Download Exercises for Chapter 23

EC 102.07-08-09
Exercises for Chapter 23
SPRING 2006
1. In an economy consisting of only households and firms, GDP can be computed by
a.
adding up the total expenditures of households.
b.
adding up the total income paid by firms.
c.
Either a or b are correct.
d.
None of the above are correct.
ANSWER: c. Either a or b are correct.
2. Production equals income because
a.
by law firms must pay out all their revenue as income to someone.
b.
for every sale there is a buyer and a seller.
c.
because ultimately firms are owned by households.
d.
None of the above are correct.
ANSWER: b. for every sale there is a buyer and a seller.
3. Which of the following is not included in GDP?
a.
unpaid cleaning and maintenance of houses
b.
services such as those provided by lawyers and hair stylists
c.
the estimated rental value of owner-occupied housing
d.
production of foreign citizens living in the domestic country
ANSWER: a. unpaid cleaning and maintenance of houses
4. Gasoline is
a.
always considered an intermediate good.
b.
counted as a final good if a company uses it to provide transportation services.
c.
counted as a final good if a consumer uses it to run a lawnmower to mow her yard.
d.
Both b and c are correct.
ANSWER: c. counted as a final good if a consumer uses it to run the lawnmower to mow her
yard.
5. George buys and lives in a newly constructed home he paid $200,000 for in 2003. He sells the
house in 2004 for $225,0000.
a. The 2004 sale increases 2004 GDP by $225,000 and does nothing to 2003 GDP.
b. The 2004 sale increases 2004 GDP by $25,000 and does nothing to 2003 GDP.
c. The 2004 sale does not increase 2004 GDP and does nothing to 2003 GDP.
d. The 2004 sale increases 2004 GDP by $225,000 and 2003 GDP is revised upward by $25,000.
ANSWER: c. The 2004 sale does not increase 2004 GDP and does nothing to 2003 GDP.
6. Which of the following is included in GDP?
a.
the sale of stocks and bonds
b.
the sale of used goods
c.
the sale of services such as visits to a doctor
d.
All of the above are correct.
ANSWER: c. the sale of services such as visits to a doctor
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7. Use the following table to answer the next five questions.
GDP
Income Earned by Citizens Abroad
Income Foreigners Earn here
Depreciation
Indirect Business Taxes
Business Subsidies
Statistical Discrepancy
Retained Earnings
Corporate Income Taxes
Social Insurance Contributions
Interest Paid to Households by Government
Transfer Payments to Households from Government
Personal Taxes
Non-tax payments to Government
a) GNP for this economy is
a.
$96.
b.
ANSWER: b. $100.
$100.
c.
$105.
d.
$110.
b) NNP for this economy is
a.
$100. b.
ANSWER: b. $96.
$96.
c.
$90.
d.
$88.
c) National income for this economy is
a.
$96.
b.
$92.
c.
ANSWER: b. $92.
$90.
d.
$88.
d) Personal Income for this economy is
a.
$91.
b.
$81
c.
ANSWER: a. $91.
$80.
d.
$51.
e) Disposable personal income for this economy is
a.
$56.
b.
$46.
c.
$45.
ANSWER: a. $56.
d.
$11.
$110
$5
$15
$4
$6
$2
$0
$5
$6
$10
$5
$15
$30
$5
8. If you buy a burger and fries at your favorite fast food restaurant
a.
neither GDP nor consumption spending will be affected because you would have eaten at
home if you hadn't eaten at the restaurant.
b.
GDP will be higher, but consumption spending will be unchanged.
c.
GDP will be unchanged, but consumption spending will be higher.
d.
both GDP and consumption spending will be higher.
ANSWER: d. both GDP and consumption spending will be higher.
9. A firm produces consumer goods and adds some to inventory in the third quarter. In the fourth
quarter the firm sells the goods at a retail outlet which leaves their inventory diminished. As a
result of these actions, what component(s) of real GDP change in the fourth quarter?
a.
only investment and it decreases
b.
only consumption and it increases
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c.
d.
ANSWER: c.
Investment decreases and consumption increases.
None of the above is correct.
investment decreases and consumption increases.
10. After the terrorist attack on September 11, governments raised expenditures to increase
security at airports. These purchases of goods and services are
a.
not included in GDP since they are not productive.
b.
not included in GDP since the government will have to raise taxes to pay for them.
c.
included in GDP since government expenditures are included in GDP.
d.
included in GDP only to the extent that the Federal, and not state or local governments,
paid for them.
ANSWER: c. included in GDP since government expenditures are included in GDP.
11. The U.S. Air Force pays a Turkish citizen $30,000 to work on the Adana-İncirlik Base in
Turkey. As a result,
a.
U.S. government purchases increase by $30,000 and U.S. net exports decrease by
$30,000. U.S. GDP and GNP are unaffected.
b.
U.S. government purchases increase by $30,000 and U.S. GNP increases by
$30,000. U.S. GDP and net exports are unaffected.
c.
U.S. government purchases, net exports, GDP, and GNP are unaffected.
d.
U.S. government purchases increase by $30,000 and U.S. net exports decrease by
$30,000. U.S. GNP increases by $30,000, but U.S. GDP is unaffected.
ANSWER: a. U.S. government purchases increase by $30,000 and U.S. net exports decrease by
$30,000. U.S. GDP and GNP are unaffected.
12. Which of the following statements about GDP is most accurate?
a.
Nominal GDP values production at current prices, while real GDP values
production at constant prices.
b.
Nominal GDP values production at constant prices, while real GDP values
production at current prices.
c.
Nominal GDP values production at market prices, while real GDP values
production at the cost of the resources used in the production process.
d.
Nominal GDP consistently underestimates the value of production, while real
GDP consistently overestimates the value of production.
ANSWER: a. Nominal GDP values production at current prices, while real GDP values
production at constant prices.
13. In the country of Mainia, GDP consists of cranberries and maple syrup. In 2002, 50 units of
cranberries are sold at $20 per unit, and 100 units of maple syrup are sold at $10 per unit. If the
price of cranberries was $10 per unit and the price of maple syrup was $15.00 per unit in 2001,
the base year, then nominal 2002 GDP is
a.
$2,000, real 2002 GDP is $2,000, and the GDP deflator is 100.
b.
$2,000, real 2002 GDP is $2,500, and the GDP deflator is 125.
c.
$2,500, real 2002 GDP is $2,000, and the GDP deflator is 83.3.
d.
None of the above are correct.
ANSWER: a. $2,000, real 2002 GDP is $2,000, and the GDP deflator is 100.
14. When economists talk about growth in the economy, they measure that growth with the
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a.
b.
c.
d.
ANSWER: b.
absolute change in nominal GDP.
percentage change in real GDP.
absolute change in real GDP.
percentage change in nominal GDP.
percentage change in real GDP.
15. If the GDP deflator is 200 and nominal GDP is $10,000 billion, then real GDP is
a.
$5,000 billion. b. $2,000 billion. c. $50 billion. d. None of the above are correct.
ANSWER: a. $5,000 billion.
16. If a small country has current nominal GDP of $25 billion and the GDP deflator is 125, what
is real GDP?
a. $312.5 billion
b. $207.5 billion c. $31.25 billion d. $20 billion
ANSWER: d. $20 billion
17. If a country reported a nominal GDP of 85 billion in 2002 and 100 billion in 2001 and
reported a GDP deflator of 100 in 2002 and of 105 in 2001, then from 2001 to 2002 real output
a.
and prices both rose.
b.
rose and prices fell.
c.
fell and prices rose.
d.
and prices both fell.
ANSWER: d. and prices both fell.
18. The GDP deflator can be used to identify the
a.
increase in nominal GDP that is due to an increase in prices rather than an
increase in production.
b.
increase in real GDP that is due to an increase in prices rather than an increase in
production.
c.
increase in the cost of living for typical U.S. consumers.
d.
reduction in government spending required to balance the federal budget.
ANSWER: a. increase in nominal GDP that is due to an increase in prices rather than an
increase in production.
19. Suppose that twenty-five years ago a country had nominal GDP of 1,000, a GDP deflator of
200, and a population of 100. Today they have nominal GDP of 3,000, a deflator of 400, and
population of 150? What happened to the real GDP per person?
a. It more than doubled. b. It rose, but less than doubled.
c. It was unchanged. d. It fell.
ANSWER: c. It was unchanged.
20. You find that your paycheck for the year is higher this year than last. Does that mean that
your real income has increased? Explain carefully.
ANSWER: Real income is nominal income adjusted for general increase in prices. If my
paycheck is higher this year than last, my nominal income has increased. Whether my real
income has increased or not depends on what has happened since last year to the level of prices of
things I buy with my income. If the percentage increase in prices is less than the percentage
increase in my nominal income, then my real income has increased. Otherwise, my real income
has not increased.
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