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Chapter 21 —Tracking the U.S. Economy MULTIPLE CHOICE 1. Which of the following is the best indicator of the performance of the national economy? a. the federal government budget deficit b. the stock of capital goods (machinery) in the nation c. the size of the nation's stock of money d. the balance of trade with other nations e. the flow of new goods and services produced in the nation 2. Which of the following is true regarding Gross Domestic Product? a. It can only be measured from the flow of total spending. b. It can only be measured from the flow of total income in the economy. c. It can be measured either from total spending or total expenditure. d. It is calculated by computing total spending and total income; the larger of the two figures is counted as GDP. e. It can only be measured from the stock of total wealth. 3. In double-entry GDP accounting, a. the value of output produced must equal the value of resource payments generated in producing that output b. government is not counted because most of government spending is for transfer payments c. payments to resources must equal the value of goods sold to households d. inventories are counted twice, once as investment and once as output e. intermediate goods are counted twice, once as a type of output themselves and once as part of final output 4. Gross Domestic Product equals the a. total output of all goods and services produced by resources located in the U.S. b. market value of all goods and services produced by resources located in the U.S. c. market value of all final goods and services produced by resources located in the U.S. d. value added to the economy by intermediate goods and services minus original cost e. value of total sales of goods and services produced in the U.S. 5. Which of the following best describes an intermediate good? a. It has no value to the seller. b. It has no value to the buyer. c. It is purchased by a household for future use. d. It helps produce another good. e. It is sold at a discounted price by middlemen. 6. Gross Domestic Product includes final goods and services, but not intermediate goods because a. intermediate goods are not part of investment spending b. the value of the intermediate goods is already included in the value of the final goods c. the value of the intermediate goods is already included as inventory investment d. intermediate goods are only produced by government e. intermediate goods are not current production 219 10. Gross Domestic Product measures the a. market value of all final goods and services produced by a nation's citizens, residents and firms of a nation regardless of the location of production b. market value of all final goods and services produced by resources located within a nation regardless of who owns those resources c. market value of all goods and services produced by resources located within a nation regardless of who owns those resources d. market values of all goods and services produced by a nation's citizens and firms regardless of the location of production e. market value of all goods and services produced within a nation by resources owned by residents and firms of that nation ANS: B PTS: 1 DIF: Moderate LOC: The study of economics, and definitions of economics NAT: Analytic TOP: National Income Accounts 11. Which of the following would not be an expenditure on a final good or service? a. a farmer's purchase of a pound of hamburger b. a medical clinic's purchase of flu vaccine c. a factory's purchase of a spot welding machine d. the purchase of a cup of coffee at a restaurant e. a college student's purchase of a textbook for a medieval history class ANS: B PTS: 1 DIF: Moderate LOC: The study of economics, and definitions of economics NAT: Reflective Thinking TOP: National Income Accounts 12. Which of the following is the best example of an intermediate good? a. the flowers Mr. Grover buys at a local nursery b. the flowers that Timmy Grover, age three, brought Mrs. Grover after he picked them from a neighbor's garden c. the flour Grandma Grover buys to make a birthday cake d. the flour that Joe buys so that he can eat pizza three nights a week e. the flour Amy orders each month for the bakery she manages ANS: E PTS: 1 DIF: Easy LOC: The study of economics, and definitions of economics NAT: Reflective Thinking TOP: National Income Accounts 13. The value of the films produced in the United States starring Charlie Chaplin that still exist will not be included in this year's U.S. GDP because a. Charlie Chaplin was not an American citizen b. Charlie Chaplin did not make the films this year c. the films are no longer being shown and earning revenue d. the films no longer have any value except for collectors e. films are intermediate goods ANS: B PTS: 1 DIF: Easy LOC: The study of economics, and definitions of economics 220 NAT: Reflective Thinking TOP: National Income Accounts Chapter 7 14. Rhonda sells a house she has owned for 15 years. To make it more marketable, she buys carpeting and has it professionally installed, and buys wallpaper that her daughter hangs. Which items would be included in this year's GDP? a. the sale price of the house b. the sale price of the house, carpeting, and wallpaper and the installation fee for the carpet c. the sale price of the house, carpeting, and wallpaper, the installation fee for the carpet, and the opportunity cost of Rhonda's daughter's time d. the sale price of the house, carpeting, and wallpaper, the installation fee for the carpet, and the opportunity cost of Rhonda's time e. the sale price of the wallpaper and carpeting and the installation fee for the carpet ANS: E PTS: 1 DIF: Hard LOC: The study of economics, and definitions of economics NAT: Reflective Thinking TOP: National Income Accounts 15. Which of the following actions would not increase GDP? a. Tom's alarm clock breaks, so he buys a new one. b. Tom buys a new alarm clock because he routinely sleeps through the first alarm. c. Tom's alarm clock breaks; now he oversleeps long enough that he buys a cup of coffee on the way to work instead of making it for himself at home. d. Tom gets fired for being late so often after his alarm clock breaks, so he moves off to the wilderness. e. Tom sells his broken alarm clock and uses the revenue to buy some French fries. ANS: D PTS: 1 DIF: Easy LOC: The study of economics, and definitions of economics NAT: Reflective Thinking TOP: National Income Accounts 16. Which of the actions below will not increase GDP? a. Bears prowl suburban areas, overturning garbage cans so that the town must hire more sanitation workers to clean up. b. Vandals spray paint all over brick buildings, increasing business for paint removal services. c. An installer of automobile tires takes a knife to the tires of cars parked in his neighborhood. d. A homemaker spends $20 taking the family to lunch at Burger King instead of spending the $20 to buy food to prepare at home. e. A consumer has a tune-up done on his pick-up truck at the local garage. ANS: C PTS: 1 DIF: Hard LOC: The study of economics, and definitions of economics NAT: Reflective Thinking TOP: National Income Accounts 17. GDP does not include the a. increase in business inventories in the period b. expenditures by government for newly produced goods and services in a given period c. value of all transactions in the economy during a given period d. value of final output during a given period e. household spending on electricity ANS: C PTS: 1 DIF: Hard LOC: The study of economics, and definitions of economics Tracking the U.S. Economy NAT: Reflective Thinking TOP: National Income Accounts 221 18. Which of the following would be included in GDP? a. payment of the monthly telephone bill by Mr. Laconic b. the purchase of corporate stock by Steven Jones c. the purchase of a used limousine by Harold Abel d. the value of a pair of mittens your mother knitted for you e. the $300 George saved because he painted his own garage ANS: A PTS: 1 DIF: Hard LOC: The study of economics, and definitions of economics NAT: Reflective Thinking TOP: National Income Accounts 19. The Lee family won a $50 million jackpot and made several major purchases this year, listed below. Which of these would be counted as investment when calculating GDP by the expenditure approach? a. the former Hollywood home of Gwyneth Paltrow that they bought for $5 million b. the villa they just built in the Swiss Alps for $2 million c. the secondhand yacht that Mr. Lee purchased for $1 million and expects to sell for a profit before year's end d. the vintage Rolls Royce that Mrs. Lee purchased in London for $500,000 e. the new house that Mrs. Lee had built in Pittsburgh for $200,000 to serve as living quarters for her ten new servants ANS: E PTS: 1 DIF: Hard LOC: The study of economics, and definitions of economics NAT: Reflective Thinking TOP: National Income Accounts 20. Which of the following would not be included in GDP as a form of consumption spending? a. Ann takes Tim out to a restaurant for dinner. b. Ann and Tim buy a microwave oven. c. Ann and Tim buy vegetables to prepare soup at home. d. Ann prepares Tim's income tax return. e. Tim buys Ann flowers. ANS: D PTS: 1 DIF: Easy LOC: The study of economics, and definitions of economics NAT: Reflective Thinking TOP: National Income Accounts 21. 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 ANS: B PTS: 1 DIF: Moderate LOC: The study of economics, and definitions of economics NAT: Reflective Thinking TOP: National Income Accounts 22. Which of the following would not be included in the calculation of GDP? a. Jim purchases a new automobile. b. Joe pays a plumber $100 to fix a broken pipe. c. Sandy, who is on welfare, receives $100 in food stamps. d. Kurt purchases an airline ticket for $500 just before a big reduction in fares. e. Laurie pays $15 for a haircut. ANS: C PTS: 1 DIF: Easy LOC: The study of economics, and definitions of economics 222 NAT: Reflective Thinking TOP: National Income Accounts Chapter 7 23. A firm run by a rational entrepreneur would want to hold inventories. a. True b. False ANS: A PTS: 1 DIF: Easy LOC: The study of economics, and definitions of economics TOP: GDP Based on the Expenditure Approach NAT: Analytic 24. If a firm's inventory decreases, the GDP counts the net decrease as a reduction in investment. a. True b. False ANS: A PTS: 1 DIF: Easy LOC: The study of economics, and definitions of economics TOP: GDP Based on the Expenditure Approach NAT: Analytic 25. Investment spending is a flow variable; inventories are a stock variable. a. True b. False ANS: A PTS: 1 DIF: Easy LOC: The study of economics, and definitions of economics TOP: GDP Based on the Expenditure Approach NAT: Analytic 26. Other things equal, increased imports decrease GDP. a. True b. False ANS: A PTS: 1 DIF: Moderate LOC: The study of economics, and definitions of economics TOP: GDP Based on the Expenditure Approach NAT: Analytic 27. Which of the following would directly reduce GDP? a. An unscrupulous disposal company dumps barrels of toxic waste near a suburban water supply. b. The switch from home-cooked meals to restaurant meals lowers the nutritional value of the average diet. c. The town of Council Bluffs decides to fire the lifeguards at the local swimming pool. d. Pollution of international waters increases. e. Damage claims filed with auto insurance companies increase. ANS: C PTS: 1 DIF: Easy LOC: The study of economics, and definitions of economics TOP: GDP Based on the Expenditure Approach NAT: Reflective Thinking 28. If toy stores overestimate the demand for a toy in 2004 and, as a result, have an unexpectedly large number of them on hand at the end of the year, the value of the increased inventory of those toys will be counted as a. investment in 2004 b. investment in 2005 c. consumption in 2004 d. consumption in 2005 e. part of GDP only when the toys are sold ANS: A PTS: 1 DIF: Moderate LOC: The study of economics, and definitions of economics TOP: GDP Based on the Expenditure Approach Tracking the U.S. Economy NAT: Reflective Thinking 223 29. Suppose that storage costs increase, so that firms decide to hold less output in inventory, other things constant. Which of the following is true? a. consumption spending will increase b. consumption spending will decrease c. investment will increase d. investment will decrease e. GDP for this year is not affected ANS: D PTS: 1 DIF: Hard LOC: The study of economics, and definitions of economics TOP: GDP Based on the Expenditure Approach NAT: Reflective Thinking 30. The immediate effect on GDP of Ibrahim's purchase of a government bond is a. a decrease in consumption because Ibrahim has less money to spend b. an increase in government spending c. an increase in investment d. a decrease in investment because less money is available to him for further investment e. nonexistent, since no real goods and services have been produced ANS: E PTS: 1 DIF: Hard LOC: The study of economics, and definitions of economics TOP: GDP Based on the Expenditure Approach NAT: Reflective Thinking 31. Which of the following is the best example of an investment as defined by economists? a. a household's purchase of 100 shares of Apple computer stock b. a firm's purchase of 100 shares of General Electric stock c. a firm's purchase of a bond issued by General Mills d. a firm's purchase of a U.S. savings bond e. a firm buying personal computers for its secretarial staff ANS: E PTS: 1 DIF: Hard LOC: The study of economics, and definitions of economics TOP: GDP Based on the Expenditure Approach NAT: Reflective Thinking 32. Consumption in the expenditures approach to calculating GDP includes a. spending by businesses on plant and equipment b. spending by government on office buildings c. spending by households on new single-family houses d. changes in business inventories e. purchases of medical services at the local clinic ANS: E PTS: 1 DIF: Moderate LOC: The study of economics, and definitions of economics TOP: GDP Based on the Expenditure Approach NAT: Reflective Thinking 33. In GDP measurement, consumer spending includes a. spending by businesses on labor resources b. spending by government on office buildings c. spending by individual households on automobiles and durables d. exchanges in business inventories e. a firm's purchase of a radio made in Taiwan ANS: C PTS: 1 DIF: Moderate LOC: The study of economics, and definitions of economics TOP: GDP Based on the Expenditure Approach 224 NAT: Reflective Thinking Chapter 7 34. Which of the following would not be included in an economist's definition of investment spending? a. the purchase of robots by Motor Magic Manufacturing b. the construction of a new office building by the Mountain City Real Estate Company c. the purchase of General Motors stock by Donald Trump d. the purchase of a new pizza oven by H and R Pizza e. an unexpected rise in inventories at Randle Manufacturing ANS: C PTS: 1 DIF: Moderate LOC: The study of economics, and definitions of economics TOP: GDP Based on the Expenditure Approach NAT: Reflective Thinking 35. In GDP measurment, Investment spending includes a. spending by individual households on automobiles and durable goods b. spending by businesses on labor resources c. changes in business inventories d. spending by government on salaries e. spending by households on stocks and bonds ANS: C PTS: 1 DIF: Hard LOC: The study of economics, and definitions of economics TOP: GDP Based on the Expenditure Approach NAT: Reflective Thinking 36. Which of the following would not be counted in this year's GDP? a. Midwest Tractor Company's inventory of brand new farm equipment, which will remain unsold by year's end b. the inventory of new baseballs ordered by the Detroit Tigers c. the new house the Barnabys had constructed this year d. the vacation that the Cartiers enjoyed in France this winter e. Bruno's meal at the local La Casa Caliente ANS: D PTS: 1 DIF: Moderate LOC: The study of economics, and definitions of economics TOP: GDP Based on the Expenditure Approach NAT: Reflective Thinking 37. Which of the following is not considered a component of investment when calculating GDP? a. new residential construction b. construction of new factories c. net increases in inventory d. purchases of corporate stock e. production of new equipment ANS: D PTS: 1 DIF: Moderate LOC: The study of economics, and definitions of economics TOP: GDP Based on the Expenditure Approach NAT: Reflective Thinking 38. Which of the following would not be included in GDP as government purchases? a. The local township repairs the roads. b. The state government funds a state university. c. The federal government sends out Social Security checks. d. The federal government pays a lawyer as a public defender. e. The state government buys computer time. ANS: C PTS: 1 DIF: Moderate LOC: The study of economics, and definitions of economics TOP: GDP Based on the Expenditure Approach Tracking the U.S. Economy NAT: Reflective Thinking 225 39. Which of the following is included in GDP as government purchases? a. Social Security payments to elderly citizens b. welfare benefits distributed to the poor c. outright grants from government to recipients d. payments to clerical workers hired by government e. unemployment compensation benefits ANS: D PTS: 1 DIF: Easy LOC: The study of economics, and definitions of economics TOP: GDP Based on the Expenditure Approach NAT: Reflective Thinking 40. Which of the following is not considered a component of government purchases in calculating GDP? a. the cost of a new federal prison b. the cost of building a new road c. unemployment compensation payments d. payments made to plow public roads after a snowstorm e. the cost of police protection ANS: C PTS: 1 DIF: Moderate LOC: The study of economics, and definitions of economics TOP: GDP Based on the Expenditure Approach NAT: Reflective Thinking 41. Which of the following is not included in GDP? a. the value of the restoration of an old painting b. interest payments on the national debt c. the cost of a new vending machine d. government expenditure on a new bridge e. a purchase of legal services by a household ANS: B PTS: 1 DIF: Moderate LOC: The study of economics, and definitions of economics TOP: GDP Based on the Expenditure Approach NAT: Reflective Thinking 42. 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 ANS: A PTS: 1 DIF: Moderate LOC: The study of economics, and definitions of economics TOP: GDP Based on the Expenditure Approach NAT: Analytic 43. 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 ANS: B PTS: 1 DIF: Moderate LOC: The study of economics, and definitions of economics TOP: GDP Based on the Expenditure Approach 226 NAT: Analytic Chapter 7 44. Net exports is the value of a. exports minus the value of imports b. imports minus the value of exports c. imports minus tariffs d. exports minus tariffs e. exports plus the value of imports minus depreciation ANS: A PTS: 1 DIF: Moderate LOC: The study of economics, and definitions of economics TOP: GDP Based on the Expenditure Approach NAT: Analytic 45. Which of the following statements about exports and imports is true? a. Both imports and exports are added to a nation's GDP. b. Both imports and exports are subtracted from a nation's GDP. c. Imports are added to a nation's GDP; exports are subtracted. d. Exports are added to a nation's GDP; imports are subtracted. e. Neither imports nor exports are included in a nation's GDP. ANS: D PTS: 1 DIF: Moderate LOC: The study of economics, and definitions of economics TOP: GDP Based on the Expenditure Approach NAT: Analytic 46. Which of the following is not a component of aggregate expenditure? a. exports b. investment c. imports d. transfer payments e. government purchases ANS: D PTS: 1 DIF: Easy LOC: The study of economics, and definitions of economics TOP: GDP Based on the Expenditure Approach NAT: Analytic 47. Use the following data to calculate GDP: consumption = $2,000; gross investment = $600; government purchases = $500; net exports = -$40; transfer payments = $340. a. GDP = $2,720 b. GDP = $3,060 c. GDP = $3,140 d. GDP = $3,400 e. GDP cannot be determined due to insufficient data ANS: B PTS: 1 DIF: Moderate LOC: The study of economics, and definitions of economics TOP: GDP Based on the Expenditure Approach NAT: Reflective Thinking 48. Which of the following would not increase U.S. GDP? a. increased demand in Costa Rica for California-made personal computers b. increased demand in Alabama for California-made personal computers c. increased production of computers in California, but no increase in the number sold d. increased shipments of computers from the U.S. to Canada e. increased shipments of Ghanian cocoa to the United States on Greek vessels ANS: E PTS: 1 DIF: Hard LOC: The study of economics, and definitions of economics TOP: GDP Based on the Expenditure Approach Tracking the U.S. Economy NAT: Reflective Thinking 227 49. The largest component of aggregate expenditure is a. government purchases b. transfer payments c. imports d. consumption e. investment ANS: D PTS: 1 DIF: Easy LOC: The study of economics, and definitions of economics TOP: GDP Based on the Expenditure Approach NAT: Analytic Exhibit 7-1 Real GDP $1,800 1,900 2,000 2,100 2,200 2,300 Consumption $1,540 1,620 1,700 1,780 1,860 1,940 Planned investment $100 100 100 100 100 100 Government purchases $200 200 200 200 200 200 50. Given the data in Exhibit 7-1, calculate aggregate expenditure. a. $1,800 b. $1,900 c. $2,000 d. $2,200 e. $2,300 ANS: C PTS: 1 DIF: Moderate LOC: The study of economics, and definitions of economics TOP: GDP Based on the Expenditure Approach NAT: Reflective Thinking 51. A problem inherent in using value added to measure GDP is that the method does not avoid double counting. a. True b. False ANS: B PTS: 1 DIF: Easy LOC: The study of economics, and definitions of economics TOP: GDP Based on the Income Approach NAT: Analytic 52. Aggregate income is defined as a. the sum of income earned by all laborers in the world economy b. the sum of income earned by all workers in the private sector c. the total income of all individuals who contribute resources to the market production of output d. total income after all income taxes but before paying other payroll taxes e. total income after purchases of necessities ANS: C PTS: 1 DIF: Easy LOC: The study of economics, and definitions of economics TOP: GDP Based on the Income Approach 228 NAT: Analytic Chapter 7 53. If an economy produces final output worth $5 trillion, then the amount of gross income generated by that production a. is $5 trillion b. is more than $5 trillion c. is $5 trillion minus taxes d. would be $5 trillion if profits were zero e. would be $5 trillion if costs of production were zero ANS: A PTS: 1 DIF: Moderate LOC: The study of economics, and definitions of economics TOP: GDP Based on the Income Approach NAT: Reflective Thinking 54. When a refrigerator worth $1,000 is produced and sold, its contribution to the GDP is measured on the expenditure side by its sale price and on the income side by a. the wages earned by the workers in the firm that produced it b. the wages earned by the workers and the profits earned by the owners of the firm that produced it c. wages, interest, and rent paid by the firm's owners to those who contributed to making the refrigerator d. wages, interest, and rent paid by the firm's owners to those who contributed to making the refrigerator, less taxes e. wages, interest, and rent paid by the firm's owners, plus the profit they kept for themselves ANS: E PTS: 1 DIF: Hard LOC: The study of economics, and definitions of economics TOP: GDP Based on the Income Approach NAT: Reflective Thinking 55. Double counting in the value added 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 ANS: E PTS: 1 DIF: Easy LOC: The study of economics, and definitions of economics TOP: GDP Based on the Income Approach NAT: Analytic 56. Double counting in the value added 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 ANS: C PTS: 1 DIF: Hard LOC: The study of economics, and definitions of economics TOP: GDP Based on the Income Approach Tracking the U.S. Economy NAT: Analytic 229 57. Katrina pays $40 for a meal at a fancy restaurant. The ingredients used in it probably cost the restaurant $10. The value added to GDP by the purchase of this meal is a. $30 b. $40 c. $70 d. $40 plus the wages paid the chef and waiters e. $40 plus the profit earned by the restaurant's owner ANS: A PTS: 1 DIF: Easy LOC: The study of economics, and definitions of economics TOP: GDP Based on the Income Approach NAT: Reflective Thinking 58. The final market value of a good is a. the sum of values added at all stages of production b. the value added at one stage of production c. greater than the sum of all the values added at all stages of production d. less than the sum of all the values added at all stages of production e. less than the price for which it is sold ANS: A PTS: 1 DIF: Moderate LOC: The study of economics, and definitions of economics TOP: GDP Based on the Income Approach NAT: Analytic 59. Jimmy Earl, a farmer, sells $20 worth of peanuts to a factory that turns them into peanut butter, which is then sold for $45. Which of the following is true? a. Total value added is $65. b. The value of final sales is $65. c. The value of final sales is $25. d. Total value added is $25. e. Total value added is $45. ANS: E PTS: 1 DIF: Moderate LOC: The study of economics, and definitions of economics TOP: GDP Based on the Income Approach NAT: Reflective Thinking 60. A wholesale nursery purchases six dozen gladiolus bulbs for $5. The nursery sells the six dozen resulting flowers to a wholesale florist for $10. The wholesale florist delivers the flowers to a retail florist for $15. The flowers are sold by the retail florist for $75 to the bereaved Jones family to use at great-grandfather Jones's wake. What is the value added by the retail florist? a. $10 b. $15 c. $25 d. $60 e. $75 ANS: D PTS: 1 DIF: Moderate LOC: The study of economics, and definitions of economics TOP: GDP Based on the Income Approach 230 NAT: Reflective Thinking Chapter 7 61. Value added is a. the sum of all income earned by resource suppliers b. actual investment minus planned investment c. any payment of income that adds to the domestic spending stream d. the value of a product minus the cost of materials e. the increase in the value of a financial asset such as a stock or bond ANS: D PTS: 1 DIF: Easy LOC: The study of economics, and definitions of economics TOP: GDP Based on the Income Approach NAT: Analytic 62. If a firm hires labor for $6,000, pays rent of $2,000, buys raw materials for $10,000, earns profits of $800, and sells its output for $25,000, the firm's value added is a. $6,200 b. $9,000 c. $15,000 d. $18,000 e. $18,800 ANS: C PTS: 1 DIF: Hard LOC: The study of economics, and definitions of economics TOP: GDP Based on the Income Approach NAT: Reflective Thinking 63. If a firm hires labor for $8,000, pays rent of $4,000, buys raw materials for $13,000, earns profits of $1,200, and sells its output for $31,000, the firm's value added is a. $4,800 b. $10,000 c. $18,000 d. $25,000 e. $26,200 ANS: C PTS: 1 DIF: Hard LOC: The study of economics, and definitions of economics TOP: GDP Based on the Income Approach NAT: Reflective Thinking 64. If a firm hires labor for $20,000, pays rent of $12,000, buys raw materials for $6,000, earns profits of $3,000, and sells its output for $41,000, the firm's value added is a. $0 b. $15,000 c. $35,000 d. $38,000 e. $41,000 ANS: C PTS: 1 DIF: Hard LOC: The study of economics, and definitions of economics TOP: GDP Based on the Income Approach Tracking the U.S. Economy NAT: Reflective Thinking 231 65. If a firm hires labor for $4,000, pays rent of $1,500, buys raw materials for $6,000, earns profits of $500, and sells its output for $14,000, the firm's value added is a. $12,000 b. $8,000 c. $6,000 d. $2,000 e. $500 ANS: B PTS: 1 DIF: Hard LOC: The study of economics, and definitions of economics TOP: GDP Based on the Income Approach NAT: Reflective Thinking 66. A farmer grows wheat and sells it to a bakery for $5. The bakery bakes the wheat into bread, which it sells to a distributor for $20. The distributor sells the bread to a supermarket for $30, which sells the bread to customers for $50. Which of the following is true? a. The value added by the distributor is $30. b. The supermarket contributed more, in value added, than the bakery. c. As a result of this activity, GDP rises by $50 minus the value added at each stage of production. d. Counting the value added at each stage instead of the final selling price creates a serious problem of double counting. e. The value added by the farmer is $20 because the wheat, which is worth $5, is necessary for each of the three remaining stages of production. ANS: B PTS: 1 DIF: Moderate LOC: The study of economics, and definitions of economics TOP: GDP Based on the Income Approach NAT: Reflective Thinking 67. Ann's Adventures, Inc. organizes and leads backpacking trips for $160. The business spends $30 on first aid equipment and $10 on maps. The amount of value added to GDP is a. $160 of backpacking trips b. $200 of backpacking trips, $30 of first aid equipment, and $10 of maps c. $160 of backpacking trips, $30 of first aid equipment, and $10 of maps d. $120 of backpacking trips e. $30 of first aid equipment and $10 of maps only ANS: D PTS: 1 DIF: Moderate LOC: The study of economics, and definitions of economics TOP: GDP Based on the Income Approach NAT: Reflective Thinking 68. The ultimate goal of studying the circular flow model is to understand the flow of a. money through the market system b. consumer spending through the economy c. goods and services through the product market d. resources, goods, and money through the economy e. resources through the resource markets and their allocation in production ANS: D PTS: 1 DIF: Moderate LOC: The study of economics, and definitions of economics TOP: Circular Flow of Income and Expenditure 232 NAT: Analytic Chapter 7 69. The simple circular flow model shows that a. households are on the demand side of both the product and resource market b. firms are on the demand side of both the product and resource market c. households are on the supply side of the resource market and the demand side of the product market d. firms and governments are on the supply side of the loanable funds market e. governments are on the demand side of the product market and the supply side of the resource market ANS: C PTS: 1 DIF: Easy LOC: The study of economics, and definitions of economics TOP: Circular Flow of Income and Expenditure NAT: Analytic 70. The two basic markets in the simple circular flow model are the a. product and resource market b. export and product market c. export and import market d. household market and the business market e. business market and the government market ANS: A PTS: 1 DIF: Moderate LOC: The study of economics, and definitions of economics TOP: Circular Flow of Income and Expenditure NAT: Analytic 71. In the resource market, a. businesses borrow money to buy the capital resources they need b. businesses sell services to the households c. firms provide the resources to the households d. households sell the resources to firms in return for factor payments e. resources flow from the business sector to the household sector ANS: D PTS: 1 DIF: Moderate LOC: The study of economics, and definitions of economics TOP: Circular Flow of Income and Expenditure NAT: Analytic 72. In the circular flow model, a. the flow of expenditures measures the dollar value on purchases of resources in the product market b. the flow of expenditures measures the dollar value of purchases of both goods and services c. the flow of income to the owners of labor only d. the flow of expenditures as they move through the loanable funds market e. the flow of funds from the product to the resource market ANS: B PTS: 1 DIF: Easy LOC: The study of economics, and definitions of economics TOP: Circular Flow of Income and Expenditure Tracking the U.S. Economy NAT: Analytic 233 73. The circular flow model a. measures identical flows through the different markets b. shows how firms maximize profits and minimize costs c. shows how competitive markets interact with noncompetitive markets d. measures the value of income earned by the public sector e. measures the value added by the business sector as it uses funds ANS: A PTS: 1 DIF: Moderate LOC: The study of economics, and definitions of economics TOP: Circular Flow of Income and Expenditure NAT: Analytic 74. Net taxes are indirect business taxes minus transfer payments. a. True b. False ANS: B PTS: 1 DIF: Moderate LOC: The study of economics, and definitions of economics TOP: Income Half of the Circular Flow NAT: Analytic 75. Disposable income equals personal income minus indirect business taxes. a. True b. False ANS: B PTS: 1 DIF: Moderate LOC: The study of economics, and definitions of economics TOP: Income Half of the Circular Flow NAT: Analytic 76. It is not possible for the government to spend more than it collects in taxes. a. True b. False ANS: B PTS: 1 DIF: Easy LOC: The study of economics, and definitions of economics TOP: Expenditure Half of the Circular Flow NAT: Analytic 77. The main function of financial markets is to direct consumers' saving to firms that use it for investment spending. a. True b. False ANS: A PTS: 1 DIF: Moderate LOC: The study of economics, and definitions of economics TOP: Expenditure Half of the Circular Flow NAT: Analytic 78. Which of the following is the largest component of GDP? a. investment (I) b. government spending (G) c. consumption (C) d. net exports (X - M) e. taxes (T) ANS: C PTS: 1 DIF: Easy LOC: The study of economics, and definitions of economics TOP: Expenditure Half of the Circular Flow 234 NAT: Analytic Chapter 7 79. Transfer payments are an injection into the circular flow. a. True b. False ANS: A PTS: 1 DIF: Easy LOC: The study of economics, and definitions of economics NAT: Analytic TOP: Leakages Equal Injections 80. The government budget must be balanced in order to have an equilibrium in the circular flow model. a. True b. False ANS: B PTS: 1 DIF: Moderate LOC: The study of economics, and definitions of economics NAT: Analytic TOP: Leakages Equal Injections 81. Taxes are an injection into the circular flow. a. True b. False ANS: B PTS: 1 DIF: Easy LOC: The study of economics, and definitions of economics NAT: Analytic TOP: Leakages Equal Injections 82. Exports are an injection into the circular flow. a. True b. False ANS: A PTS: 1 DIF: Easy LOC: The study of economics, and definitions of economics NAT: Analytic TOP: Leakages Equal Injections 83. Imports are a leakage from the circular flow. a. True b. False ANS: A PTS: 1 DIF: Easy LOC: The study of economics, and definitions of economics NAT: Analytic TOP: Leakages Equal Injections 84. Leakages include any diversion from the domestic spending stream. a. True b. False ANS: A PTS: 1 DIF: Moderate LOC: The study of economics, and definitions of economics NAT: Analytic TOP: Leakages Equal Injections 85. Suppose that the economy is in equilibrium with a trade surplus and and with saving less than investment. According to the circular flow model, the government's budget a. must be in deficit b. must be in surplus c. must be balanced d. could be in a surplus or a deficit e. could be in balance or a surplus ANS: B PTS: 1 DIF: Hard LOC: The study of economics, and definitions of economics Tracking the U.S. Economy NAT: Reflective Thinking TOP: Leakages Equal Injections 235 86. Suppose that the economy is in equilibrium with a trade deficit and that saving is greater than investment. According to the circular flow model, the government's budget a. must be in deficit b. must be in surplus c. must be balanced d. could be in a surplus or a deficit e. could be in balance or a deficit ANS: A PTS: 1 DIF: Hard LOC: The study of economics, and definitions of economics NAT: Reflective Thinking TOP: Leakages Equal Injections 87. Suppose that the economy is in equilibrium with the government budget is in deficit and with saving is less than investment. According to the circular flow model, a. imports must exceed exports b. imports must be less than exports c. imports must equal exports d. imports could be less than or equal to exports e. it is impossible to determine anything about inports and exports with the given information ANS: A PTS: 1 DIF: Hard LOC: The study of economics, and definitions of economics NAT: Reflective Thinking TOP: Leakages Equal Injections 88. Suppose that the economy is in equilibrium with the government budget in surplus and with saving is greater than investment. According to the circular flow model, a. imports must exceed exports b. imports must be less than exports c. imports must equal exports d. imports could be greater than or equal to exports e. it is impossible to determine anything about imports and exports using the given information ANS: B PTS: 1 DIF: Hard LOC: The study of economics, and definitions of economics NAT: Reflective Thinking TOP: Leakages Equal Injections 89. Suppose that the economy is in equilibrium with the government budget in surplus and with exports less than imports. According to the circular flow model, a. saving must exceed investment b. saving must be less than investment c. saving must equal investment d. saving could be greater than or equal to investment e. it is impossible to determine anything about saving and investment using the given information ANS: B PTS: 1 DIF: Hard LOC: The study of economics, and definitions of economics 236 NAT: Reflective Thinking TOP: Leakages Equal Injections Chapter 7 90. Suppose that the economy is in equilibrium with the government budget in deficit and with exports greater than imports. According to the circular flow model, a. saving must exceed investment b. saving must equal investment c. saving must be less than investment d. saving could be equal to or less than investment e. it is impossible to determine anything about saving and investment using the given information ANS: A PTS: 1 DIF: Hard LOC: The study of economics, and definitions of economics NAT: Reflective Thinking TOP: Leakages Equal Injections 91. If aggregate income equals aggregate expenditure, which of the following will not be true? a. Leakages from the circular flow must equal injections. b. Consumption plus investment plus government spending plus net exports must equal disposable income plus net taxes. c. Saving must equal investment. d. Saving plus net taxes and imports must equal investment plus government purchases and exports. e. Saving must equal investment if the government's budget is balanced and exports equal imports. ANS: C PTS: 1 DIF: Hard LOC: The study of economics, and definitions of economics NAT: Reflective Thinking TOP: Leakages Equal Injections 92. Which is true of leakages and injections in the circular flow? a. Leakages minus injections equal GDP. b. Injections minus leakages equal GDP. c. Leakages minus injections equal zero in equilibrium. d. Domestic leakages must equal domestic injections. e. Leakages must be greater than injections for the economy to be growing. ANS: C PTS: 1 DIF: Moderate LOC: The study of economics, and definitions of economics NAT: Analytic TOP: Leakages Equal Injections 93. Which of the following statements is true regarding leakages and injections? a. Government transfer payments must equal taxes because one is a leakage and one is an injection. b. Imports must equal exports since both are leakages. c. Saving must equal investment for the economy to be in equilibrium. d. Since leakages equal injections, aggregate income equals aggregate expenditure. e. Net taxes are an injection into the circular flow; net exports are a leakage. ANS: D PTS: 1 DIF: Hard LOC: The study of economics, and definitions of economics NAT: Analytic TOP: Leakages Equal Injections 94. Which of the following correctly states the leakages-injections approach to GDP? a. DI + (NT) = C + I + G + (X - M) b. S + C + T = DI c. S + C + (NT) = I + G + (X - M) d. S + (NT) + M = I + G + X e. S + (NT) = I + G + (X - M) ANS: D PTS: 1 DIF: Hard LOC: The study of economics, and definitions of economics Tracking the U.S. Economy NAT: Reflective Thinking TOP: Leakages Equal Injections 237 95. Which of the following is a leakage from the circular flow? a. investment b. imports c. government purchases d. government borrowing e. transfer payments ANS: B PTS: 1 DIF: Easy LOC: The study of economics, and definitions of economics NAT: Analytic TOP: Leakages Equal Injections 96. Which of the following is a leakage from the circular flow? a. government purchases of goods and services b. saving c. transfer payments d. exports e. consumption expenditures ANS: B PTS: 1 DIF: Easy LOC: The study of economics, and definitions of economics NAT: Analytic TOP: Leakages Equal Injections 97. Which of the following is a leakage from the circular flow? a. government purchases of goods and services b. taxes c. investment d. exports e. consumption expenditures ANS: B PTS: 1 DIF: Easy LOC: The study of economics, and definitions of economics NAT: Analytic TOP: Leakages Equal Injections 98. Which of the following is an injection into the circular flow? a. taxes b. saving c. transfer payments d. government borrowing e. disposable income ANS: C PTS: 1 DIF: Easy LOC: The study of economics, and definitions of economics NAT: Analytic TOP: Leakages Equal Injections 99. Which of the following is an injection into the circular flow? a. consumption b. exports c. taxes d. saving e. government borrowing ANS: B PTS: 1 DIF: Easy LOC: The study of economics, and definitions of economics 238 NAT: Analytic TOP: Leakages Equal Injections Chapter 7 100. Which of the following is an injection into the circular flow? a. government spending b. imports c. disposable income d. taxes e. saving ANS: A PTS: 1 DIF: Easy LOC: The study of economics, and definitions of economics NAT: Analytic TOP: Leakages Equal Injections 101. Which of the following is an injection into the circular flow? a. savings b. taxes c. government borrowing d. investment e. imports ANS: D PTS: 1 DIF: Easy LOC: The study of economics, and definitions of economics NAT: Analytic TOP: Leakages Equal Injections 102. Which of the following is not an injection into the circular flow? a. saving b. domestic exports c. government expenditure on goods d. transfer payments e. investment by firms ANS: A PTS: 1 DIF: Moderate LOC: The study of economics, and definitions of economics NAT: Analytic TOP: Leakages Equal Injections 103. Which of the following is an injection into the circular flow? a. interest rates b. saving c. taxes d. exports e. imports ANS: D PTS: 1 DIF: Easy LOC: The study of economics, and definitions of economics NAT: Analytic TOP: Leakages Equal Injections 104. Which of the following is an injection into the spending stream? a. planned investment b. imports c. indirect business taxes d. disposable income e. interest on savings ANS: A PTS: 1 DIF: Easy LOC: The study of economics, and definitions of economics Tracking the U.S. Economy NAT: Analytic TOP: Leakages Equal Injections 239 105. GDP reflects many things; however, it does not reflect the depletion of natural resources, leisure, or many things we as individuals do for ourselves. a. True b. False ANS: A PTS: 1 DIF: Moderate LOC: The study of economics, and definitions of economics TOP: Limitations of National Income Accounting NAT: Analytic 106. Which of the following is not a problem associated with GDP as a measure of social welfare? a. It excludes many nonmarket activities. b. It values all types of output equally. c. It excludes pollution damage. d. It excludes intermediate goods as a separate entry. e. It excludes the value of leisure time. ANS: D PTS: 1 DIF: Moderate LOC: The study of economics, and definitions of economics TOP: Limitations of National Income Accounting NAT: Analytic 107. An increase in household production will show up in GDP. a. True b. False ANS: B PTS: 1 DIF: Easy LOC: The study of economics, and definitions of economics TOP: Some Production Is Not Included in GDP NAT: Analytic 108. If drug enforcement policies result in price increases for illegal drugs and the quantity sold decreases, GDP will decrease. a. True b. False ANS: B PTS: 1 DIF: Hard LOC: The study of economics, and definitions of economics TOP: Some Production Is Not Included in GDP NAT: Reflective Thinking 109. GDP understates total economic activity because it ignores household production of goods and services. a. True b. False ANS: A PTS: 1 DIF: Easy LOC: The study of economics, and definitions of economics TOP: Some Production Is Not Included in GDP NAT: Analytic 110. Recent estimates of the size of the underground economy are that it is equivalent of 7.5 percent of GDP. a. True b. False ANS: A PTS: 1 DIF: Easy LOC: The study of economics, and definitions of economics TOP: Some Production Is Not Included in GDP 240 NAT: Analytic Chapter 7 111. Marianne and Laura are both homemakers with children. Then Laura takes a volunteer (unpaid) job at a hospital and hires Marianne to care for her preschool-age child. What happens to GDP? a. GDP increases b. GDP decreases c. there is no change in GDP d. GDP increases only if Marianne gives the child better care than Laura e. GDP increases only if the patients receive better care now that Laura works in the hospital ANS: A PTS: 1 DIF: Moderate LOC: The study of economics, and definitions of economics TOP: Some Production Is Not Included in GDP NAT: Reflective Thinking 112. Louis always knits ten sweaters a year to give as birthday gifts to his nephews. One year, instead of giving the sweaters as gifts, he sells them to a local store for $50 each; his nephews receive no gifts. What is the effect on GDP? a. GDP increases b. GDP decreases c. there is no change in GDP d. GDP increases only if the $50 sweaters are comparable to store-bought sweaters e. GDP increases only if the $50 price is less than the cost of materials ANS: A PTS: 1 DIF: Moderate LOC: The study of economics, and definitions of economics TOP: Some Production Is Not Included in GDP NAT: Reflective Thinking 113. Which of the following transactions is not included in GDP? a. Someone sells drugs in a vacant lot. b. Someone sells drugs in a pharmacy. c. A doctor treats a patient for drug addiction. d. A drug addict spends two months in a drug rehabilitation center. e. The drug addict buys cough medicine. ANS: A PTS: 1 DIF: Moderate LOC: The study of economics, and definitions of economics TOP: Some Production Is Not Included in GDP NAT: Reflective Thinking 114. Which of the following increases GDP? a. Workers take more vacation time. b. The length of the average work week decreases. c. Homeowners purchase lawn care services rather than maintain the lawns themselves. d. Meals cooked at home at an average cost of $10 are replaced by restaurant meals at an average cost of $10. e. More people wrap birthday presents in the Sunday newspaper's cartoon section. ANS: C PTS: 1 DIF: Moderate LOC: The study of economics, and definitions of economics TOP: Some Production Is Not Included in GDP Tracking the U.S. Economy NAT: Reflective Thinking 241 115. Which of the following would not be included in GDP? a. you hire someone to fix a leaky faucet b. you clean the house before relatives visit c. the value of housing services if you own your own home d. an unplanned drop in business inventories e. the Federal government buys U.S. soybeans to ship to Russia ANS: B PTS: 1 DIF: Moderate LOC: The study of economics, and definitions of economics TOP: Some Production Is Not Included in GDP NAT: Reflective Thinking 116. An imputed payment a. is a payment that is due but not made b. is a payment not made through the market and therefore not counted in GDP c. refers to nonmarket goods and services being valued as if they were sold on a market d. refers to governmental services being valued at the cost of production e. refers to consumers imputing a value to the payment ANS: C PTS: 1 DIF: Moderate LOC: The study of economics, and definitions of economics TOP: Some Production Is Not Included in GDP NAT: Analytic 117. Which of the following would not be included in the measurement of GDP? a. federal government purchases of automobiles b. a purchase of California wine by a Canadian firm c. employers' payments for employees' medical insurance d. a state government's purchase of personal computers e. transactions in the underground economy ANS: E PTS: 1 DIF: Moderate LOC: The study of economics, and definitions of economics TOP: Some Production Is Not Included in GDP NAT: Reflective Thinking 118. GDP figures tend to understate the quantity of goods and services available because a. they ignore most houseshold production b. many items are counted twice or more in intermediate stages of production c. more women are entering the labor force d. firms often add less to inventories than they planned to e. exports are subtracted from GDP but imports are not added back in ANS: A PTS: 1 DIF: Moderate LOC: The study of economics, and definitions of economics TOP: Some Production Is Not Included in GDP NAT: Analytic 119. Because of activity in the underground economy, a. GDP statistics understate the true volume of economic activity b. GDP statistics overstate the true prices in the economy c. consumers are not as well off as GDP statistics indicate d. firms' profits are higher than GDP statistics indicate e. government revenue is higher than GDP statistics indicate ANS: A PTS: 1 DIF: Easy LOC: The study of economics, and definitions of economics TOP: Some Production Is Not Included in GDP 242 NAT: Analytic Chapter 7 120. GDP is a good measure of social welfare since it includes the value of leisure time. a. True b. False ANS: B PTS: 1 DIF: Easy LOC: The study of economics, and definitions of economics TOP: Leisure | Quality | and Variety NAT: Analytic 121. Which of the following would increase GDP? a. More people walk to work rather than drive cars. b. Consumers in rural areas switch from buying home heating oil to burning wood they collect on their own land. c. Farm families grow more for themselves than for the market. d. Neither the price nor the quantity of television sets changes, but the quality of sets improves. e. The amount spent on vacuum cleaners does not change, but quality decreases so much that more is spent on their repair. ANS: E PTS: 1 DIF: Hard LOC: The study of economics, and definitions of economics TOP: Leisure | Quality | and Variety NAT: Reflective Thinking 122. Which of the following would not be included in the measurement of GDP? a. the spark plugs you bought to tune up your car at home b. the government hiring a public relations consultant c. any improvements in product or service quality not reflected in a higher price d. winning a brand new Chevy truck in a contest e. sales of U.S. beef to Scotland ANS: C PTS: 1 DIF: Moderate LOC: The study of economics, and definitions of economics TOP: Leisure | Quality | and Variety NAT: Reflective Thinking 123. GDP is a poor measure of social well-being because a. the value of leisure time is not counted in GDP b. revenue earned on U.S. exports is ignored c. each dollar of government spending is valued at less than one-half of private spending d. consumer spending is more important than business spending and should be considered more valuable e. it values products at their market prices but ignores services produced ANS: A PTS: 1 DIF: Easy LOC: The study of economics, and definitions of economics TOP: Leisure | Quality | and Variety NAT: Analytic 124. GDP fails to measure changes in a. the prices of products caused by inflation b. the market value of goods and services since it uses market prices for valuation c. the quality of existing products that do not cause a change in price d. leisure time, since it is valued at the minimum wage and not the true opportunity cost of lost wages e. the production of services that are produced in the economy ANS: C PTS: 1 DIF: Easy LOC: The study of economics, and definitions of economics TOP: Leisure | Quality | and Variety Tracking the U.S. Economy NAT: Analytic 243 125. If U.S. net investment is positive, the nation's capital stock is growing. a. True b. False ANS: A PTS: 1 DIF: Moderate LOC: The study of economics, and definitions of economics TOP: What's Gross about Gross Domestic Product? NAT: Analytic 126. Depreciation refers to a decrease in the value of a durable good caused by a. an increase in the price level b. changes in the depreciation allowance c. wear and tear over time d. changes in tax law e. a decrease in its resale value ANS: C PTS: 1 DIF: Easy LOC: The study of economics, and definitions of economics TOP: What's Gross about Gross Domestic Product? NAT: Analytic 127. How does net domestic product (NDP) differ from gross domestic product (GDP)? a. GDP includes expenditures for gross products that pollute the environment; NDP does not. b. GDP is gross because it values spending on each good and service in dollar terms; NDP excludes taxes. c. GDP includes exports; NDP omits exports. d. GDP includes all government spending; NDP subtracts taxes. e. GDP includes that part of the capital stock used up in the production process; NDP does not. ANS: E PTS: 1 DIF: Moderate LOC: The study of economics, and definitions of economics TOP: What's Gross about Gross Domestic Product? NAT: Analytic 128. Depreciation is subtracted from GDP to get NDP. Depreciation a. represents the value of leisure goods b. measures changes in exchange rates c. represents income that we earn but do not receive d. represents investment undertaken merely to replace worn-out capital e. measures the effects of government subsidy programs ANS: D PTS: 1 DIF: Moderate LOC: The study of economics, and definitions of economics TOP: What's Gross about Gross Domestic Product? NAT: Analytic 129. Given the following hypothetical data: C = $3,000; I = $1,200; G = $2,000; X - M = -$500; depreciation = $200; transfer payments = $800, net domestic product is a. $5,500 b. $5,700 c. $6,200 d. $6,400 e. $6,900 ANS: A PTS: 1 DIF: Moderate LOC: The study of economics, and definitions of economics TOP: What's Gross about Gross Domestic Product? 244 NAT: Reflective Thinking Chapter 7 130. GDP is not a perfect measure of material well-being because it ignores a. production of goods and services by the government b. goods produced in the United States but shipped overseas c. negative externalities d. consumer spending on services e. business spending on equipment ANS: C PTS: 1 DIF: Moderate LOC: The study of economics, and definitions of economics TOP: GDP Does Not Reflect All Costs NAT: Analytic 131. The U.S. Department of Commerce has been developing so called "green accounting" to a. focus attention to the money side of GDP b. reflect the impact of pollution and natural resource depletion c. properly value the output of very new firms d. illustrate the difference between GDP and real GDP e. measure the value of the output produced by inexperienced workers ANS: B PTS: 1 DIF: Moderate LOC: The study of economics, and definitions of economics TOP: GDP Does Not Reflect All Costs NAT: Analytic 132. A shortcoming of national income accounting is that it ignores a. the depreciation of manufactured capital b. spending by poor households who are receiving government transfer payments c. spending on items such as handguns and attack dogs, since they represent a decline in social well-being d. the depletion of natural resources e. U.S. production that is sold overseas ANS: D PTS: 1 DIF: Easy LOC: The study of economics, and definitions of economics TOP: GDP Does Not Reflect All Costs NAT: Analytic 133. Which of the following is reflected in GDP? a. the value of leisure time b. the value of illegal goods and services c. emotional and psychological well-being d. costs of cleaning up after pollution e. the value of house maintenance performed by homeowners ANS: D PTS: 1 DIF: Easy LOC: The study of economics, and definitions of economics TOP: GDP Does Not Reflect All Costs NAT: Analytic 134. A decrease in GDP necessarily means that consumer welfare has decreased. a. True b. False ANS: B PTS: 1 DIF: Moderate LOC: The study of economics, and definitions of economics Tracking the U.S. Economy NAT: Analytic TOP: GDP and Economic Welfare 245 135. 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 ANS: A PTS: 1 DIF: Moderate LOC: The study of economics, and definitions of economics NAT: Analytic TOP: GDP and Economic Welfare 136. Limitations of the national income accounting system include a. valuing all output at its market price regardless of whether it contributes to a society's economic welfare b. placing a market value on all positive externalities but ignoring negative externalities c. accurate measurement of the value of leisure time d. double counting food produced on a farm for family consumption e. ignoring government production of goods and services ANS: A PTS: 1 DIF: Moderate LOC: The study of economics, and definitions of economics NAT: Analytic TOP: GDP and Economic Welfare 137. Which is not a shortcoming of GDP accounting? a. It ignores the underground economy. b. It excludes household production. c. It excludes the value of leisure time. d. It ignores changes in population. e. It has no mechanism for adjusting the figures for inflation. ANS: E PTS: 1 DIF: Easy LOC: The study of economics, and definitions of economics NAT: Analytic TOP: GDP and Economic Welfare 138. The statement that "GDP values all output equally" means that a. household production is treated the same as production by firms b. depreciation of manufactured capital is treated the same as depletion of natural resources c. the purchase of pollution control equipment is valued the same as the pollution itself d. leisure time is valued the same as time spent working at a job e. the market price of output is the measure of that output's value ANS: E PTS: 1 DIF: Easy LOC: The study of economics, and definitions of economics NAT: Analytic TOP: GDP and Economic Welfare 139. Nominal GDP is a better measure of the growth in production than real GDP is. a. True b. False ANS: B PTS: 1 DIF: Moderate LOC: The study of economics, and definitions of economics TOP: Accounting for Price Changes 246 NAT: Analytic Chapter 7 140. To accurately measure the growth rate of output between two years, one should use a. gross domestic product b. net domestic product c. real net investment d. real gross domestic product e. disposable income ANS: D PTS: 1 DIF: Easy LOC: The study of economics, and definitions of economics TOP: Accounting for Price Changes NAT: Analytic 141. Real GDP is the same thing as a. total spending on all goods and services b. constant-dollar GDP c. net domestic product d. nominal GDP adjusted for taxes e. domestic income ANS: B PTS: 1 DIF: Easy LOC: The study of economics, and definitions of economics TOP: Accounting for Price Changes NAT: Analytic 142. If nominal GDP increases by 3 percent from 2004 to 2005 and real GDP increases by 5 percent from 2004 to 2005, this indicates that a. depreciation occurred b. taxes increased c. the inflation rate decreased d. the price level decreased e. output decreased ANS: D PTS: 1 DIF: Easy LOC: The study of economics, and definitions of economics TOP: Accounting for Price Changes NAT: Reflective Thinking 143. Nominal GDP is measured in a. current-year prices b. base-year prices c. real dollars d. quantity of goods produced e. hours of employment ANS: A PTS: 1 DIF: Easy LOC: The study of economics, and definitions of economics TOP: Accounting for Price Changes NAT: Analytic 144. 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 ANS: D PTS: 1 DIF: Moderate LOC: The study of economics, and definitions of economics TOP: Accounting for Price Changes Tracking the U.S. Economy NAT: Reflective Thinking 247 145. If real GDP increased by 3 percent, then a. real output has increased by 3 percent b. the price level has increased by 3 percent c. consumer spending increased by 3 percent d. government spending increased by 3 percent e. the increase might have been caused by an increase in the price level, but we cannot tell for sure ANS: A PTS: 1 DIF: Moderate LOC: The study of economics, and definitions of economics TOP: Accounting for Price Changes NAT: Reflective Thinking 146. The base year for a price index is the year a. in which prices are lowest b. in which prices are highest c. in which real output is largest d. in which prices were stable e. that serves as a reference point ANS: E PTS: 1 DIF: Easy LOC: The study of economics, and definitions of economics NAT: Analytic TOP: Price Indexes 147. If the GDP deflator is 100 this year, a. there has been no inflation during the year b. the price level is the same as it was in the base year c. the price level is one hundred times what it was in the base year d. the price level is double what it was in the base year e. the inflation rate has been 100 percent per year since the base year ANS: B PTS: 1 DIF: Moderate LOC: The study of economics, and definitions of economics NAT: Reflective Thinking TOP: Price Indexes 148. The price index in the base year always equals a. 0 b. 1 c. 100 d. infinity e. 0.01 ANS: C PTS: 1 DIF: Moderate LOC: The study of economics, and definitions of economics NAT: Analytic TOP: Price Indexes 149. If the price index for 2008 was 100 and the price index for 2009 was 109, then how much did prices change between 2008 and 2009? a. 1 percent increase b. 8 percent increase c. 9 percent increase d. 12 percent increase e. 12 percent decrease ANS: C PTS: 1 DIF: Moderate LOC: The study of economics, and definitions of economics 248 NAT: Reflective Thinking TOP: Price Indexes Chapter 7 150. Suppose that in year 1 the respective prices of yogurt, candy bars, and popcorn are $1, $2, and $3. In year 2 the unit prices of each are $2, $3, and $4, respectively. Which of the following statements is true of the price level between year 1 and year 2? a. it doubled b. it increased by 33 percent c. it rose from $6 to $9 d. it went up from 106 to 109 e. it must have risen at a rate between 33 percent and 100 percent ANS: E PTS: 1 DIF: Hard LOC: The study of economics, and definitions of economics NAT: Reflective Thinking TOP: Price Indexes 151. If the CPI rises in one year from 220 to 230, the inflation rate is 10 percent. a. True b. False ANS: B PTS: 1 DIF: Moderate LOC: The study of economics, and definitions of economics NAT: Reflective Thinking TOP: Consumer Price Index 152. Assume the economy produces five goods. If the prices of three of the goods increase, then the price level must increase. a. True b. False ANS: B PTS: 1 DIF: Moderate LOC: The study of economics, and definitions of economics NAT: Reflective Thinking TOP: Consumer Price Index 153. If the CPI is 160 one year and 175 the next, the annual rate of inflation as measured by the CPI is approximately a. 4.5 percent b. 8.6 percent c. 9.4 percent d. 15 percent e. 175 percent ANS: C PTS: 1 DIF: Hard LOC: The study of economics, and definitions of economics NAT: Reflective Thinking TOP: Consumer Price Index 154. If the CPI is 220 one year and 210 the next, the annual rate of inflation as measured by the CPI is approximately a. -2.3 percent b. -4.6 percent c. 10 percent d. 4.8 percent e. 220 percent ANS: B PTS: 1 DIF: Moderate LOC: The study of economics, and definitions of economics Tracking the U.S. Economy NAT: Reflective Thinking TOP: Consumer Price Index 249 155. If the CPI is 200 one year and 206 the next year, the annual rate of inflation as measured by the CPI is approximately a. 103 percent b. 1 percent c. 6 percent d. 3 percent e. 206 percent ANS: D PTS: 1 DIF: Moderate LOC: The study of economics, and definitions of economics NAT: Reflective Thinking TOP: Consumer Price Index 156. To determine the CPI, you would need to know the a. current market basket at current- and base-year prices b. base-year market basket at current- and base-year prices c. current market basket at current prices and base-year market basket at base-year prices d. current market basket at base-year prices only e. current market basket at current prices only ANS: B PTS: 1 DIF: Hard LOC: The study of economics, and definitions of economics NAT: Analytic TOP: Consumer Price Index Exhibit 7-2 Product Bread Milk Gum Quantity in market basket 10 5 50 Price in base year $1.00 1.00 0.20 Price in current year $1.50 2.00 0.50 157. Use the information in Exhibit 7-2 to calculate the consumer price index in the current year. a. CPI = 2 b. CPI = 50 c. CPI = 55 d. CPI = 182 e. CPI = 200 ANS: E PTS: 1 DIF: Hard LOC: The study of economics, and definitions of economics NAT: Reflective Thinking TOP: Consumer Price Index 158. The consumer price index measures changes in a. the prices of all goods and services b. the prices of goods that are sold c. the total cost of a specific market basket of consumer goods and services d. the total costs of all goods and services e. the total costs of goods and services purchased by firms ANS: C PTS: 1 DIF: Easy LOC: The study of economics, and definitions of economics 250 NAT: Analytic TOP: Consumer Price Index Chapter 7 159. The Consumer Price Index is a measure of the a. cost of a market basket of consumer goods and services relative to its cost in some base year b. change in the average price of a market basket of "necessary" goods and services c. annual inflation rate in the producers' goods market d. change in the average price level of all final goods and services e. average price of all goods and services relative to their price last year ANS: A PTS: 1 DIF: Hard LOC: The study of economics, and definitions of economics NAT: Analytic TOP: Consumer Price Index 160. If the CPI this year is 162 and last year it was 170, what do we know about the inflation rate this year? a. It is positive. b. It is negative. c. It has decreased since last year. d. It has increased since last year. e. It is the same as last year. ANS: B PTS: 1 DIF: Hard LOC: The study of economics, and definitions of economics NAT: Reflective Thinking TOP: Consumer Price Index Exhibit 7-3 Year 2001 2002 2003 2004 2005 Price Index 100 105 110 120 132 Nominal GDP $ 95 billion $110 billion $120 billion $125 billion $137.5 billion 161. Refer to Exhibit 7-3. Between 2001 and 2002, real GDP for this nation a. increased by slightly less than $10 billion b. decreased by slightly more than $5 billion c. remained constant d. increased by only about $1 billion e. cannot be determined from the information given ANS: A PTS: 1 DIF: Hard LOC: The study of economics, and definitions of economics NAT: Reflective Thinking TOP: Consumer Price Index 162. Refer to Exhibit 7-3. Between 2002 and 2003, real GDP for this nation a. decreased by slightly more than $5 billion b. increased by slightly more than $4 billion c. remained constant d. increased by only about $1 billion e. cannot be determined from the information given ANS: B PTS: 1 DIF: Hard LOC: The study of economics, and definitions of economics Tracking the U.S. Economy NAT: Reflective Thinking TOP: Consumer Price Index 251 163. Refer to Exhibit 7-3. Between 2002 and 2005, real GDP for this nation a. increased more than $5 billion b. decreased more than $5 billion c. increased by less than $1 billion d. decreased by less than $1 billion e. cannot be determined from the information above ANS: D PTS: 1 DIF: Hard LOC: The study of economics, and definitions of economics NAT: Reflective Thinking TOP: Consumer Price Index 164. Refer to Exhibit 7-3. Between 2004 and 2005, real GDP for this nation a. increased by about $5 billion b. decreased by about $5 billion c. remained almost constant d. increased by about $2 billion e. cannot be determined from the information given ANS: C PTS: 1 DIF: Moderate LOC: The study of economics, and definitions of economics NAT: Reflective Thinking TOP: Consumer Price Index 165. The CPI overstates the true inflation rate because it ignores changes in consumers' purchasing patterns as relative prices change. a. True b. False ANS: A PTS: 1 DIF: Moderate LOC: The study of economics, and definitions of economics NAT: Analytic TOP: Problems with the CPI 166. The CPI tends to understate the true rate of inflation. a. True b. False ANS: B PTS: 1 DIF: Moderate LOC: The study of economics, and definitions of economics NAT: Analytic TOP: Problems with the CPI 167. The CPI overstates the true inflation rate because it does not fully incorporate the effects of quality improvements. a. True b. False ANS: A PTS: 1 DIF: Moderate LOC: The study of economics, and definitions of economics NAT: Analytic TOP: Problems with the CPI 168. In order to convert nominal GDP to real GDP, we must divide a. real GDP by the price index b. nominal GDP by the price index c. the price index by nominal GDP d. the price index by real GDP e. nominal GDP by real GDP ANS: B PTS: 1 DIF: Moderate LOC: The study of economics, and definitions of economics 252 NAT: Analytic TOP: Problems with the CPI Chapter 7 169. A panel of economists concluded that the current Consumer Price Index overstates increases in the "cost of living" by about a. 9 percent per year b. 3 percent per year c. 5 percent per year d. 7 percent per year e. 1 percent per year ANS: E PTS: 1 DIF: Easy LOC: The study of economics, and definitions of economics NAT: Analytic TOP: Problems with the CPI 170. Which of the following is true about the consumer price index (CPI) and the GDP price index? a. Both measures weigh prices by the quantities consumed in some base year. b. Both yield identical numbers for price level changes for any two years. c. A price level change indicated by the CPI is usually smaller because it includes only prices for a limited number of goods. d. The CPI measures changes in relative prices of goods; the GDP price index measures changes in the price level. e. A price level change indicated by the GDP price index is usually smaller because people tend to find substitutes for goods whose prices rise sharply. ANS: E PTS: 1 DIF: Hard LOC: The study of economics, and definitions of economics NAT: Reflective Thinking TOP: The GDP Price Index 171. If the GDP price index rises from 100 to 110 to 115 over three consecutive year, the inflation rate is decreasing. a. True b. False ANS: A PTS: 1 DIF: Hard LOC: The study of economics, and definitions of economics NAT: Reflective Thinking TOP: The GDP Price Index 172. If nominal GDP is $6 trillion in a particular year and base year GDP was $3 trillion, then the GDP price index is 167. a. True b. False ANS: B PTS: 1 DIF: Moderate LOC: The study of economics, and definitions of economics NAT: Reflective Thinking TOP: The GDP Price Index 173. If nominal GDP for a particular year is $4 trillion and real GDP for that year is $3 trillion, then the GDP price index is 133. a. True b. False ANS: A PTS: 1 DIF: Moderate LOC: The study of economics, and definitions of economics NAT: Reflective Thinking TOP: The GDP Price Index 174. If real GDP is $5 trillion for a particular year and the GDP price index is 140, then nominal GDP is $7 trillion. a. True b. False ANS: A PTS: 1 DIF: Moderate LOC: The study of economics, and definitions of economics Tracking the U.S. Economy NAT: Reflective Thinking TOP: The GDP Price Index 253 175. We can conclude that there has been inflation since the base year if the GDP price index in the current year is a. positive b. equal to zero c. less than 100 d. greater than 100 e. negative ANS: D PTS: 1 DIF: Moderate LOC: The study of economics, and definitions of economics NAT: Analytic TOP: The GDP Price Index 176. The GDP price index a. involves all final goods and services produced in the economy b. is derived from looking at quantities of goods sold rather than at prices c. is derived using the prices of only imported and exported goods and services d. is derived using the implicit prices of goods and services produced by the government e. involves all goods and services sold in the economy ANS: A PTS: 1 DIF: Easy LOC: The study of economics, and definitions of economics NAT: Analytic TOP: The GDP Price Index 177. Real GDP is measured in a. current-year prices b. base-year prices c. nominal dollars d. quality of goods produced e. hours of employment ANS: B PTS: 1 DIF: Moderate LOC: The study of economics, and definitions of economics NAT: Analytic TOP: The GDP Price Index 178. If real GDP in a particular year is $5,000 trillion and nominal GDP in that same year is $4,000 trillion, then the a. CPI is 125 b. economic activity has decreased 20 percent c. GDP price index is 125 d. GDP price index is 80 e. economy has grown by 20 percent ANS: D PTS: 1 DIF: Hard LOC: The study of economics, and definitions of economics NAT: Reflective Thinking TOP: The GDP Price Index 179. The country of Fishland had a GDP of 1,000 doubloons (the monetary unit) in 2003 and 1,500 dubloons in 2004. The GDP price index was 100 in 2003 and 150 in 2004. Between 2003 and 2004 real GDP in Irishland a. increased by 500 doubloons b. increased by 333 doubloons c. increased by 50 doubloons d. remained the same e. decreased by 50 doubloons ANS: D PTS: 1 DIF: Moderate LOC: The study of economics, and definitions of economics 254 NAT: Reflective Thinking TOP: The GDP Price Index Chapter 7 180. If we knew that nominal GDP was currently $5.4 trillion, and that GDP in dollars of 1997 purchasing power was $3.6 trillion, what would we know about the GDP price index? a. It would be 0.667. b. It would be 150. c. We would know nothing until we had current information on the price level. d. We would know only that a dollar buys more currently than it bought in 1997. e. It indicates that substantial deflation has occurred since 1997. ANS: B PTS: 1 DIF: Moderate LOC: The study of economics, and definitions of economics NAT: Reflective Thinking TOP: The GDP Price Index 181. If real GDP equals $200 billion this year and nominal GDP equals $300 billion, the price level since the base year has increased a. $100 billion b. $200 billion c. 50 percent d. 100 percent e. 33 percent ANS: C PTS: 1 DIF: Moderate LOC: The study of economics, and definitions of economics NAT: Reflective Thinking TOP: The GDP Price Index 182. 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 ANS: D PTS: 1 DIF: Moderate LOC: The study of economics, and definitions of economics NAT: Reflective Thinking TOP: The GDP Price Index 183. You could determine the value of the GDP price index if you knew a. current GDP at current- and base-year prices b. base-year GDP at current- and base-year prices c. current GDP at current prices and base-year GDP at base-year prices d. current GDP at base-year prices only e. current GDP at current prices only ANS: A PTS: 1 DIF: Hard LOC: The study of economics, and definitions of economics Tracking the U.S. Economy NAT: Analytic TOP: The GDP Price Index 255 184. A major difference between the CPI and the GDP price index is that the CPI includes a. all domestically produced goods and the price index includes only a sample of domestically produced goods b. all domestically produced goods and the price index includes a sample of goods consumed, including imported goods c. only a sample of domestically produced goods and the price index includes all domestically produced goods d. a sample of goods consumed, including imported goods, and the price index includes all domestically produced goods e. a sample of all goods consumed that are domestically produced, and the price index includes all goods produced ANS: D PTS: 1 DIF: Moderate LOC: The study of economics, and definitions of economics NAT: Analytic TOP: The GDP Price Index 185. If nominal GDP for a particular year is $4 trillion and real GDP for that year is $5 trillion, then the GDP price index for that year is a. 1.25 b. 20 c. 25 d. 80 e. 125 ANS: D PTS: 1 DIF: Moderate LOC: The study of economics, and definitions of economics NAT: Reflective Thinking TOP: The GDP Price Index 186. If nominal GDP for a particular year is $6 trillion and real GDP for that year is $5 trillion, then the GDP price index for that year is a. 1.2 b. 17 c. 20 d. 83 e. 120 ANS: E PTS: 1 DIF: Moderate LOC: The study of economics, and definitions of economics NAT: Analytic TOP: The GDP Price Index 187. If real GDP for a particular year is $5 trillion and the GDP price index for that year is 136, the nominal GDP for that year is a. $3.7 trillion b. $4 trillion c. $6.8 trillion d. $27 trillion e. $68 trillion ANS: C PTS: 1 DIF: Hard LOC: The study of economics, and definitions of economics 256 NAT: Reflective Thinking TOP: The GDP Price Index Chapter 7 188. If real GDP for the base year is $3 trillion, then nominal GDP for that year is a. $.03 trillion b. $0.3 trillion c. $3 trillion d. $30 trillion e. $300 trillion ANS: C PTS: 1 DIF: Hard LOC: The study of economics, and definitions of economics NAT: Reflective Thinking TOP: The GDP Price Index 189. Suppose that 1986 is our base year (price index equals 100) and that the 2000 price index was 200. If nominal GDP was $6.2 trillion in 2000, what was real GDP that year (measured in 1986 dollars)? a. $3.1 trillion b. $6.2 trillion c. $12.4 trillion d. $18.6 trillion e. $24.3 trillion ANS: A PTS: 1 DIF: Easy LOC: The study of economics, and definitions of economics NAT: Reflective Thinking TOP: The GDP Price Index 190. Chain-weighted indexes have less bias compared to fixed-weight indexes. a. True b. False ANS: A PTS: 1 DIF: Moderate LOC: The study of economics, and definitions of economics TOP: Moving From Fixed Weights to Chain Weights NAT: Analytic 191. A fixed-weight price index recognizes the fact that the composition of output changes over time. a. True b. False ANS: B PTS: 1 DIF: Hard LOC: The study of economics, and definitions of economics TOP: Moving From Fixed Weights to Chain Weights NAT: Analytic 192. A chain-weighted index recognizes the fact that the composition of output changes over time. a. True b. False ANS: A PTS: 1 DIF: Hard LOC: The study of economics, and definitions of economics TOP: Moving From Fixed Weights to Chain Weights NAT: Analytic 193. Problems with a fixed-weight price index include all of the following except one. Which is the exception? a. the index utilizes prices from the base year only b. the index does not account for relative price changes over time c. price distortions only decrease when there is a long time period covered d. base year does not include new products which came into existence later e. the price index does not take into consideration quality changes ANS: C PTS: 1 DIF: Moderate LOC: The study of economics, and definitions of economics TOP: Moving From Fixed Weights to Chain Weights Tracking the U.S. Economy NAT: Analytic 257 194. Chain-weighted indexes can not be calculated if some prices are going up while others are going down. a. True b. False ANS: B PTS: 1 DIF: Easy LOC: The study of economics, and definitions of economics TOP: CASE STUDY: The Price Is Right NAT: Analytic 195. Since 1982, computer prices a. rose in some years and fell in others, without changing much over the entire period b. have not varied much c. have fallen approximately 13 percent per year d. have risen more than 13 percent per year e. have become increasingly irrelevant because currently almost everyone owns a computer ANS: C PTS: 1 DIF: Easy LOC: The study of economics, and definitions of economics TOP: CASE STUDY: The Price Is Right NAT: Analytic 196. The rapid decline in computer prices since 1982 a. poses a problem for government statisticians trying to estimate real GDP b. has had very little effect on computer purchases c. has caused the demand curve for computers to shift to the right d. led government statisticians to overestimate the role of investment during the most recent economy expansion e. led government statisticians to underestimate the value of computer production ANS: A PTS: 1 DIF: Hard LOC: The study of economics, and definitions of economics TOP: CASE STUDY: The Price Is Right NAT: Analytic 197. As a result of the sharp decline in computer prices since 1982, the value of computer production a. has consistently been overestimated b. was overestimated in 1982 and underestimated in 2004, leading to an underestimate of growth in this sector c. was overestimated in 1982 and underestimated in 2004, leading to an underestimate of growth in this sector d. was underestimated in 1982 and overestimated in 2004, leading to an exaggeration of growth in this sector e. was underestimated in 1982 and overestimated in 2004, leading to an underestimate of growth in this sector ANS: D PTS: 1 DIF: Hard LOC: The study of economics, and definitions of economics TOP: CASE STUDY: The Price Is Right NAT: Analytic 198. Each month, the Bureau of Labor Statistics calculates the a. CPI b. Number of births in the U.S. c. nominal GDP d. cost of going to college e. All of the answers are correct ANS: A PTS: 1 DIF: Easy LOC: The study of economics, and definitions of economics TOP: CASE STUDY: Price Check on Aisle 2 258 NAT: Analytic Chapter 7 199. If Bureau of Labor Statistics data collectors find that the model of car they priced the previous month is no longer available on the market, they a. just drop that product from the calculation of the CPI b. ask the manufacturer to choose another of its models for the CPI calculation c. must look for an available model with very similar features d. keep entering the price of the car from the last month it was available e. None of the answers is correct ANS: C PTS: 1 DIF: Moderate LOC: The study of economics, and definitions of economics TOP: CASE STUDY: Price Check on Aisle 2 NAT: Reflective Thinking 200. The hedonic method of calculating prices breaks down the item under consideration into its characteristics and then estimates the value of each characteristics. a. True b. False ANS: A PTS: 1 DIF: Moderate LOC: The study of economics, and definitions of economics TOP: CASE STUDY: Price Check on Aisle 2 NAT: Analytic 201. The national income accounting system measures economic activity based on the concept of the a. triangular flow of output and income through different sectors of the economy b. stock of precious metals accumulated in the public treasury c. comparative advantage of crucial national industries d. circular flow of output and income through different sectors of the economy e. balance sheets of all a country’s corporations ANS: D PTS: 1 DIF: Moderate LOC: The study of economics, and definitions of economics NAT: Analytic TOP: The Product of a Nation 202. The value added at all production stages sums to the market value of the final good, and the value added for all final goods sums to GDP based on the income approach. a. True b. False ANS: A PTS: 1 DIF: Easy LOC: The study of economics, and definitions of economics TOP: GDP Based on the Income Approach NAT: Analytic 203. Consumption spending is the biggest aggregate expenditure, about a. one half b. three fifths c. two fifths d. two thirds e. seven tenths ANS: D PTS: 1 DIF: Moderate LOC: The study of economics, and definitions of economics TOP: Expenditure Half of the Circular Flow Tracking the U.S. Economy NAT: Analytic 259 204. The gross domestic product does capture changes in the a. prices at which final goods are sold b. availability of leisure time c. quality of products when prices do not change d. availability of new products e. All of the answers are correct ANS: A PTS: 1 DIF: Moderate LOC: The study of economics, and definitions of economics TOP: Leisure | Quality | and Variety NAT: Analytic 205. The economy’s production possibilities depend on what happens to a. fishing net investment b. gross investment c. net investment d. net domestic product e. computer network investment ANS: C PTS: 1 DIF: Moderate LOC: The study of economics, and definitions of economics TOP: What's Gross about Gross Domestic Product? NAT: Analytic 206. Suppose a loaf of bread sold for $3.00 in 2008. The price of bread then increases to $3.60 in 2009. The price index for bread is a. ($3.60/$3.00) = 1.20 b. ($3.00/$3.60) x 100 = 83.33 c. ($3.60/$3.00) x 100 = 120 d. ($3.00/$3.00) x 100 = 100 e. ($0.60/$3.00) x 100 = 20 ANS: C PTS: 1 DIF: Hard LOC: The study of economics, and definitions of economics NAT: Reflective Thinking TOP: Price Indexes 207. The CPI _____________ inflation because it includes an item in the market basket only after the product becomes ______________. a. overstates, unpopular b. overstates, obsolete c. overstates, widely used d. understates, widely used e. understates, obsolete ANS: C PTS: 1 DIF: Moderate LOC: The study of economics, and definitions of economics NAT: Analytic TOP: Problems with the CPI 208. If the CPI overstated inflation by 1 percent per year, then the average real wage, instead of dropping by 2 percent in the last two decades, actually increased by about a. 1 percent b. 2 percent c. 10 percent d. 20 percent e. 3 percent ANS: D PTS: 1 DIF: Moderate LOC: The study of economics, and definitions of economics 260 NAT: Analytic TOP: Problems with the CPI Chapter 7 Tracking the U.S. Economy 261
