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Measuring a Nations Income

Macroeconomics is
a. the study of market regulation.
b. the study of economy-wide phenomena.
c. the study of how households and firms make decisions and how they interact.
d. the study of money and financial markets.

Macroeconomics includes the study of topics such as:


a. national output, the national unemployment rate, the rate of inflation, and the trade
deficit.
b. the price of Novell stock, the wage rate of steel workers, and antitrust laws.
c. the expected effect of bad weather in Florida on the price of orange juice.
d. how prices coordinate the decisions of millions of buyers and sellers in the market.

Statistics such as GDP, the unemployment rate, the rate of inflation, and the trade balance
are
a. microeconomic, since they affect individual households and firms.
b. macroeconomic, since they tell us something about the economy as a whole.
c. both microeconomic and macroeconomic.
d. neither macroeconomic nor microeconomic, but properly in the realm of political
science.

Statistics such as individual stock prices, salaries of business executives, and prices of
California wines are
a. microeconomic, since they reflect situations in individual businesses and markets.
b. macroeconomic, since they refer to the economy as a whole.
c. both microeconomic and macroeconomic.

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d.

neither microeconomic nor macroeconomic.

Microeconomics is
a. the study of how households and firms make decisions, and how they interact in
markets.
b. the study of economics at the level of the industry.
c. the study of the economy-wide phenomena.
d. the study of small businesses.

The goal of macroeconomics is


a. to explain the economic changes that affect a particular household, firm, or market.
b. to explain the economic changes that affect many households, firms, and markets at
once.
c. to devise policies to deal with market failures such as monopoly, externalities,
common resources, and public goods.
d. all of the above.

The basic tools of supply and demand are


a. useful only in the analysis of economic behavior in individual markets.
b. useful in analyzing the overall economy, but not in analyzing individual markets.
c. not particularly useful in either macroeconomic analysis or microeconomic analysis.
d. as central to macroeconomic analysis as they are to microeconomic analysis.

The most closely watched economic statistic is


a. the Dow-Jones industrial average.
b. NASDAC.
c. GDP.
d. the inflation rate.

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The best single measure of the economic well-being of a society is believed to be


a. the stock market index.
b. consumption expenditures.
c. life expectancy.
d. Gross Domestic Product.

Gross Domestic Product measures


a. the total income of everyone in the economy.
b. the total expenditure on the economy's output of goods and services.
c. both a and b.
d. neither a nor b.

For the economy as a whole


a. income must equal expenditure.
b. expenditure exceeds income because of taxes.
c. income exceeds expenditure because of saving.
d. expenditure exceeds income because of the government budget deficit.

In a simple circular-flow diagram, total income and total expenditure in an economy


a. are seldom equal because of the dynamic changes which occur in an economy.
b. are equal only when all goods and services produced are sold.
c. are always equal because every transaction has both a buyer and a seller.
d. are always equal because of accounting rules.

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If you buy a new snowboard from the local sporting goods store, as a result of your
purchase
a. the increase in expenditure in the economy will equal the increase in income in the
economy.
b. the increase in expenditure in the economy will exceed the increase in income in the
economy.
c. the increase in income in the economy will exceed the increase in expenditure in the
economy.
d. it is impossible to tell whether the increase in income in the economy will equal the
increase in expenditure.

A circular-flow diagram is used to describe


a. how weather patterns affect the economy.
b. the most efficient organization of the work process.
c. the flow of income and expenditures in an economy.
d. how banks create money.

GDP in an economy consisting only of households and firms can be computed


a. by adding up the total expenditures by households.
b. by adding up the total income paid by firms.
c. by adding together the total expenditures by households and the total income paid by
firms.
d. either by the method described in a or the method described in b.

In the real economy, expenditure and income are always the same
a. only if households spend all of their income and buy all the goods and services
produced in the economy.
b. only if households spend all of their income.
c. only if households buy all the goods and services produced in the economy.
d. regardless of whether households spend all of their income or buy all of the goods
and services produced in the economy.

Which of the following statements best explains the equality between total income and
total expenditure in an economy?

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a.
b.
c.
d.

Government taxes firms and redistributes the money to households until household
income is high enough to equal total expenditures.
Total income and total expenditure are always equal in an economy because only
households purchase goods and services.
Total income and total expenditure are equal in an economy because every transaction
has both a buyer and a seller.
All of the above are correct explanations.

Gross Domestic Product is defined as


a. the market value of all final goods and services produced within a country in a given
period of time.
b. the market value of all final goods and services produced by a country's citizens in a
given period of time.
c. the market value of all goods and services produced within a country in a given
period of time.
d. the market value of all goods and services produced by a country's citizens in a given
period of time.

The real economy is more complicated than the one illustrated in a simple circular-flow
diagram because
a. households do not buy all goods and services produced in the economy, and
households do not spend all of their income on goods and services.
b. saving should be counted as part of expenditure.
c. taxes should be included as part of expenditure.
d. the income government gives poor people should be counted as government
production of human capital.

In order to include many different products in a summary or aggregate measure, GDP


a. uses a combination of weights and measures.
b. uses a combination of price indexes and costs of production of the products.
c. uses only the cost of production of the products.
d. uses market prices.

Which of the following would be the most useful way to measure GDP?
a. use the value of the products measured by market price to add together the
production of different kinds of goods and services

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b.
c.
d.

create a list showing the actual output of all final goods and services
find a common unit of measurement, such as weight or volume, to use in adding
together quantities of different kinds of goods and services
add together the physical quantities of all final goods and services produced

Market prices are used in adding together different kinds of products into a single,
summary measure of economic activity because
a. market prices rarely change, therefore the measure is easy to update each year.
b. market prices are set by government to reflect the importance of each product in the
economy.
c. market prices measure what people are willing to pay for different goods; hence, they
reflect the value of those goods.
d. None of the above is correct. Market prices are not used in summary measures of
economic activity.

The old adage, You cant compare apples and oranges,


a. means that GDP must be simply a list of all final products and their quantities.
b. does not apply to GDP because GDP does add together the values of many different
products in order to get a single measure of economic activity.
c. implies that our measure of GDP is erroneous.
d. means that certain agricultural products present particular difficulties in measuring
GDP.

Which of the goods and services produced in the economy are included as part of GDP?
a. all goods and services
b. all final goods and services bought and sold in legal markets
c. all final goods and services which are bought and sold in markets
d. all final goods and services bought and sold in legal markets plus the imputed value
of some other legal goods and services that are not bought and sold in markets

The value of the housing service provided to individuals who live in housing they own
themselves is included in GDP by
a. using the monthly mortgage payment.
b. estimating the rental value of the housing.

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c.
d.

using the purchase price of the house.


None of the above, it is excluded because the value cannot be measured directly.

An example of a non-market good or service that is included as an estimate in GDP is:


a. the estimated rental value of owner occupied homes.
b. the value of housework performed by individuals in their own homes.
c. the value of vegetables that people grow in their gardens.
d. all of the above are correct examples

Juanita rented a house in 1999, paying $500 each month. She could have continued renting
at $500 per month in 2000, but took the option of purchasing the house from the owner.
She now makes a $650 per month mortgage payment. The housing service Juanita receives
will be
a. included in 2000 GDP at the rate of $500 per month.
b. included in 2000 GDP at the rate of $650 per month.
c. excluded from 2000 GDP because Juanita owns the house and doesn't pay rent to
herself.
d. included in 2000 GDP at a rate higher than $650 per month because Jane also pays
taxes and insurance on the house.

Goods and services produced and sold illegally


a. are included in GDP to the extent that they can be measured.
b. are excluded from GDP.
c. are included in GDP only if income from the sales is reported on income tax returns.
d. are included in GDP.

Chris lives in Utah, where gambling is illegal. Chris becomes a professional gambler,
going to work each week in Idaho, where gambling is legal. In 2001, he earns $100,000
from his profession. What will be the effect of his earnings on GDP?
a. None of his earnings will be included in GDP because gambling is illegal in his home
state.
b. Only the part of his earnings spent in Idaho will be included in GDP.
c. GDP will increase by $100,000 because the income was earned legally.

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d.

GDP will increase by a fraction of $100,000, equal to the fraction of the time Chris
spends in Idaho.

Chris has been a professional gambler in Idaho, where gambling is legal, for several years.
He lives in Utah, however, and his wife Christa convinces him to start practicing his
profession in Utah, where gambling is illegal. In 2002, Chris earns $100,000 gambling in
Utah, and reports the income to the IRS as income from illegal sources. What will be the
effect of Chris's earnings on 2002 GDP?
a. GDP will be unaffected because the income was earned illegally.
b. GDP will increase by $100,000 because Chris reported the income to the IRS.
c. GDP will decrease by $100,000, representing the harm done to society by the illegal
gambling.
d. GDP could either increase or decrease as a result of Chris's illegal activity.

Suppose a prostitute living in Florida, where prostitution is illegal, earns $50,000 and
reports the income on her tax return under the category "income from illegal sources." Her
income
a. will be included as part of GDP.
b. will be included only if it was taxable.
c. will be seized by the Florida attorney general's office.
d. will be excluded from GDP because it was earned as a result of an illegal activity.

Suppose a professional gambler moves in 2000 from Utah, where he gambles illegally, to
Nevada, where gambling is legal. If he reports truthfully the same income in 2000 and
2001, as a result of his move
a. there is no effect on GDP because his income is included in both 2000 GDP and 2001
GDP.
b. there is no effect on GDP because his income is excluded in both 2000 GDP and 2001
GDP.
c. GDP will be higher in 2001.
d. GDP will be lower in 2001.

If Lynne decides to change the oil in her car herself instead of having the local garage
change the oil,
a. GDP will increase.
b. GDP will decrease.
c. GDP will be unaffected because the same service would be performed in either case.
d. GDP will be unaffected because only the value of the oil and filter is included in GDP.

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Latrell decides to hire Cynthia to mow his lawn, instead of mowing it himself, as he is
accustomed to doing. As a result of this transaction,
a. GDP will increase.
b. GDP will decrease.
c. GDP will be unaffected because the same service would be performed in either case.
d. GDP could increase or decrease, depending on whether Cynthia mows Latrells lawn
as well as Latrell could mow it himself.

George decides to cut his own hair rather than paying a barber to cut it, as had been his
custom. He buys scissors and comb and proceeds to cut his own hair. As a result of his
purchase and haircut
a. GDP stays the same, because the same service was performed by George as would
have been performed by the barber.
b. GDP is reduced, because George does not cut hair as well as the barber cuts hair.
c. GDP is reduced, because Georges haircut is no longer a market transaction.
d. we cannot tell whether GDP increases, decreases, or remains the same. The value of
Georges haircut is no longer included in GDP, but he did make an additional
purchase of scissors and a comb, which is included in GDP.

Igor and Natalia have each been doing their own housework. Igor decides to hire Natalia
to do his housework, and in turn, Natalia hires Igor to do her housework. As a result of
this change,
a. GDP falls.
b. GDP rises.
c. GDP is unaffected because housework is not included in GDP.
d. GDP is unaffected because the same work is being performed in both cases.

The value of intermediate goods that are sold


a. is added to GDP if they were produced and sold in the current year.
b. is added to GDP if they were produced in a previous year.
c. is not added to GDP.
d. is added to GDP unless they are sold at a loss.

Which of the following is an example of double counting?

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a.
b.
c.
d.

errors made in adding together the value of all final goods and services to measure
GDP
adding the market value of the wood used to produce a house to the market value of
the house in measuring GDP
adding the change in inventories to GDP
All of the above are examples of double counting.

GDP includes the value of final goods and not intermediate goods because
a. the value of intermediate goods is already included in the value of final goods.
b. the value of intermediate goods is too difficult to measure.
c. the value of intermediate goods is measured by GNP.
d. the value of intermediate goods depends on the number of separate production
processes.

The value of an intermediate good will be added to GDP if


a. the administration needs to show a rapidly growing economy in an election year.
b. the intermediate good is produced and added to a firms inventory of goods to be
used or sold at a later date.
c. the intermediate good is used to produce a final service rather than a final good.
d. None of the above is correct. The value of an intermediate good is never included in
GDP.

The Necco candy factory in Cambridge, Massachusetts, found that it had produced
100,000 more rolls of Neccos in 1980 than it sold during the year. The value of those
100,000 rolls
a. would be written off as a loss; hence, would not be included as part of 1980 GDP.
b. would be included as part of GDP during the year in which they were finally sold.
c. would be included as part of 1980 GDP in the category of inventory investment.
d. None of the above are correct answers.

Goods that go into inventory and are not sold during the current period
a. are included in GDP as inventory investment.

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b.
c.
d.

are intermediate goods until sold, hence, are not included in GDP.
are included in GDP as consumption.
are included in GDP as inventory investment, but not until the goods are sold.

Doug decides to earn extra income while in college by producing and selling ski caps. In
2001, he produces 50 more ski caps than he sells. In 2002, he sells all the ski caps he
produces, plus the 50 he couldn't sell in 2001. As a result,
a. the value of the 50 unsold caps increases GDP as inventory investment in 2001, and
increases GDP again when the caps are sold in 2002.
b. The value of the 50 unsold caps does not affect GDP in 2001, but increases GDP when
the caps are sold in 2002.
c. The value of the 50 unsold caps increases GDP as inventory investment in 2001, and
decreases GDP as negative inventory investment when sold in 2002.
d. The value of the 50 unsold caps increases GDP as inventory investment in 2001, and
has no net effect on GDP in 2002.

A company produces 500 units of an intermediate good on the last day of the year.
a. If it sells the good, GDP for that year will increase.
b. If it sells the good, GDP for that year will remain unchanged.
c. If it does not sell the good, GDP for that year will increase.
d. b and c.

The local Chevrolet dealership has an increase in inventory of 22 cars in 2000. In 2001 it
sells all 22 cars.
a. The value of the increased inventory will be counted as part of GDP in 2000, but the
value of the 22 cars sold in 2001 will not cause 2001 GDP to increase.
b. The value of the increased inventory will not affect 2000 GDP, but the sale of the cars
in 2001 will cause 2001 GDP to increase.
c. The value of the increased inventory will be counted as part of GDP in 2000 and the
value of the 22 cars sold in 2001 will cause 2001 GDP to increase.
d. Since the cars were not sold in 2000, they will not be included as part of 2000 GDP,
and since they were not produced in 2001, they will not be included as part of 2001
GDP.

Oiko Nomos buys a new computer in June 2001 and then sells it to a friend in December
2001. GDP
a. will include the value of both the June sale and the December sale.
b. will include the full value of the June sale, but only part of the value of the December
sale, since the computer had been used.

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c.
d.

will include the value of the June sale only.


will include the value of the December sale only, since that was the final sale of the
computer in 2001.

Oiko Nomos buys a new car in June 2000 and sells it to a friend in June 2001. As a result,
a. both 2000 GDP and 2001 GDP will include the value of the car.
b. 2000 GDP will include the value of the car, but 2001 GDP will not.
c. 2000 GDP will include the value of the car, and 2001 GDP will include the value of the
car minus depreciation.
d. the value of the car will be included in 2001 GDP only, since that was the year of final
sale.

Christopher buys a new house in 1999 for $80,000. He puts up a for sale sign in 2000 and
resells the same house for $90,000.
a. The 1999 sale will increase GDP by $80,000, and the 2000 sale will increase GDP by
$90,000.
b. The 1999 sale will increase GDP by $80,000, but the 2000 sale will not increase GDP.
c. The 1999 sale will increase GDP by $80,000, and the 2000 sale will increase GDP by
$10,000.
d. The 1999 sale will increase GDP by $80,000, and when the house is sold again in 2000,
1999 GDP will be adjusted to reflect the increased value of the house.

An American company owns a fast-food store in Lima, Peru. The value of the goods and
services produced in the store
a. are included in both Peruvian GDP and U.S. GDP.
b. are included partly in Peruvian GDP and partly in U.S. GDP.
c. are included in U.S. GDP, but not Peruvian GDP.
d. are included in Peruvian GDP, but not U.S. GDP.
e. none of the above

In addition to GDP, other measures of income for the economy include


a. gross national product, net national product, personal income, and disposable
personal income.
b. gross national product, net national product, net national profits, and personal
income.

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c.
d.

gross national product, net national profits, personal income, and disposable personal
income.
gross national product, net national product, personal income, and personal profits.

A South African citizen owns an ostrich ranch in the United States. The profits from the
ostrich ranch
a. are part of both South African GNP and U. S. GNP.
b. are part of South African GNP, but not part of South African GDP.
c. are part of South African GDP, but not part of South African GNP.
d. are part of U.S. GNP, but not part of South African GNP.
e. none of the above
TYPE: M SECTION: 2 OBJECTIVE: 2 RANDOM: Y
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An American company buys a pizza business in Italy. In 2001, it begins producing pizzas
for sale to Italians using only U.S. labor and materials. The value of pizza sales
a. will be included in U.S. GNP and in Italian GDP.
b. will be included in U.S. GDP and in Italian GNP.
c. will be included in U.S. GNP and in Italian GNP.
d. will be included in U.S. GDP and in Italian GDP.
e. none of the above

A Bulgarian owns an aircraft company in Poland. The company uses local labor and
materials.
a. The value of aircraft sales will be included in Polish GDP and in Bulgarian GNP.
b. The value of aircraft sales will be included in Polish GNP and in Bulgarian GDP.
c. The value of aircraft sales will be included in Polish GDP, and the profits will be
included in Bulgarian GNP.
d. The value of aircraft sales will be included in Polish GNP, and the profits will be
included in Bulgarian GDP.
e. none of the above

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U.S. GNP is calculated from U.S. GDP by


a. including income earned by foreigners in the United States and excluding income
earned by U.S. citizens abroad.
b. including income earned by U.S. citizens abroad and excluding income earned by
foreigners in the U.S.
c. including income earned by U.S. citizens in the U.S. and excluding income earned by
foreigners abroad.
d. including income earned by U.S. citizens abroad, and excluding income earned by
foreigners abroad.

How is NNP calculated?


a. by subtracting saving from the total income of citizens of a nation
b. by subtracting business expenses and taxes from the total profits earned by citizens of
a nation
c. by subtracting depreciation from the total income of citizens of a nation
d. by subtracting depreciation from the total profits earned by citizens of a nation

In the national income accounts, depreciation is called


a. "consumption of fixed capital."
b. "total tax depreciation."
c. "consumption of circulating capital."
d. "depreciation."

National income is defined as


a. all income produced within a country.
b. the total income earned by a nations residents in the production of goods and
services.
c. the total income earned by a nations residents from the production of goods and
services within the borders of the country.
d. the income received by the national government.

National income is found from net national product by

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a.
b.
c.
d.

excluding profits of corporations.


excluding retained earnings of corporations.
excluding depreciation.
excluding indirect business taxes.

The income that households and noncorporate businesses receive is called


a. proprietors income.
b. personal income.
c. disposable personal income.
d. national income.

Personal income differs from GDP and NNP in that


a. it includes retained earnings, corporate income taxes and social insurance
contributions, and excludes interest and transfer payments received by households
from government.
b. it excludes retained earnings, corporate income taxes, social insurance contributions,
and interest and transfer payments received by households from government..
c. it excludes retained earnings, corporate income taxes and social insurance
contributions, and includes interest and transfer payments received by households
from government.
d. it includes retained earnings, corporate income taxes, social insurance contributions,
and interest and transfer payments received by households from government.

Disposable personal income is


a. the income that households have left after paying taxes and non-tax payments to the
government.
b. the income that households and noncorporate businesses have left after paying taxes
and non-tax payments to the government.
c. the income that households and businesses have left after paying taxes and non-tax
payments to the government.
d. the income that businesses have left after paying taxes and non-tax payments to the
government.

Suppose that in 2002, Christina earns $50,000 from her work, and also receives $2,000 in
interest from her government bonds. Her taxes total $8,000 for the year. How will
Christinas income and taxes affect the various measures of national income?
a. GDP will be higher by $50,000, NNP will be higher by $42,000, personal income will
be higher by $52,000, and disposable income will be higher by $44,000.

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b.
c.
d.

GDP will be higher by $52,000, NNP will be higher by $52,000, personal income will
be higher by $52,000, and disposable personal income will be higher by $44,000.
GDP will be higher by $50,000, NNP will be higher by $50,000, personal income will
be higher by $52,000, and disposable personal income will be higher by $44,000.
GDP will be higher by $50,000, NNP will be higher by $50,000, personal income will
be higher by $50,000, and personal disposable income will be higher by $42,000.

J & R Corporation earns income of $10 million in 2001. The corporation pays income
taxes of $2 million and social insurance contributions of $1 million. It has retained
earnings of $5 million. J & Rs economic activity will have the following differential effects
on national income measures.
a. NNP will increase by $5 million more than will personal income.
b. NNP will increase by $3 million more than will personal income.
c. NNP will increase by $8 million more than will personal income.
d. NNP will increase by $7 million more than will personal income.

Retained earnings are


a. the part of income that households retain after paying taxes.
b. the part of income that business retain after paying taxes.
c. the part of income that corporations pay to their owners in the form of dividends.
d. the part of income that corporations do not pay to their owners in the form of
dividends.

GDP measures the value of production that takes place within a specific interval of time.
a. a week or a month.
b. a month or a quarter.
c. a quarter or a year.
d. a year or a decade.

When the government reports that GDP "increased at an annual rate of 6.8 percent for the
fourth quarter of 1999,"
a. GDP actually increased by 6.8 percent during the fourth quarter of 1999.
b. GDP actually increased by 27.2 percent during 1999.

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c.
d.

GDP actually increased by 1.7 percent during the fourth quarter of 1999.
GDP actually increased by 6.8 percent during 1999.

When the government reports that GDP "increased at an annual rate of 4 percent for the
first two quarters of 2000,"
a. GDP actually increased by 4 percent during the first quarter and 4 percent during the
second quarter.
b. GDP actually increased by 2 percent during the first quarter and 2 percent during the
second quarter.
c. GDP actually increased by 1 percent during the first quarter and 1 percent during the
second quarter.
d. GDP actually increased by 2 percent during the first half of 2000.
e. GDP actually increased by 4 percent during the first half of 2000.

The government reports that GDP "increased by 2 percent in the last quarter."
a. GDP increased by 8 percent for the year.
b. GDP increased at an annual rate of 8 percent during the last quarter.
c. GDP increased at an annual rate of 2 percent during the last quarter.
d. GDP increased at an annual rate of .5 percent during the last quarter.

The government reports that GDP "increased by 4 percent for the year."
a. GDP increased at an annual rate of 4 percent for the year.
b. GDP increased at an annual rate of 1 percent during the last quarter.
c. GDP increased at an annual rate of 16 percent for the year.
d. GDP increased by 1 percent each quarter.

When GDP is growing rapidly,


a. the other measures of the nations income are usually growing much more slowly.
b. the other measures of the nations income are usually growing much more rapidly.

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c.
d.

the other measures of the nations income are usually growing rapidly.
the other measures of the nations income are usually growing at widely different
rates.

Seasonal adjustment of quarterly GDP


a. is a statistical procedure that takes out of the data the effects of regular seasonal
changes.
b. adds a random component to the data to make them more statistically tractable.
c. makes it difficult to know what is really happening to GDP from quarter to quarter.
d. is done in some countries, but not in the U.S.

An identity is
a. an equation that must always be true by the way the variables in the equation are
defined.
b. the name of a variable.
c. a computer address.
d. the solution to an equation.

The four components of GDP are


a. consumption, money supply, government purchases, and exports.
b. consumption, investment, transfer payments, and imports.
c. consumption, investment, government purchases, and foreign exchange.
d. consumption, investment, government purchases, and net exports

Which of the following is not a component of GDP?


a. investment
b. government purchases
c. net exports

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d.

foreign exchange

In macroeconomics, investment is
a. spending on stocks, bonds, and other financial assets.
b. spending on real estate and financial assets.
c. spending on capital equipment, inventories, and structures, including new housing.
d. spending on capital equipment, inventories, and structures, excluding household
purchases of new housing.

a.
imports minus exports.
the purchases of domestically produced goods by foreigners minus the domestic
purchases of foreign goods.
exports minus imports.
b and c
a and b

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b.
c.
d.
e.
.

Government purchases include spending on goods and services by


a. local and state governments, but not the federal government.
b. local, state and federal governments.
c. the federal government only.
d. state and federal governments only.

The state of New Jersey builds a new toll road for $50 billion in 2000, and collects tolls of
$10 billion for the year. As a result of this project,
a. 2000 GDP increases by $60 billion.
b. 2000 GDP increases by $50 billion.
c. 2000 GDP increases by $10 billion.
d. 2000 GDP increases by $40 billion.

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The Arizona state highway department spends $10 million in 2000 to install new cattle
guards in its roads.
a. 2000 GDP is unaffected because only federal government purchases are included in
GDP.
b. 2000 GDP increases by $10 million because state government purchases are included
in GDP.
c. 2000 GDP increases by less than $10 million because the value of the cattle guards will
be spread over the expected useful life of the guards.
d. 2000 GDP increases by more than $10 million because of the reduction in accident
rates.

If you buy a seafood dinner in a local 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.

If a textbook publishing company buys new U.S. computer equipment to increase worker
productivity,
a. investment will be higher, but GDP will be unchanged, since the computers will
replace workers.
b. neither investment nor GDP will be higher, since computers are not final goods.
c. investment will be higher, but GDP will be higher only if workers are, indeed, more
productive.
d. investment and GDP will both be higher because computers are final goods, and
investment is a component of GDP.

An Oregon freight company buys a new truck made in Utah by a Japanese company. As a
result
a. U.S. investment and GDP increase, but Japanese GDP is unaffected.
b. U.S. investment and Japanese GDP increase, but U.S. GDP is unaffected.
c. U.S. investment, U.S. GDP and Japanese GDP are unaffected, because trucks are
intermediate goods.
d. U.S. investment, U.S. GDP, and Japanese GDP all increase.

Your cousin buys a television set produced in the United States by a Slovakian company
that hires U.S. workers. As a result of the purchase

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a.
b.
c.
d.

GNP and consumption both increase by the amount of the sale, but GDP increases by
a smaller amount.
GDP and consumption both increase by the amount of the sale, but GNP does not
increase.
GDP and consumption both increase by the amount of the sale, but GNP increases by
a smaller amount.
GNP and consumption both increase by the amount of the sale, but GDP does not
increase.

If exports are smaller than imports, net exports


a. are positive.
b. are negative.
c. are larger than imports.
d. will increase GDP.

If a U.S. citizen buys a tractor made in Belarus,


a. U.S. net exports decrease, and U.S. GDP decreases.
b. U.S. net exports are unaffected, and U.S. GDP decreases.
c. U.S. net exports are unaffected, and U.S. GDP is unaffected.
d. U.S. net exports decrease but U.S. GDP is unaffected.

If a U.S. household buys a $50 wool sweater from Canada,


a. U.S. consumption increases by $50, U.S. imports increase by $50, and U.S. GDP
increases by $50.
b. U.S. consumption increases by $50, U.S. imports increase by $50, but U.S. GDP is
unaffected.
c. U.S. consumption increases by $50, U.S. imports are unaffected, and U.S. GDP is
unaffected.
d. U.S. consumption increases by $50, U.S. exports increase by $50, and U.S. GDP
increases by $50.

Ingrid buys a pair of shoes produced by an American-owned shoe manufacturer in Italy.


As a result,
a. U.S. consumption increases, U.S. net exports decrease, U.S. GDP is unaffected, but
U.S. GNP increases.

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b.
c.
d.

U.S. consumption increases, U.S. net exports decrease, U.S. GDP increases, but U.S.
GNP is unaffected.
U.S. consumption increases, U.S. net exports decrease, U.S. GNP increases, but Italian
GDP is unaffected.
U.S. consumption increases, U.S. net exports are unaffected, U.S. GDP is unaffected,
but Italian GDP increases.

If an American student buys a computer from a Korean-owned company operating in


Switzerland,
a. U.S. net exports decrease, U.S. GDP and GNP are unaffected, Korean GDP increases,
and Swiss GNP increases.
b. U.S. net exports decrease, U.S. GDP and GNP decrease, Korean GNP increases, and
Swiss GDP increases.
c. U.S. net exports, GDP, and GNP are unaffected, Korean GNP increases, and Swiss
GDP increases.
d. U.S. net exports decrease, U.S. GDP and GNP are unaffected, Korean GNP increases,
and Swiss GDP increases.

A Mexican citizen buys an automobile produced in the United States by a Chinese


company. As a result,
a. U.S. net exports, GNP, and GDP increase, Chinese GDP increases, Mexican net
exports decrease, and Mexican GDP is unaffected.
b. U.S. net exports and GDP increase, Chinese GNP increases, Mexican net exports
decrease, and Mexican GDP and GNP are unaffected.
c. U.S. net exports, GNP, and GDP are unaffected, Chinese GNP increases, Mexican net
exports decrease, and Mexican GDP and GNP fall.
d. U.S. net exports increase, U.S. GNP and GDP are unaffected, Chinese GNP increases,
Mexican net exports decrease, and Mexican GNP and GDP are unaffected.

The United States government pays private contractors $10 billion to repair the interstate
highway system through Salt Lake City in preparation for the 2002 Winter Olympics. As a
result,
a. GDP is unaffected, since no new roads are built.
b. GDP is unaffected, since the government is using money which taxpayers would have
spent anyway.
c. GDP increases by $10 billion, since government purchases are part of GDP.
d. GDP decreases by $10 billion, since the repairs represent depreciation expenses.

The U.S. Air Force pays a Turkish citizen $30,000 to work on a U.S. 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.

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b.
c.
d.

U.S. government purchases increase by $30,000 and U.S. GNP increases by $30,000.
U.S. GDP and net exports are unaffected.
U.S. government purchases, net exports, GDP, and GNP are unaffected.
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.

Raft River Power, located in Idaho, buys a large turbine generator from a Norwegianowned factory located in New Hampshire.
a. U.S. investment, GDP, and GNP all increase by the same amount.
b. U.S. investment increases, but GDP and GNP are unaffected by the purchase.
c. U.S. investment and GNP increase by the same amount, but U.S. GDP increases by a
smaller amount.
d. U.S. investment and GDP increase by the same amount, but U.S. GNP increases by a
smaller amount.

A transfer payment is
a. the term that is used to indicate that your paycheck has been automatically deposited
to your bank account.
b. a form of government spending that is not made in exchange for a currently produced
good or service.
c. a payment for moving expenses a worker receives when he or she is transferred by an
employer to a new location.
d. a payment that is automatically transferred from your bank account to pay your
utility bill.

Which of the following represents a transfer payment?


a. the government sends your grandfather his social security check.
b. you transfer $1,000 from your bank account to a mutual fund.
c. the bank transfers $10 quarterly interest to your savings account.
d. your employer automatically transfers $100 each month from your pay to a nontaxable medical spending account.

You send a gift of $500 to your brother in Montana. When it is received,


a. GDP increases because the $500 represents income to your brother.
b. GDP decreases because the $500 represents a reduction in your income.
c. GDP is unaffected because the $500 represents a transfer, not a purchase.

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d.

GDP increases because your brother will probably spend it.

If you win $5 million in the state lottery,


a. GDP will be unaffected.
b. GDP will increase by $5 million.
c. GDP will increase by less than $5 million.
d. GDP will increase by more than $5 million.

If the U.S. government pays a naval commander $50,000 in salary in 2000, and $30,000 in
retirement benefits in 2001,
a. each payment will be included in GDP as government purchases for the respective
years.
b. the 2000 payment is included in 2000 GDP as government purchases, but the 2001
payment is not included in 2001 GDP.
c. the 2000 payment is included in 2000 GDP as government purchases, and the 2001
payment is included in 2001 GDP as government transfer payments.
d. the 2000 payment is included in 2000 GDP as government purchases, and the 2001
payment is allocated to previous years' GDP according to the amount of work
performed each year.

The Conservation Reserve Program (CRP) specifies that the U.S. government will pay
farmers a certain amount per acre for each year for marginal land taken out of production
and used for wildlife habitat. Payments made to farmers under this program
a. will be included as part of GDP because the land is increasing the production of
wildlife.
b. will be included as part of GDP because the payments represent income to farmers.
c. will not be included as part of GDP because the payments do not represent purchases
of final goods or services.
d. will not be included as part of GDP because wildlife is less valuable than agricultural
crops.

Transfer payments
a. are included in GDP because they represent income to individuals.
b. are not included in GDP because they do not represent payments for currently
produced goods or services.
c. are included in GDP because the income will be spent for consumption.
d. are not included in GDP unless they represent unemployment compensation.

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Social Security payments are


a. included in GDP because they represent payment for work performed in the past.
b. included in GDP because they represent potential consumption.
c. excluded from GDP because they do not represent current government purchases of
goods and services.
d. excluded from GDP because they are not private pensions.

You buy pencils so that you can do your homework. Your state university buys pencils so
that your teachers can grade your homework. The pencil store buys pencils for its
employees' use. Which of these purchases will be counted as part of GDP?
a. your purchase only
b. your purchase and the pencil store's purchase
c. the pencil store's purchase and the university's purchase
d. your purchase and the university's purchase

Unemployment compensation
a. is part of GDP because it represents income.
b. is not part of GDP because it is a transfer payment.
c. is part of GDP because the recipients must have worked in the past to qualify.
d. is not part of GDP because the payments reduce business profits.

In 1998, U.S. GDP was


a. about $8.5 trillion.
b. about $85 trillion.
c. about $85 billion.
d. about $850 billion.

In 1998, GDP per person in the United States was

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a.
b.
c.
d.

more than $200,000.


less than $20,000.
more than $20,000.
about $2,000.

In the United States in 1998, consumption represented approximately


a. one-third of GDP.
b. one-half of GDP.
c. two-thirds of GDP.
d. three-fourths of GDP.

In 1998, U.S. net exports were


a. negative.
b. positive.
c. zero.
d. the largest component of GDP.

In 1998 government purchases of goods and services


a. were larger than consumption, but smaller than investment as a proportion of GDP.
b. were larger than investment, but smaller than consumption as a proportion of GDP.
c. were smaller than both consumption and investment as a proportion of GDP.
d. were larger than both consumption and investment as a proportion of GDP.

If total spending rises from one year to the next, then


a. the economy must be producing a larger output of goods and services.

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b.
c.
d.

prices at which goods and services are sold must be higher.


either the economy must be producing a larger output of goods and services, or the
prices at which goods and services are sold must be higher, or both.
net exports must be falling.

Real GDP
a. evaluates current production at the prices that prevailed in some specific year in the
past.
b. evaluates current production at current prices.
c. is not a valid measure of the economys performance, since prices actually change
from year to year.
d. is a measure of the value of goods only, hence, it excludes the value of services.

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.
a. Nominal GDP values production at current prices, while real GDP values production
at constant prices.

The best measure of a countrys production of goods and services is


a. nominal GDP.
b. nominal GNP.
c. real GDP.
d. real NNP.

Suppose GDP consists of wheat and rice, and in 2001, 20 bushels of wheat are sold at $4
per bushel, and 10 bushels of rice are sold at $2 per bushel. If the price of wheat was $1
per bushel and the price of rice was $2 per bushel in 2000, the base year,
a. nominal 2000 GDP is $100, real 2000 GDP is $40, and the GDP deflator is 40.

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b.
c.
d.

nominal 2000 GDP is $40, real 2000 GDP is $100, and the GDP deflator is 250.
nominal 2000 GDP is $100, real 2000 GDP is $40, and the GDP deflator is 250.
nominal 2000 GDP is $40, real 2000 GDP is $100, and the GDP deflator is 40.

In the country of Mainia, GDP consists of cranberries and maple syrup. In 2000, 50 units
of cranberries are sold at $10 per unit, and 100 units of maple syrup are sold at $5 per unit.
If the price of cranberries was $5 per unit and the price of maple syrup was $7.50 per unit
in 1999, the base year,
a. nominal 2000 GDP is $1,000, real 2000 GDP is $1,000, and the GDP deflator is 100.
b. nominal 2000 GDP is $1,000, real 2000 GDP is $1,250, and the GDP deflator is 83.3.
c. nominal 2000 GDP is $1,000, real 2000 GDP is $1,000, and the GDP deflator is 1.
d. nominal 2000 GDP is $1,000, real 2000 GDP is $833, and the GDP deflator is 125.

In Kiowa, the two products produced are corn and hogs. In 2001, 20 bushels of corn are
sold at $5 per bushel, and 8 hogs are sold at $50 each. In 2000, the base year, the price of
corn was $10 per bushel, and the price of hogs was $75 each.
a. Nominal 2001 GDP is $500, real 2001 GDP is $800, and the GDP deflator is 62.5.
b. Nominal 2001 GDP is $500, real 2001 GDP is $800, and the GDP deflator is 160.
c. Nominal 2001 GDP is $800, real 2001 GDP is $500, and the GDP deflator is 62.5.
d. Nominal 2001 GDP is $800, real 2001 GDP is $500, and the GDP deflator is 160.

Real GDP is
a. the production of goods and services valued at current year prices.
b. the production of goods and services valued at constant prices.
c. the production of goods and services valued at future year prices.
d. the production of goods and services valued at the ratio of current year prices to
constant year prices.

Which statement represents most correctly the relationship between nominal GDP and
real GDP?
a. Nominal GDP measures base-year production using base-year prices, while real GDP
measures current production using current prices.
b. Nominal GDP measures current production using base-year prices, while real GDP
measures current production using current prices.

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c.
d.

Nominal GDP measures current production using current prices, while real GDP
measures base-year production using base-year prices.
Nominal GDP measures current production using current prices, while real GDP
measures current production using base-year prices.

Which of the following statements about nominal GDP and real GDP is most accurate?
a. Nominal GDP is a better gauge of economic well-being than is real GDP.
b. Real GDP is a better gauge of economic well-being than is nominal GDP.
c. Real GDP and nominal GDP are equally good measures of economic well-being.
d. Whether real GDP or nominal GDP is a better measure of economic well-being
depends on the business cycle.

When economists talk about growth in the economy, they measure that growth with
a. the absolute change in nominal GDP.
b. the percentage change in real GDP.
c. the absolute change in real GDP.
d. the percentage change in nominal GDP.

The GDP deflator


a. is the ratio of nominal GDP to real GDP.
b. is the ratio of nominal GDP to real GDP multiplied by 100.
c. is the ratio of real GDP to nominal GDP.
d. is the ratio of real GDP to nominal GDP multiplied by 100.

If nominal GDP is $10 trillion and real GDP is $8 trillion, the GDP deflator is
a. .8
b. 1.25
c. 80

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d.

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If the GDP deflator is 150 and nominal GDP is $9,000 billion, then real GDP is
a. $600 billion.
b. $6,000 billion.
c. $1,350 billion.
d. $135 billion.

If the GDP deflator is 200 and real GDP is $80 billion, then nominal GDP is
a. $16,000 billion.
b. $40 billion.
c. $160 billion.
d. $4,000 billion.

The GDP deflator can be used to identify


a. the increase in nominal GDP that is due to an increase in prices rather than an
increase in production.
b. the increase in real GDP that is due to an increase in prices rather than an increase in
production.
c. the increase in the cost of living for typical U.S. consumers.
d. the reduction in government spending required to balance the federal budget.

Bjorn, an artist, sells the same number of etchings this year as last year, but at 20 percent
higher prices.
a. He must be better off than last year because his income is higher.
b. He cannot be better off than last year because he sold the same number of paintings
both years.
c. We do not have enough information to tell whether he is better off this year than last.
d. He is better off this year only if there was no inflation over the past year.

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A farmer produces the same output in 2001 as in 2000. His input prices increase by 50
percent, but so does his product price. We can conclude that
a. the farmer is better off in 2001.
b. the farmer was better off in 2000.
c. the farmer is equally well off in 2001 as in 2000.
d. we cannot tell whether the farmer is better off in 2001 or in 2000 without additional
information.

If the GDP deflator was 100 in the base year of 2000, and was 105 in 2002, we can say that
a. the price level increased by 105 percent from 2000 to 2002.
b. the price level increased by 5 percent from 2000 to 2002.
c. the price level increased by 205 percent from 2000 to 2002.
d. we cannot judge price increases from changes in the GDP deflator.

Which of the following is a correct statement about the growth of real GDP in the U.S.
economy?
a. Real GDP in 1998 was more than twice its level in 1970.
b. The output of goods and services grew on average about 3 percent per year from 1970
to 1998.
c. Continued growth in real GDP enables the typical American to enjoy greater
economic prosperity than did his or her parents and grandparents.
d. All of the above are correct statements.

Which of the following statements about the growth of real GDP in the U.S. economy is
incorrect?
a. Real GDP grew on average about 3 percent per year from 1970 to 1998.
b. The growth in real GDP measures the growth in the output of goods and services.
c. The growth of real GDP has been steady over time.
d. All of the above are incorrect statements.

Recessions are associated with which of the following?

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a.
b.
c.
d.
e.

rising unemployment
increased bankruptcies
falling profits
falling output
all of the above

GDP is used as the basic measure of a society's economic well-being. A better measure of
the economic well-being of individuals in society is
a. GDP per person.
b. the consumption component of GDP.
c. government expenditures per person.
d. the level of business investment.

During a presidential campaign, the incumbent argues that he should be reelected


because GDP grew by 12 percent during his 4-year term in office. You know that
population grew by 4 percent over the period, and that the GDP deflator increased by 8
percent during the past 4 years. You should conclude that
a. real GDP per person grew by 12 percent during the 4 years.
b. real GDP per person grew by 8 percent during the 4 years.
c. real GDP per person was unchanged during the 4 years.
d. real GDP per person decreased by 4 percent during the 4 years.

Suppose you find out that the GDP of China is $1,000 billion and the GDP of the United
States is $10,000 billion. You should conclude that
a. the typical person in the United States is 10 times as well off as the typical person in
China.
b. the typical person in the United States is more than 10 times as well off as the typical
person in China.
c. the typical person in the United States is less than 10 times as well off as the typical
person in China.
d. it is not possible to make a good comparison of the economic well-being of typical
individuals in the two countries without additional information.

Many things that society values, such as good health, high-quality education, enjoyable
recreation opportunities, and desirable moral attributes of the population, are not
measured as part of GDP.

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a.
b.

c.
d.

Therefore, GDP is not a useful measure of society's welfare.


However, GDP is still a useful measure of society's welfare because it measures a
nation's ability to purchase the inputs that can be used to help produce these
contributors to welfare.
However, GDP is still a useful measure of society's welfare because providing these
other attributes is the responsibility of government.
However, GDP is still the best measure of societys welfare because these other values
cannot actually be measured.

GDP per person is not a perfect measure of the well-being of individuals in society
because
a. it excludes the value of investment in real capital.
b. it excludes the value of money.
c. it excludes things like leisure time, the value of goods and services produced at home,
and environmental quality.
d. it excludes the role of government.

Real GDP in the United States is five times as great as it was 50 years ago, yet the GDP
weighs almost the same as it did a half-century ago. These facts suggest that
a. consumers are being ripped off with lower-quality goods.
b. we are no longer in danger of running out of raw materials.
c. each U.S. worker is more productive, and international trade is less expensive to
conduct.
d. Americans are actually consuming fewer goods per person than they did 50 years
ago.

International studies of the relationship between GDP per person and quality of life
measures such as life expectancy and literacy rates show that
a. larger GDP per person is associated with longer life expectancy and higher levels of
illiteracy.
b. larger GDP per person is associated with longer life expectancy and lower levels of
illiteracy.
c. larger GDP per person is associated with shorter life expectancy and higher levels of
illiteracy.
d. larger GDP per person is associated with shorter life expectancy and lower levels of
illiteracy.

Which of the following statements is accurate?


a. In rich countries, people typically live into their late seventies, while in poor countries,
people typically live only until their fifties or early sixties.

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b.
c.
d.

In rich countries, almost all the population can read, while in poor countries, about
half the population is illiterate.
Poor countries tend to have higher infant mortality rates, higher maternal mortality,
and higher rates of child malnutrition than do rich countries.
All of the above are accurate statements.

International GDP and socioeconomic data


a. leave no doubt that a nations GDP is closely associated with its citizens standard of
living.
b. are inconclusive about the relationship between GDP and the economic well-being of
citizens.
c. suggest that poor nations actually might enjoy a higher standard of living than do
rich nations.
d. indicate that there are few real differences in living standards around the world, in
spite of the large differences in GDP among nations.

In Russia, it is difficult to know whether the economy is growing or shrinking because


a. the Russian government has not yet adopted national income accounting.
b. the statisticians believe that producers are exaggerating the size of output.
c. a large part of the economy is underground, and is able to hide income from the
statisticians.
d. official government policy does not allow statistics on the economy to be made public.

Being able to measure the behavior of the economy with statistics such as GDP
a. is useful only in the accounting sense.
b. is all that is necessary in order for us to be able to understand the macroeconomy.
c. can be helpful in developing macroeconomic science, but is not useful for policymaking.
d. is a crucial step toward developing the science of macroeconomics.

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ANSWERS

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1 ~ANSWER:
b.
the study of economy-wide phenomena.
TYPE: M SECTION: INT OBJECTIVE: RANDOM: Y

2
~ANSWER:
a.
national output, the national unemployment rate, the rate of inflation, and the trade deficit.
TYPE: M SECTION: INT OBJECTIVE: RANDOM: Y
3
~ANSWER:
b.
macroeconomic, since they tell us something about the economy as a whole.
TYPE: M SECTION: INT OBJECTIVE: RANDOM: Y
4
~ANSWER:
a.
microeconomic, since they reflect situations in individual businesses and markets.
TYPE: M SECTION: INT OBJECTIVE: RANDOM: Y
5
~ANSWER:
a.
the study of how households and firms make decisions, and how they interact in markets.
TYPE: M SECTION: INT OBJECTIVE: RANDOM: Y
6 ANSWER:
b.
to explain the economic changes that affect many households, firms, and markets at once.
TYPE: M SECTION: INT OBJECTIVE: RANDOM: Y

7
~ANSWER:
d.
as central to macroeconomic analysis as they are to microeconomic analysis.
TYPE: M SECTION: INT OBJECTIVE: 1 RANDOM: Y
8
~ANSWER:
c.
GDP.
TYPE: M SECTION: INT OBJECTIVE: 1 RANDOM: Y
9

~ANSWER:
d.
Gross Domestic Product.
TYPE: M SECTION: INT OBJECTIVE: 1 RANDOM: Y
10
~ANSWER:
c.
both a and b.
TYPE: M SECTION: 1 OBJECTIVE: 1 RANDOM: Y
11
~ANSWER:
a.
income must equal expenditure.
TYPE: M SECTION: 1 OBJECTIVE: 1 RANDOM: Y
12
~ANSWER:
c.
are always equal because every transaction has both a buyer and a seller.
TYPE: M SECTION: 1 OBJECTIVE: 1 RANDOM: Y
13
~ANSWER:
a.
the increase in expenditure in the economy will equal the increase in income in the economy.
TYPE: M SECTION: 1 OBJECTIVE: 1 RANDOM: Y
14
~ANSWER:
c.
the flow of income and expenditures in an economy.
TYPE: M SECTION: 1 OBJECTIVE: 1 RANDOM: Y
15
~ANSWER:
d.
either by the method described in a or the method described in b.
TYPE: M SECTION: 1 OBJECTIVE: 1 RANDOM: Y
16
~ANSWER:
d.
regardless of whether households spend all of their income or buy all of the goods and services
produced in the economy.
TYPE: M SECTION: 1 OBJECTIVE: 1 RANDOM: Y
17

~ANSWER:
c.
Total income and total expenditure are equal in an economy because every transaction has both
a buyer and a seller.
TYPE: M SECTION: 1 OBJECTIVE: 1 RANDOM: Y
18
~ANSWER:
a.
the market value of all final goods and services produced within a country in a given period of
time.
TYPE: M SECTION: 1 OBJECTIVE: 1 RANDOM: Y
19
~ANSWER:
a.
households do not buy all goods and services produced in the economy, and households do not
spend all of their income on goods and services.
TYPE: M SECTION: 1 OBJECTIVE: 1 RANDOM: Y
20
~ANSWER:
d.
uses market prices.
TYPE: M SECTION: 2 OBJECTIVE: 2 RANDOM: Y
21
~ANSWER:
a.
use the value of the products measured by market price to add together the production of
different kinds of goods and services
TYPE: M SECTION: 2 OBJECTIVE: 2 RANDOM: Y
22
~ANSWER:
c.
market prices measure what people are willing to pay for different goods; hence, they reflect
the value of those goods.
TYPE: M SECTION: 2 OBJECTIVE: 2 RANDOM: Y
23
~ANSWER:
b.
does not apply to GDP because GDP does add together the values of many different products
in order to get a single measure of economic activity.
TYPE: M SECTION: 2 OBJECTIVE: 2 RANDOM: Y
24

~ANSWER:
d.
all final goods and services bought and sold in legal markets plus the imputed value of some
other legal goods and services which are not bought and sold in markets
TYPE: M SECTION: 2 OBJECTIVE: 2 RANDOM: Y
25
~ANSWER:
b.
estimating the rental value of the housing.
TYPE: M SECTION: 2 OBJECTIVE: 2 RANDOM: Y
26
~ANSWER:
a.
the estimated rental value of owner-occupied homes.
TYPE: M SECTION: 2 OBJECTIVE: 2 RANDOM: Y
27
~ANSWER:
a.
included in 2000 GDP at the rate of $500 per month.
TYPE: M SECTION: 2 OBJECTIVE: 2 RANDOM: Y
28
~ANSWER:
b.
are excluded from GDP.
TYPE: M SECTION: 2 OBJECTIVE: 2 RANDOM: Y
29
~ANSWER:
c.
GDP will increase by $100,000 because the income was earned legally.
TYPE: M SECTION: 2 OBJECTIVE: 2 RANDOM: Y
30
~ANSWER:
a.
GDP will be unaffected because the income was earned illegally.
TYPE: M SECTION: 2 OBJECTIVE: 2 RANDOM: Y
31
~ANSWER:
d.
will be excluded from GDP because it was earned as a result of an illegal activity.
TYPE: M SECTION: 2 OBJECTIVE: 2 RANDOM: Y

32
~ANSWER:
c.
GDP will be higher in 2001.
TYPE: M SECTION: 2 OBJECTIVE: 2 RANDOM: Y
33
~ANSWER:
b.
GDP will decrease.
TYPE: M SECTION: 2 OBJECTIVE: 2 RANDOM: Y
34
~ANSWER:
a.
GDP will increase.
TYPE: M SECTION: 2 OBJECTIVE: 2 RANDOM: Y
35
~ANSWER:
d.
we cannot tell whether GDP increases, decreases, or remains the same. The value of Georges
haircut is no longer included in GDP, but he did make an additional purchase of scissors and comb,
which is included in GDP.
TYPE: M SECTION: 2 OBJECTIVE: 2 RANDOM: Y
36
~ANSWER:
b.
GDP rises.
TYPE: M SECTION: 2 OBJECTIVE: 2 RANDOM: Y
37
~ANSWER:
c.
is not added to GDP.
TYPE: M SECTION: 2 OBJECTIVE: 2 RANDOM: Y
38
~ANSWER:
b.
adding the market value of the wood used to produce a house to the market value of the house
in measuring GDP
TYPE: M SECTION: 2 OBJECTIVE: 2 RANDOM: Y
39
~ANSWER:

a.
the value of intermediate goods is already included in the value of final goods.
TYPE: M SECTION: 2 OBJECTIVE: 2 RANDOM: Y
40
~ANSWER:
b.
the intermediate good is produced and added to a firms inventory of goods to be used or sold
at a later date.
TYPE: M SECTION: 2 OBJECTIVE: 2 RANDOM: Y
41
~ANSWER:
c.
would be included as part of 1980 GDP in the category of inventory investment.
TYPE: M SECTION: 2 OBJECTIVE: 2 RANDOM: Y
42
~ANSWER:
a.
are included in GDP as inventory investment.
TYPE: M SECTION: 2 OBJECTIVE: 2 RANDOM: Y
43
~ANSWER:
d.
The value of the 50 unsold caps increases GDP as inventory investment in 2001, and has no net
effect on GDP in 2002.
TYPE: M SECTION: 2 OBJECTIVE: 2 RANDOM: Y
44
~ANSWER:
d.
b and c.
TYPE: M SECTION: 2 OBJECTIVE: 2 RANDOM: Y
45
~ANSWER:
a.
The value of the increased inventory will be counted as part of GDP in 2000, but the value of
the 22 cars sold in 2001 will not cause 2001 GDP to increase.
TYPE: M SECTION: 2 OBJECTIVE: 2 RANDOM: Y
46
~ANSWER:
c.
will include the value of the June sale only.
TYPE: M SECTION: 2 OBJECTIVE: 2 RANDOM: Y

47
~ANSWER:
b.
2000 GDP will include the value of the car, but 2001 GDP will not.
TYPE: M SECTION: 2 OBJECTIVE: 2 RANDOM: Y
48
~ANSWER:
b.
The 1999 sale will increase GDP by $80,000, but the 2000 sale will not increase GDP.
TYPE: M SECTION: 2 OBJECTIVE: 2 RANDOM: Y
49 ANSWER:
d.
are included in Peruvian GDP, but not U.S. GDP.
TYPE: M SECTION: 2 OBJECTIVE: 2 RANDOM: Y

50
~ANSWER:
a.
gross national product, net national product, personal income, and disposable personal
income.
TYPE: M SECTION: 2 OBJECTIVE: 2 RANDOM: Y
51 ANSWER:
b.
are part of South African GNP, but not part of South African GDP.
TYPE: M SECTION: 2 OBJECTIVE: 2 RANDOM: Y

52 ANSWER:
a.
will be included in U.S. GNP and in Italian GDP.
TYPE: M SECTION: 2 OBJECTIVE: 2 RANDOM: Y

53 ANSWER:
c.
The value of aircraft sales will be included in Polish GDP, and the profits will be included in
Bulgarian GNP.
TYPE: M SECTION: 2 OBJECTIVE: 2 RANDOM: Y

54
~ANSWER:
b.
including income earned by U.S. citizens abroad and excluding income earned by foreigners in
the U.S.
TYPE: M SECTION: 2 OBJECTIVE: 2 RANDOM: Y
55

~ANSWER:
c.
by subtracting depreciation from the total income of citizens of a nation
TYPE: M SECTION: 2 OBJECTIVE: 2 RANDOM: Y
56
~ANSWER:
a.
"consumption of fixed capital."
TYPE: M SECTION: 2 OBJECTIVE: 2 RANDOM: Y
57
~ANSWER:
b.
the total income earned by a nations residents in the production of goods and services.
TYPE: M SECTION: 2 OBJECTIVE: 2 RANDOM: Y
58
~ANSWER:
d.

excluding indirect business taxes.

59
~ANSWER:
b.
personal income.
TYPE: M SECTION: 2 OBJECTIVE: 2 RANDOM: Y
60
~ANSWER:
c.
it excludes retained earnings, corporate income taxes and social insurance contributions, and
includes interest and transfer payments received by households from government.
TYPE: M SECTION: 2 OBJECTIVE: 2 RANDOM: Y
61
~ANSWER:
b.
the income that households and noncorporate businesses have left after paying taxes and nontax payments to the government.
TYPE: M SECTION: 2 OBJECTIVE: 2 RANDOM: Y
62
~ANSWER:
c.
GDP will be higher by $50,000, NNP will be higher by $50,000, personal income will be higher
by $52,000, and disposable personal income will be higher by $44,000.

TYPE: M SECTION: 2 OBJECTIVE: 2 RANDOM: Y


63
~ANSWER:
c.
NNP will increase by $8 million more than will personal income.
TYPE: M SECTION: 2 OBJECTIVE: 2 RANDOM: Y
64
~ANSWER:
d.
the part of income that corporations do not pay to their owners in the form of dividends.
TYPE: M SECTION: 2 OBJECTIVE: 2 RANDOM: Y
65
~ANSWER:
c.
a quarter or a year.
TYPE: M SECTION: 2 OBJECTIVE: 2 RANDOM: Y

66
~ANSWER:
c.
GDP actually increased by 1.7 percent during the fourth quarter of 1999.
TYPE: M SECTION: 2 OBJECTIVE: 2 RANDOM: Y
67
ANSWER: d. GDP actually increased by 2 percent during the first half of 2000.
TYPE: M SECTION: 2 OBJECTIVE: 2 RANDOM: Y

68
~ANSWER:
b.
GDP increased at an annual rate of 8 percent during the last quarter.
TYPE: M SECTION: 2 OBJECTIVE: 2 RANDOM: Y
69
~ANSWER:
a.
GDP increased at an annual rate of 4 percent for the year.
TYPE: M SECTION: 2 OBJECTIVE: 2 RANDOM: Y
70
~ANSWER:
c.
the other measures of the nations income are usually growing rapidly.
TYPE: M SECTION: 2 OBJECTIVE: 2 RANDOM: Y

71
~ANSWER:
a.
is a statistical procedure that takes out of the data the effects of regular seasonal changes.
TYPE: M SECTION: 2 OBJECTIVE: 2 RANDOM: Y
72
~ANSWER:
a.
an equation that must always be true by the way the variables in the equation are defined.
TYPE: M SECTION: 3 OBJECTIVE: 3 RANDOM: Y
73
~ANSWER:
d.
consumption, investment, government purchases, and net exports.
TYPE: M SECTION: 3 OBJECTIVE: 3 RANDOM: Y
74
~ANSWER:
d.
foreign exchange.
TYPE: M SECTION: 3 OBJECTIVE: 3 RANDOM: Y
75
~ANSWER:
c.
spending on capital equipment, inventories, and structures, including new housing.
TYPE: M SECTION: 3 OBJECTIVE: 3 RANDOM: Y
76 ANSWER:
d.
b and c
TYPE: M SECTION: 3 OBJECTIVE: 3 RANDOM: Y

77
~ANSWER:
b.
local, state, and federal governments.
TYPE: M SECTION: 3 OBJECTIVE: 3 RANDOM: Y
78
~ANSWER:
a.
2000 GDP increases by $60 billion.
TYPE: M SECTION: 3 OBJECTIVE: 3 RANDOM: Y

79
~ANSWER:
b.
2000 GDP increases by $10 million because state government purchases are included in GDP.
TYPE: M SECTION: 3 OBJECTIVE: 3 RANDOM: Y
80
~ANSWER:
d.
both GDP and consumption spending will be higher.
TYPE: M SECTION: 3 OBJECTIVE: 3 RANDOM: Y
81
~ANSWER:
d.
Investment and GDP will both be higher because computers are final goods, and investment is
a component of GDP.
TYPE: M KEY1: C SECTION: 2 OBJECTIVE: 2 RANDOM: Y
82
~ANSWER:
a.
U.S. investment and GDP increase, but Japanese GDP is unaffected.
TYPE: M SECTION: 3 OBJECTIVE: 3 RANDOM: Y
83
~ANSWER:
c.
GDP and consumption both increase by the amount of the sale, but GNP increases by a smaller
amount.
TYPE: M SECTION: 3 OBJECTIVE: 3 RANDOM: Y
84
~ANSWER:
b.
are negative.
TYPE: M SECTION: 3 OBJECTIVE: 3 RANDOM: Y
85
~ANSWER:
d.
U.S. net exports decrease but U.S. GDP is unaffected.
TYPE: M SECTION: 3 OBJECTIVE: 3 RANDOM: Y
86
~ANSWER:
b.

U.S. consumption increases by $50, U.S. imports increase by $50, but U.S. GDP is unaffected.

TYPE: M SECTION: 3 OBJECTIVE: 3 RANDOM: Y


87
~ANSWER:
a.
U.S. consumption increases, U.S. net exports decrease, U.S. GDP is unaffected, but U.S. GNP
increases.
TYPE: M SECTION: 3 OBJECTIVE: 3 RANDOM: Y
88
~ANSWER:
d.
U.S. net exports decrease, U.S. GDP and GNP are unaffected, Korean GNP increases, and Swiss
GDP increases.
TYPE: M SECTION: 3 OBJECTIVE: 3 RANDOM: Y
89
~ANSWER:
b.
U.S. net exports and GDP increase, Chinese GNP increases, Mexican net exports decrease, and
Mexican GDP and GNP are unaffected.
TYPE: M SECTION: 3 OBJECTIVE: 3 RANDOM: Y
90
~ANSWER:
c.
GDP increases by $10 billion, since government purchases are part of GDP.
TYPE: M KEY1: C SECTION: 2 OBJECTIVE: 2 RANDOM: Y
91
~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.
TYPE: M SECTION: 3 OBJECTIVE: 3 RANDOM: Y
92
~ANSWER:
d.
U.S. investment and GDP increase by the same amount, but U.S. GNP increases by a smaller
amount.
TYPE: M SECTION: 3 OBJECTIVE: 3 RANDOM: Y
93
~ANSWER:
b.
a form of government spending that is not made in exchange for a currently produced good or
service.

TYPE: M SECTION: 3 OBJECTIVE: 3 RANDOM: Y


94
~ANSWER:
a.
the government sends your grandfather his social security check.
TYPE: M SECTION: 3 OBJECTIVE: 3 RANDOM: Y
95
~ANSWER:
c.
GDP is unaffected because the $500 represents a transfer, not a purchase.
TYPE: M SECTION: 3 OBJECTIVE: 3 RANDOM: Y
96
~ANSWER:
a.
GDP will be unaffected.
TYPE: M SECTION: 3 OBJECTIVE: 3 RANDOM: Y
97
~ANSWER:
b.
the 2000 payment is included in 2000 GDP as government purchases, but the 2001 payment is
not included in 2001 GDP.
TYPE: M SECTION: 3 OBJECTIVE: 3 RANDOM: Y
98
~ANSWER:
c.
will not be included as part of GDP because the payments do not represent purchases of final
goods or services.
TYPE: M SECTION: 3 OBJECTIVE: 3 RANDOM: Y
99
~ANSWER:
b.
are not included in GDP because they do not represent payments for currently produced goods
or services.
TYPE: M SECTION: 3 OBJECTIVE: 3 RANDOM: Y
100
~ANSWER:
c.
excluded from GDP because they do not represent current government purchases of goods and
services.
TYPE: M SECTION: 3 OBJECTIVE: 3 RANDOM: Y

101
~ANSWER:
d.
Your purchase and the university's purchase.
TYPE: M SECTION: 3 OBJECTIVE: 3 RANDOM: Y
102
~ANSWER:
b.
is not part of GDP because it is a transfer payment.
TYPE: M SECTION: 3 OBJECTIVE: 3 RANDOM: Y
103 ANSWER:
a.
about $8.5 trillion.
TYPE: M SECTION: 3 OBJECTIVE: 3 RANDOM: Y

104
~ANSWER:
c.
more than $20,000.
TYPE: M SECTION: 3 OBJECTIVE: 3 RANDOM: Y
105
~ANSWER:
c.
two-thirds of GDP.
TYPE: M SECTION: 3 OBJECTIVE: 3 RANDOM: Y
106
~ANSWER:
a.
negative.
TYPE: M SECTION: 3 OBJECTIVE: 3 RANDOM: Y
107
~ANSWER:
b.
were larger than investment, but smaller than consumption as a proportion of GDP.
TYPE: M SECTION: 3 OBJECTIVE: 3 RANDOM: Y
108
~ANSWER:
c.
either the economy must be producing a larger output of goods and services, or the prices at
which goods and services are sold must be higher, or both.
TYPE: M SECTION: 4 OBJECTIVE: 4 RANDOM: Y

109
~ANSWER:
a.
evaluates current production at the prices that prevailed in some specific year in the past.
TYPE: M SECTION: 4 OBJECTIVE: 4 RANDOM: Y
110
~ANSWER:
a.
Nominal GDP values production at current prices, while real GDP values production at
constant prices.
111
~ANSWER:
c.
real GDP.
TYPE: M SECTION: 4 OBJECTIVE: 4 RANDOM: Y
112
~ANSWER:
c.
nominal 2000 GDP is $100, real 2000 GDP is $40, and the GDP deflator is 250.
TYPE: M SECTION: 4 OBJECTIVE: 4 RANDOM: Y
113
~ANSWER:
a.
nominal 2000 GDP is $1,000, real 2000 GDP is $1,000, and the GDP deflator is 100.
TYPE: M SECTION: 4 OBJECTIVE: 4 RANDOM: Y
114
~ANSWER:
a.
Nominal 2001 GDP is $500, real 2001 GDP is $800, and the GDP deflator is 62.5.
TYPE: M SECTION: 4 OBJECTIVE: 4 RANDOM: Y
115
~ANSWER:
b.
the production of goods and services valued at constant prices.
TYPE: M SECTION: 4 OBJECTIVE: 4 RANDOM: Y
116
~ANSWER:
d.
Nominal GDP measures current production using current prices, while real GDP measures
current production using base-year prices.

TYPE: M SECTION: 4 OBJECTIVE: 4 RANDOM: Y


117
~ANSWER:
b.
Real GDP is a better gauge of economic well-being than is nominal GDP.
TYPE: M SECTION: 4 OBJECTIVE: 4 RANDOM: Y
118
~ANSWER:
b.
the percentage change in real GDP.
TYPE: M SECTION: 4 OBJECTIVE: 4 RANDOM: Y
119
~ANSWER:
b.
is the ratio of nominal GDP to real GDP multiplied by 100.
TYPE: M SECTION: 4 OBJECTIVE: 4 RANDOM: Y
120
~ANSWER:
d.
125
TYPE: M SECTION: 4 OBJECTIVE: 4 RANDOM: Y
121
~ANSWER:
b.
$6,000 billion.
TYPE: M SECTION: 4 OBJECTIVE: 4 RANDOM: Y
122
~ANSWER:
c.
$160 billion.
TYPE: M SECTION: 4 OBJECTIVE: 4 RANDOM: Y
123
~ANSWER:
a.
the increase in nominal GDP that is due to an increase in prices rather than an increase in
production.
TYPE: M SECTION: 4 OBJECTIVE: 4 RANDOM: Y
124
~ANSWER:

c.
We do not have enough information to tell whether he is better off this year than last.
TYPE: M SECTION: 4 OBJECTIVE: 4 RANDOM: Y
125
~ANSWER:
d.
we cannot tell whether the farmer is better off in 2001 or in 2000 without additional
information.
TYPE: M SECTION: 4 OBJECTIVE: 4 RANDOM: Y
126
~ANSWER:
b.
the price level increased by 5 percent from 2000 to 2002.
TYPE: M SECTION: 4 OBJECTIVE: 4 RANDOM: Y
127
~ANSWER:
d.
All of the above are correct statements.
TYPE: M SECTION: 4 OBJECTIVE: 4 RANDOM: Y
128
~ANSWER:
c.
The growth of real GDP has been steady over time.
TYPE: M SECTION: 4 OBJECTIVE: 4 RANDOM: Y
129 ANSWER:
e.
all of the above
TYPE: M SECTION: 4 OBJECTIVE: 4 RANDOM: Y

130
~ANSWER:
a.
GDP per person.
TYPE: M SECTION: 5 OBJECTIVE: 5 RANDOM: Y
131
~ANSWER:
c.
real GDP per person was unchanged during the 4 years.
TYPE: M SECTION: 5 OBJECTIVE: 5 RANDOM: Y
132
~ANSWER:

d.
it is not possible to make a good comparison of the economic well-being of typical individuals
in the two countries without additional information.
TYPE: M SECTION: 5 OBJECTIVE: 5 RANDOM: Y
133
~ANSWER:
b.
However, GDP is still a useful measure of society's welfare because it measures a nation's
ability to purchase the inputs that can be used to help produce these contributors to welfare.
TYPE: M SECTION: 5 OBJECTIVE: 5 RANDOM: Y
134
~ANSWER:
c.
it excludes things like leisure time, the value of goods and services produced at home, and
environmental quality.
TYPE: M SECTION: 5 OBJECTIVE: 5 RANDOM: Y
135
~ANSWER:
c.
each U.S. worker is more productive, and international trade is less expensive to conduct.
TYPE: M SECTION: 5 OBJECTIVE: 5 RANDOM: Y
136
~ANSWER:
b.
larger GDP per person is associated with longer life expectancy and lower levels of illiteracy.
TYPE: M SECTION: 5 OBJECTIVE: 5 RANDOM: Y
137
~ANSWER:
a.
All of the above are accurate statements.
TYPE: M SECTION: 5 OBJECTIVE: 5 RANDOM: Y
138
~ANSWER:
a.
leave no doubt that a nations GDP is closely associated with its citizens standard of living.
TYPE: M SECTION: 5 OBJECTIVE: 5 RANDOM: Y
139
~ANSWER:
c.
a large part of the economy is underground, and is able to hide income from the statisticians.
TYPE: M SECTION: 5 OBJECTIVE: 5 RANDOM: Y

140
~ANSWER:
d.
is a crucial step toward developing the science of macroeconomics.
TYPE: M KEY1: C SECTION: 6 OBJECTIVE: 5 RANDOM: Y