
22. 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?
23. 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.
24. 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?
25. Answer the following questions:
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.
26. Discuss the problems with GDP as a measure of a country's current production and income.
27. 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?
Macro Chapter 7 study guide questions
Answer Section
MULTIPLE CHOICE
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2.
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C
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B
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B