Chapter 22

Measuring a Nation's Income

MULTIPLE CHOICE

. 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.

ANSWER: b. the study of economy-wide phenomena.

TYPE: M SECTION: INT OBJECTIVE: RANDOM: Y

. 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.

ANSWER: a. national output, the national unemployment rate, the rate of inflation, and the trade deficit.

TYPE: M SECTION: INT OBJECTIVE: RANDOM: Y

. 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.

ANSWER: b. macroeconomic, since they tell us something about the economy as a whole.

TYPE: M SECTION: INT OBJECTIVE: RANDOM: Y

. 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.

d. neither microeconomic nor macroeconomic.

ANSWER: a. microeconomic, since they reflect situations in individual businesses and markets.

TYPE: M SECTION: INT OBJECTIVE: RANDOM: Y

. 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.

ANSWER: a. the study of how households and firms make decisions, and how they interact in markets.

TYPE: M SECTION: INT OBJECTIVE: RANDOM: Y

. 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.

ANSWER: b. to explain the economic changes that affect many households, firms, and markets at once.

TYPE: M SECTION: INT OBJECTIVE: RANDOM: Y

. 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.

ANSWER: d. as central to macroeconomic analysis as they are to microeconomic analysis.

TYPE: M SECTION: INT OBJECTIVE: 1 RANDOM: Y

. The most closely watched economic statistic is

a. the Dow-Jones industrial average.

b. NASDAC.

c. GDP.

d. the inflation rate.

ANSWER: c. GDP.

TYPE: M SECTION: INT OBJECTIVE: 1 RANDOM: Y

. 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.

ANSWER: d. Gross Domestic Product.

TYPE: M SECTION: INT OBJECTIVE: 1 RANDOM: Y

. 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.

ANSWER: c. both a and b.

TYPE: M SECTION: 1 OBJECTIVE: 1 RANDOM: Y

. 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.

ANSWER: a. income must equal expenditure.

TYPE: M SECTION: 1 OBJECTIVE: 1 RANDOM: Y

. 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.

ANSWER: c. are always equal because every transaction has both a buyer and a seller.

TYPE: M SECTION: 1 OBJECTIVE: 1 RANDOM: Y

. 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.

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

. 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.

ANSWER: c. the flow of income and expenditures in an economy.

TYPE: M SECTION: 1 OBJECTIVE: 1 RANDOM: Y

. 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.

ANSWER: d. either by the method described in a or the method described in b.

TYPE: M SECTION: 1 OBJECTIVE: 1 RANDOM: Y

. 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.

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

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

a. Government taxes firms and redistributes the money to households until household income is high enough to equal total expenditures.

b. Total income and total expenditure are always equal in an economy because only households purchase goods and services.

c. Total income and total expenditure are equal in an economy because every transaction has both a buyer and a seller.

d. All of the above are correct explanations.

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

. 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.

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

. 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.

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

. 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.

ANSWER: d. uses market prices.

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

. 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

b. create a list showing the actual output of all final goods and services

c. find a common unit of measurement, such as weight or volume, to use in adding together quantities of different kinds of goods and services

d. add together the physical quantities of all final goods and services produced

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

. 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.

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

. The old adage, "You can't 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.

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

. 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

ANSWER: 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

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

. 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.

c. using the purchase price of the house.

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

ANSWER: b. estimating the rental value of the housing.

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

. 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

ANSWER: a. the estimated rental value of owner occupied homes.

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

. 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.

ANSWER: a. included in 2000 GDP at the rate of $500 per month.

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

. 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.

ANSWER: b. are excluded from GDP.

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

. 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.

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

ANSWER: c. GDP will increase by $100,000 because the income was earned legally.

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

. 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.

ANSWER: a. GDP will be unaffected because the income was earned illegally.

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

. 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.

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

. 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.

ANSWER: c. GDP will be higher in 2001.

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

. 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.

ANSWER: b. GDP will decrease.

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

. 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 Latrell's lawn as well as Latrell could mow it himself.

ANSWER: a. GDP will increase.

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

. 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 George's haircut is no longer a market transaction.

d. we cannot tell whether GDP increases, decreases, or remains the same. The value of George's haircut is no longer included in GDP, but he did make an additional purchase of scissors and a comb, which is included in GDP.

ANSWER: d. we cannot tell whether GDP increases, decreases, or remains the same. The value of George's haircut is no longer included in GDP, but he did make an additional purchase of scissors and a comb, which is included in GDP.

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

. 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.

ANSWER: b. GDP rises.

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

. 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.

ANSWER: c. is not added to GDP.

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

. Which of the following is an example of double counting?

a. errors made in adding together the value of all final goods and services to measure GDP

b. adding the market value of the wood used to produce a house to the market value of the house in measuring GDP

c. adding the change in inventories to GDP

d. All of the above are examples of double counting.

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

. 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.

ANSWER: a. the value of intermediate goods is already included in the value of final goods.

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

. 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 firm's 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.

ANSWER: b. the intermediate good is produced and added to a firm's inventory of goods to be used or sold at a later date.

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

. 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.

ANSWER: c. would be included as part of 1980 GDP in the category of inventory investment.

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

. Goods that go into inventory and are not sold during the current period

a. are included in GDP as inventory investment.

b. are intermediate goods until sold, hence, are not included in GDP.

c. are included in GDP as consumption.

d. are included in GDP as inventory investment, but not until the goods are sold.

ANSWER: a. are included in GDP as inventory investment.

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

. 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.

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

. 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.

ANSWER: d. b and c.

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

. 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.

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

. 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.

c. will include the value of the June sale only.

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

ANSWER: c. will include the value of the June sale only.

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

. 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.

ANSWER: b. 2000 GDP will include the value of the car, but 2001 GDP will not.

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

. 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.

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

. 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

ANSWER: d. are included in Peruvian GDP, but not U.S. GDP.

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

. 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.

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

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

ANSWER: a. gross national product, net national product, personal income, and disposable personal income.

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

. 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

ANSWER: b. are part of South African GNP, but not part of South African GDP.

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

. 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

ANSWER: a. will be included in U.S. GNP and in Italian GDP.

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

. 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

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

. 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.

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

. 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

ANSWER: c. by subtracting depreciation from the total income of citizens of a nation

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

. In the national income accounts, depreciation is called

a. "consumption of fixed capital."

b. "total tax depreciation."

c. "consumption of circulating capital."

d. "depreciation."

ANSWER: a. "consumption of fixed capital."

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

. National income is defined as

a. all income produced within a country.

b. the total income earned by a nation's residents in the production of goods and services.

c. the total income earned by a nation's residents from the production of goods and services within the borders of the country.

d. the income received by the national government.

ANSWER: b. the total income earned by a nation's residents in the production of goods and services.

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

. National income is found from net national product by

a. excluding profits of corporations.

b. excluding retained earnings of corporations.

c. excluding depreciation.

d. excluding indirect business taxes.

ANSWER: d. excluding indirect business taxes.

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

. The income that households and noncorporate businesses receive is called

a. proprietors' income.

b. personal income.

c. disposable personal income.

d. national income.

ANSWER: b. personal income.

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

. 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.

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

. 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.

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

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

. 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 Christina's 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.

b. 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.

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.

d. 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.

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

. 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 & R's 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.

ANSWER: c. NNP will increase by $8 million more than will personal income.

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

. 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.

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

. GDP measures the value of production that takes place within a specific interval of time.

That interval is

a. a week or a month.

b. a month or a quarter.

c. a quarter or a year.

d. a year or a decade.

ANSWER: c. a quarter or a year.

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

. 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.

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

d. GDP actually increased by 6.8 percent during 1999.

ANSWER: c. GDP actually increased by 1.7 percent during the fourth quarter of 1999.

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

. 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.

ANSWER: d. GDP actually increased by 2 percent during the first half of 2000.

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

. 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.

ANSWER: b. GDP increased at an annual rate of 8 percent during the last quarter.

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

. 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.

ANSWER: a. GDP increased at an annual rate of 4 percent for the year.

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

. When GDP is growing rapidly,

a. the other measures of the nation's income are usually growing much more slowly.

b. the other measures of the nation's income are usually growing much more rapidly.

c. the other measures of the nation's income are usually growing rapidly.

d. the other measures of the nation's income are usually growing at widely different rates.

ANSWER: c. the other measures of the nation's income are usually growing rapidly.

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

. 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.

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

. 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.

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

. 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

ANSWER: d. consumption, investment, government purchases, and net exports.

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

. Which of the following is not a component of GDP?

a. investment

b. government purchases

c. net exports

d. foreign exchange

ANSWER: d. foreign exchange

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

. 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.

ANSWER: c. spending on capital equipment, inventories, and structures, including new housing.

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

. Net exports are

a. imports minus exports.

b. the purchases of domestically produced goods by foreigners minus the domestic purchases of foreign goods.

c. exports minus imports.

d. b and c

e. a and b

ANSWER: d. b and c

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

. 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.

ANSWER: b. local, state, and federal governments.

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

. 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.

ANSWER: a. 2000 GDP increases by $60 billion.

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

. 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.

ANSWER: b. 2000 GDP increases by $10 million because state government purchases are included in GDP.

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

. 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.

ANSWER: d. both GDP and consumption spending will be higher.

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

. 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.

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

. 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.

ANSWER: a. U.S. investment and GDP increase, but Japanese GDP is unaffected.

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

. 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

a. GNP and consumption both increase by the amount of the sale, but GDP increases by a smaller amount.

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

c. GDP and consumption both increase by the amount of the sale, but GNP increases by a smaller amount.

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

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

. If exports are smaller than imports, net exports

a. are positive.

b. are negative.

c. are larger than imports.

d. will increase GDP.

ANSWER: b. are negative.

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

. 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.

ANSWER: d. U.S. net exports decrease but U.S. GDP is unaffected.

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

. 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.

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

. 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.

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

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

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

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

. 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.

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

. 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.

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

. 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.

ANSWER: c. GDP increases by $10 billion, since government purchases are part of GDP.

TYPE: M KEY1: C SECTION: 2 OBJECTIVE: 2 RANDOM: Y

. 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.

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

c. U.S. government purchases, net exports, GDP, and GNP are unaffected.

d. U.S. government purchases increase by $30,000 and U.S. net exports decrease by $30,000. U.S. GNP increases by $30,000, but U.S. GDP is unaffected.

ANSWER: a. U.S. government purchases increase by $30,000 and U.S. net exports decrease by $30,000. U.S. GDP and GNP are unaffected.

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

. Raft River Power, located in Idaho, buys a large turbine generator from a Norwegian-owned 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.

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

. 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.

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

. 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 non-taxable medical spending account.

ANSWER: a. the government sends your grandfather his social security check.

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

. 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.

d. GDP increases because your brother will probably spend it.

ANSWER: c. GDP is unaffected because the $500 represents a transfer, not a purchase.

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

. 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.

ANSWER: a. GDP will be unaffected.

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

. 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.

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

. 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.

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

. 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.

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

. 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.

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

. 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

ANSWER: d. your purchase and the university's purchase

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

. 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.

ANSWER: b. is not part of GDP because it is a transfer payment.

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

. In 1998, U.S. GDP was

a. about $8.5 trillion.

b. about $85 trillion.

c. about $85 billion.

d. about $850 billion.

ANSWER: a. about $8.5 trillion.

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

. In 1998, GDP per person in the United States was

a. more than $200,000.

b. less than $20,000.

c. more than $20,000.

d. about $2,000.

ANSWER: c. more than $20,000.

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

. 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.

ANSWER: c. two-thirds of GDP.

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

. In 1998, U.S. net exports were

a. negative.

b. positive.

c. zero.

d. the largest component of GDP.

ANSWER: a. negative.

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

. 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.

ANSWER: b. were larger than investment, but smaller than consumption as a proportion of GDP.

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

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

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

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

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.

d. net exports must be falling.

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

. 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 economy's 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.

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

. Which of the following statements about GDP is most accurate?

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

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

c. Nominal GDP values production at market prices, while real GDP values production at the cost of the resources used in the production process.

d. Nominal GDP consistently underestimates the value of production, while real GDP consistently overestimates the value of production.

ANSWER:

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

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

. The best measure of a country's production of goods and services is

a. nominal GDP.

b. nominal GNP.

c. real GDP.

d. real NNP.

ANSWER: c. real GDP.

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

. 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 2001 GDP is $100, real 2001 GDP is $40, and the GDP deflator is 40.

b. nominal 2001 GDP is $40, real 2001 GDP is $100, and the GDP deflator is 250.

c. nominal 2001 GDP is $100, real 2001 GDP is $40, and the GDP deflator is 250.

d. nominal 2001 GDP is $40, real 2001 GDP is $100, and the GDP deflator is 40.

ANSWER: c. nominal 2001 GDP is $100, real 2001 GDP is $40, and the GDP deflator is 250.

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

. 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.

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

. 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.

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

. 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.

ANSWER: b. the production of goods and services valued at constant prices.

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

. 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.

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

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

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

. 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.

ANSWER: b. Real GDP is a better gauge of economic well-being than is nominal GDP.

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

. 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.

ANSWER: b. the percentage change in real GDP.

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

. 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.

ANSWER: b. is the ratio of nominal GDP to real GDP multiplied by 100.

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

. If nominal GDP is $10 trillion and real GDP is $8 trillion, the GDP deflator is

a. .8

b. 1.25

c. 80

d. 125

ANSWER: d. 125

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

. 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.

ANSWER: b. $6,000 billion.

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

. 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.

ANSWER: c. $160 billion.

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

. 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.

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

. 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.

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

. 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.

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

. 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.

ANSWER: b. the price level increased by 5 percent from 2000 to 2002.

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

. 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.

ANSWER: d. All of the above are correct statements.

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

. 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.

ANSWER: c. The growth of real GDP has been steady over time.

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

. Recessions are associated with which of the following?

a. rising unemployment

b. increased bankruptcies

c. falling profits

d. falling output

e. all of the above

ANSWER: e. all of the above

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

. 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.

ANSWER: a. GDP per person.

TYPE: M SECTION: 5 OBJECTIVE: 5 RANDOM: Y

. 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.

ANSWER: c. real GDP per person was unchanged during the 4 years.

TYPE: M SECTION: 5 OBJECTIVE: 5 RANDOM: Y

. 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.

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

. 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.

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

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.

c. However, GDP is still a useful measure of society's welfare because providing these other attributes is the responsibility of government.

d. However, GDP is still the best measure of society's welfare because these other values cannot actually be measured.

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

. 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.

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

. 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.

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

. 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.

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

. 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.

b. In rich countries, almost all the population can read, while in poor countries, about half the population is illiterate.

c. Poor countries tend to have higher infant mortality rates, higher maternal mortality, and higher rates of child malnutrition than do rich countries.

d. All of the above are accurate statements.

ANSWER: d. All of the above are accurate statements.

TYPE: M SECTION: 5 OBJECTIVE: 5 RANDOM: Y

. International GDP and socioeconomic data

a. leave no doubt that a nation's 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.

ANSWER: a. leave no doubt that a nation's GDP is closely associated with its citizens' standard of living.

TYPE: M SECTION: 5 OBJECTIVE: 5 RANDOM: Y

. 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.

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

. 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 policy-making.

d. is a crucial step toward developing the science of macroeconomics.

ANSWER: d. is a crucial step toward developing the science of macroeconomics.

TYPE: M KEY1: C SECTION: 6 OBJECTIVE: 5 RANDOM: Y

TRUE/FALSE

. Macroeconomics is the study of how households and firms make decisions and how they interact in markets.

ANSWER: F

TYPE: T SECTION: INT OBJECTIVE: RANDOM: Y

. Macroeconomics includes the study of topics such as the unemployment rate, the rate of inflation, and differences in income among countries.

ANSWER: T

TYPE: T SECTION: INT OBJECTIVE: RANDOM: Y

. Supply and demand are tools that are central to microeconomics, but not to macroeconomics.

ANSWER: F

TYPE: T SECTION: INT OBJECTIVE: RANDOM: Y

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

ANSWER: T

TYPE: T SECTION: INT OBJECTIVE: RANDOM: Y

. Gross Domestic Product measures both the total income of everyone in the economy and the total expenditure on the economy's output of goods and services.

ANSWER: T

TYPE: T SECTION: 1 OBJECTIVE: 1 RANDOM: Y

. Total income and total expenditure in an economy are always equal.

ANSWER: T

TYPE: T SECTION: 1 OBJECTIVE: 1 RANDOM: Y

. For the economy as a whole, income must equal expenditure because every transaction has both a buyer and a seller.

ANSWER: T

TYPE: T SECTION: 1 OBJECTIVE: 1 RANDOM: Y

. Gross domestic product is defined as the market value of all final goods and services produced within a country in a given period of time.

ANSWER: T

TYPE: T SECTION: 2 OBJECTIVE: 2 RANDOM: Y

. In order to include many different products in a single measure of the value of economic activity, GDP uses market prices.

ANSWER: T

TYPE: T SECTION: 2 OBJECTIVE: 2 RANDOM: Y

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

ANSWER: F

TYPE: T SECTION: 2 OBJECTIVE: 2 RANDOM: Y

. Goods and services produced and sold illegally are included in GDP if they are reported on income tax returns as income from illegal sources.

ANSWER: F

TYPE: T SECTION: 2 OBJECTIVE: 2 RANDOM: Y

. Hans earns $100,000 this year from the sale of marijuana he cultivated in his back yard. He reports the income to the IRS as "income from illegal sources." This income will be excluded from GDP because it was earned illegally.

ANSWER: T

TYPE: T SECTION: 2 OBJECTIVE: 2 RANDOM: Y

. Sandra decides to hire the neighbor boy to water her lawn and feed her dog this year instead of doing those tasks herself, as she did last year. Since the same work is done in either case, GDP is unaffected by the change.

ANSWER: F

TYPE: T SECTION: 2 OBJECTIVE: 2 RANDOM: Y

. Marilyn buys the parts to repair the carburetor on her car rather than having the local garage do the repairs. GDP is lower as a result.

ANSWER: T

TYPE: T SECTION: 2 OBJECTIVE: 2 RANDOM: Y

. If you rent a car to drive on vacation, instead of driving your own car, GDP will be higher.

ANSWER: T

TYPE: T SECTION: 2 OBJECTIVE: 2 RANDOM: Y

. James hires Anna to do his housework, rather than doing it himself. GDP is unaffected, since it doesn't include housework.

ANSWER: F

TYPE: T SECTION: 2 OBJECTIVE: 2 RANDOM: Y

. GDP excludes the value of intermediate goods because the value of intermediate goods is already included in the value of final goods.

ANSWER: T

TYPE: T SECTION: 2 OBJECTIVE: 2 RANDOM: Y

. If Ryan buys a new computer for his business, GDP is unaffected because computers are intermediate goods.

ANSWER: F

TYPE: T SECTION: 2 OBJECTIVE: 2 RANDOM: Y

. If a student buys a calculator to do her homework, the purchase is included as consumption in GDP, but if the state university buys a calculator so that a teacher can grade the homework, the purchase is not added to GDP because the calculator is an intermediate good.

ANSWER: T

TYPE: T SECTION: 2 OBJECTIVE: 2 RANDOM: Y

. An intermediate good that goes into inventory and is stored to be used or sold at a later date is included as part of GDP.

ANSWER: T

TYPE: T SECTION: 2 OBJECTIVE: 2 RANDOM: Y

. A company produces an intermediate good on the last day of the year. If it is sold, GDP for that year will not increase, but if it is not sold, GDP for that year will increase.

ANSWER: T

TYPE: T SECTION: 2 OBJECTIVE: 2 RANDOM: Y

. An Oklahoma freight company buys a new truck made in California by a Czech company. As a result, U.S. GDP increases, but Czech GDP is unaffected.

ANSWER: T

TYPE: T SECTION: 2 OBJECTIVE: 2 RANDOM: Y

. Susan buys a new car in June, then sells it to her brother at a higher price in July. GDP will include the value of the July sale only, since it was the final sale of the car that year.

ANSWER: F

TYPE: T SECTION: 2 OBJECTIVE: 2 RANDOM: Y

. A U.S. company owns a fast-food store in Peru. The sales of the store are included in both U.S. GDP and Peruvian GDP.

ANSWER: F

TYPE: T SECTION: 2 OBJECTIVE: 2 RANDOM: Y

. GDP is measured at both quarterly and yearly intervals.

ANSWER: T

TYPE: T SECTION: 2 OBJECTIVE: 2 RANDOM: Y

. The seasonal adjustment of GDP takes regular seasonal changes out of the data.

ANSWER: T

TYPE: T SECTION: 2 OBJECTIVE: 2 RANDOM: Y

. U.S. Gross National Product is found from GDP by adding to GDP income earned by U.S. permanent residents abroad, and subtracting income earned by foreigners in the U.S.

ANSWER: T

TYPE: T SECTION: 2 OBJECTIVE: 2 RANDOM: Y

. Net National Product is the total income of a nation's residents after subtracting the losses from depreciation.

ANSWER: T

TYPE: T SECTION: 2 OBJECTIVE: 2 RANDOM: Y

. In the national income accounts, depreciation is called, "consumption of circulating capital."

ANSWER: F

TYPE: T SECTION: 2 OBJECTIVE: 2 RANDOM: Y

. Personal income is the income that households, noncorporate, and corporate businesses receive.

ANSWER: F

TYPE: T SECTION: 2 OBJECTIVE: 2 RANDOM: Y

. Personal income excludes retained earnings, corporate income taxes, and social insurance contributions, but includes transfer payments as well as interest income households receive from government debt.

ANSWER: T

TYPE: T SECTION: 2 OBJECTIVE: 2 RANDOM: Y

. Disposable personal income is the income households and non-corporate businesses have left after satisfying their obligations to the government.

ANSWER: T

TYPE: T SECTION: 2 OBJECTIVE: 2 RANDOM: Y

. The various measures of national income rarely all move in the same direction.

ANSWER: F

TYPE: T SECTION: 2 OBJECTIVE: 2 RANDOM: Y

. A Canadian citizen owns a sheep ranch in Wyoming. The profits from the ranch are part of Canadian GNP, but not part of Canadian GDP.

ANSWER: T

TYPE: T SECTION: 2 OBJECTIVE: 2 RANDOM: Y

. A French company owns a hat store in New York. The profits from the hat store are included in U.S. GDP and in French GNP.

ANSWER: T

TYPE: T SECTION: 2 OBJECTIVE: 2 RANDOM: Y

. Government reports that GDP increased at an annual rate of 6.9 percent for the fourth quarter of 1999. This means that GDP was 6.9 percent higher at the end of the fourth quarter than at the beginning of the quarter.

ANSWER: F

TYPE: T SECTION: 2 OBJECTIVE: 2 RANDOM: Y

. Government reports that GDP grew by 2 percent during the first quarter of the year. This means that GDP grew at an annual rate of .5 percent for the first quarter.

ANSWER: F

TYPE: T SECTION: 2 OBJECTIVE: 2 RANDOM: Y

. The four components of GDP are consumption, investment, government purchases and exports.

ANSWER: F

TYPE: T SECTION: 3 OBJECTIVE: 3 RANDOM: Y

. Net exports are imports minus exports.

ANSWER: F

TYPE: T SECTION: 3 OBJECTIVE: 3 RANDOM: Y

. If a U.S. citizen buys a car made in Germany, U.S. net exports decrease, but U.S. GDP is unaffected.

ANSWER: T

TYPE: T SECTION: 3 OBJECTIVE: 3 RANDOM: Y

. Florence buys a sweater made by an American-owned company in Canada. As a result, U.S. consumption and GNP increase, U.S. GDP is unaffected, and U.S. net exports decrease.

ANSWER: T

TYPE: T SECTION: 3 OBJECTIVE: 3 RANDOM: Y

. Government purchases include spending on goods and services and transfer payments by local, state, and federal governments.

ANSWER: F

TYPE: T SECTION: 3 OBJECTIVE: 3 RANDOM: Y

. Transfer payments are included in GDP because they represent income to the recipient.

ANSWER: F

TYPE: T SECTION: 3 OBJECTIVE: 3 RANDOM: Y

. In the United States in 1998, consumption represented approximately two-thirds of GDP.

ANSWER: T

TYPE: T SECTION: 3 OBJECTIVE: 3 RANDOM: Y

. In 1998, U.S. net exports were positive.

ANSWER: F

TYPE: T SECTION: 3 OBJECTIVE: 3 RANDOM: Y

. In the U.S. in 1998, government purchases were larger than both consumption and investment as a proportion of GDP.

ANSWER: F

TYPE: T SECTION: 3 OBJECTIVE: 3 RANDOM: Y

. When total spending on goods and services increases from one year to the next, we know that the economy is producing more goods and services.

ANSWER: F

TYPE: T SECTION: 4 OBJECTIVE: 4 RANDOM: Y

. Tim sells the same number of carrots this year as last, but at a 10 percent higher price, hence, he must be better off this year.

ANSWER: F

TYPE: T SECTION: 4 OBJECTIVE: 4 RANDOM: Y

. Real GDP uses constant base-year prices to place a value on the economy's production of goods and services.

ANSWER: T

TYPE: T SECTION: 4 OBJECTIVE: 4 RANDOM: Y

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

ANSWER: T

TYPE: T SECTION: 4 OBJECTIVE: 4 RANDOM: Y

. The GDP deflator is the ratio of nominal GDP to real GDP multiplied by 100.

ANSWER: T

TYPE: T SECTION: 4 OBJECTIVE: 4 RANDOM: Y

. If nominal GDP is $8 trillion and real GDP is $6 trillion, the GDP deflator is 75.

ANSWER: F

TYPE: T SECTION: 4 OBJECTIVE: 4 RANDOM: Y

. If the GDP deflator is 200 and real GDP is $150 billion, then nominal GDP is $300 billion.

ANSWER: T

TYPE: T SECTION: 4 OBJECTIVE: 4 RANDOM: Y

. If the GDP of Canada is $1,000 billion and the GDP of Panama is $100 billion, the average citizen of Canada must be ten times as well off as the average citizen of Panama.

ANSWER: F

TYPE: T SECTION: 5 OBJECTIVE: 5 RANDOM: Y

. Even though GDP is not the only thing that affects the quality of life, it is a useful measure because it measures a nation's ability to purchase the inputs that can be used to produce things like good health, quality education, and desirable moral attributes.

ANSWER: T

TYPE: T SECTION: 5 OBJECTIVE: 5 RANDOM: Y

. GDP per person is not a perfect measure of the well-being of individuals in society because it excludes things like leisure time and environmental quality.

ANSWER: T

TYPE: T SECTION: 5 OBJECTIVE: 5 RANDOM: Y

. International studies show that larger GDP per person is associated with lower levels of illiteracy and shorter life expectancy, and higher infant mortality.

ANSWER: F

TYPE: T SECTION: 5 OBJECTIVE: 5 RANDOM: Y

. Being able to measure the behavior of the economy with statistics such as GDP can be helpful in developing macroeconomic science, but is not useful for policy-making.

ANSWER: F

TYPE: T SECTION: 6 OBJECTIVE: 5 RANDOM: Y

SHORT ANSWER

. We are told that total income and total expenditure in an economy must be equal. How can this be so when some household income is saved and some is taxed?

ANSWER: Household income is only one source of expenditure. Government and firms also buy goods and services. Even though some household income is saved and some is taxed, every transaction has both a buyer and a seller, and every dollar of spending by a buyer is a dollar of income to a seller. Hence, for the economy as a whole, total income equals total expenditure.

TYPE: S SECTION: 1 OBJECTIVE: 1 RANDOM: Y

. GDP is defined as the market value of all final goods and services produced within a country in a given period of time. In spite of this definition, the value of all final goods and services is not measured as part of GDP. Explain why some final goods and services are not included.

ANSWER: GDP excludes some products because they are so difficult to measure. These products include services performed by individuals for themselves and their families, and most goods that are produced and consumed at home and, therefore, never enter the marketplace. In addition, illegal products are not included in GDP even if they can be measured because, by society's definition, they are bads, not goods.

TYPE: S SECTION: 2 OBJECTIVE: 2 RANDOM: Y

. What is the economic logic used to justify market prices as the summary measure of the value of output in the economy?

ANSWER: Market prices are used as the summary measure of the value of output in the economy because market prices measure the amount people are willing to pay for the goods; therefore, they measure, in terms of dollars, the benefit received by the buyers of the products, hence the value of the goods and services to society.

TYPE: S SECTION: 2 OBJECTIVE: 2 RANDOM: Y

. Explain why the value of intermediate goods produced and sold during the year are not included separately as part of GDP, but intermediate goods produced and not sold are included separately as part of GDP.

ANSWER: Intermediate goods produced and sold during the year are not included separately as part of GDP because the value of those goods will be included in the value of the final goods produced from them. If the intermediate good is produced but not sold during the year, its value is included as inventory investment for the year in which it was produced. If inventory investment was not included as part of GDP, true production would be underestimated for the year the intermediate good went into inventory, and overestimated for the year the intermediate good is used or sold.

TYPE: S SECTION: 2 OBJECTIVE: 2 RANDOM: Y

. If I buy a house in 1999 for $60,000 and I resell it in 2002 for $100,000, why doesn't GDP in 2002 include the $100,000 value of the house, or even the $40,000 increased value from 1999 to 2002?

ANSWER: 2002 GDP includes only the value of final goods and services produced in 2002. Since the house was produced in 1999, its value will not be included in 2002 GDP. Unless some part of the $40,000 increased value of the house from 1999 to 2002 represents improvements made to the house in 2002, GDP in that year will not include any of the $100,000 value of the house.

TYPE: S SECTION: 2 OBJECTIVE: 2 RANDOM: Y

. Some economists believe that the market value of the cooking, cleaning, child care, and other work performed by people in their own homes is about $45,000 per household per year in the U.S.

a. If there are 100 million households in the U.S., and if GDP is now $9 trillion, by how much do we underestimate actual output because we do not include the value of these services?

b. Does this underestimate mean that economists cannot use GDP with any confidence in assessing the health of the economy from one year to the next? Explain.

ANSWER: a. $45,000 per household times 100 million households equals $4.5 trillion. Hence, actual output is underestimated by 50 percent because we do not include the value of this housework in GDP.

b. Even though the absolute level of actual output is seriously underestimated by failing to include housework and similar products in GDP, the percentage change in GDP likely gives a good estimate of the percentage change in actual output because we use a consistent set of rules for measuring GDP. If, however, Americans suddenly began paying others to do housework now done by themselves, the percentage change in GDP would be a less reliable estimate of the percentage change in actual output.

TYPE: S SECTION: 2 OBJECTIVE: 2 RANDOM: Y

. Why doesn't the purchase of an automobile from Italy increase U.S. GDP, since it is counted as consumption?

ANSWER: The purchase of an automobile from Italy is counted as consumption, but GDP measures only the value of production within the geographic borders of a country. In order to avoid including the value of the imported automobile, imports are subtracted from GDP. Hence, the value of the automobile in consumption is canceled by subtracting the value of the automobile in imports.

TYPE: S SECTION: 3 OBJECTIVE: 3 RANDOM: Y

. Since government purchases primarily inputs which are used to produce government services, why do you suppose these purchases are all counted as final goods and services?

ANSWER: It is difficult for the national income accountants to measure the value of goods and services that do not go through markets. Since very few goods and services produced by government go through market transactions, it is impossible to measure their values directly. It is possible, however, to measure the cost of producing those goods and services by using the value of the inputs which government buys in order to produce government goods and services.

TYPE: S SECTION: 3 OBJECTIVE: 3 RANDOM: Y

. Identify the effect of each of the following circumstances on U.S. GDP and on the components of GDP.

a. DeeAnn purchases a Ford tractor to be used on the farm.

b. Reed receives a social security check.

c. Amit purchases a shirt which was made in Madras, India.

d. The U.S. Navy hires a German to work on a U.S. base in Germany.

ANSWER: a. GDP will increase and investment will increase by an amount equal to the value of the tractor.

b. There will be no change in GDP or any of its components.

c. There will be no change in GDP, but consumption will increase and net exports will decrease by an amount equal to the value of the shirt.

d. There will be no change in GDP, but government purchases will increase and net exports will decrease by an amount equal to the wages paid to the German.

TYPE: S SECTION: 3 OBJECTIVE: 3 RANDOM: Y

. Suppose Pierre, an American citizen, purchases a sports car which has been produced by an American company operating in France and using French labor and materials. What will be the effect of this purchase on:

a. U.S. GNP?

b. U.S. GDP?

c. French GNP?

d. French GDP?

e. U.S. net exports?

f. French net exports?

g. U.S. consumption?

h. French consumption?

ANSWER: a. U.S. GNP will increase by the part of the purchase price received as profit by the U.S. owners of the car company.

b. U.S. GDP will be unaffected since the car was produced in France.

c. French GNP will increase by the amount paid to French labor and for French materials.

d. French GDP will increase by the value of the car.

e. U.S. net exports will fall by an amount equal to the value of the car minus the amount paid to the U.S. owners of the car company (GNP measurement), or by an amount equal to the value of the car (GDP measurement).

f. French net exports will increase by the amount paid to French labor and for French materials (GNP measurement), or by an amount equal to the value of the car (GDP measurement).

g. U.S. consumption will increase by the value of the car.

h. French consumption will be unaffected.

TYPE: S SECTION: 3 OBJECTIVE: 3 RANDOM: Y

. Between 1929 and 1933 NNP measured in current prices fell from $96 billion to $48 billion. Over the same period, the relevant price index fell from 100 to 75.

a. What was the percentage decline in nominal NNP from 1929 to1933?

b. What was the percentage decline in real NNP from 1929 to 1933?

ANSWER: a. NNP measured in current prices is nominal NNP. Nominal NNP fell from $96 billion to $48 billion, a decline of 50 percent.

b. Real NNP is nominal NNP divided by the price index and multiplied by 100. Real NNP in 1929 was ($96 b/100) x 100 = $96 b. Real NNP in 1933 was ($48 b/75) x 100 = $64 b. Real NNP fell from $96 billion to $64 billion, a decline of 33 percent.

TYPE: S SECTION: 4 OBJECTIVE: 4 RANDOM: Y

. If I find that my own paycheck for the year is higher this year than last, does that mean that my real income has increased? Explain carefully.

ANSWER: Real income is nominal income adjusted for general increase in prices. If my paycheck is higher this year than last, my nominal income has increased. Whether my real income has increased or not depends on what has happened since last year to the level of prices of things I buy with my income. If the percentage increase in prices is less than the percentage increase in my nominal income, then my real income has increased. Otherwise, my real income has not increased.

TYPE: S SECTION: 4 OBJECTIVE: 4 RANDOM: Y

. Suppose you know that U.S. GDP in 2000 was $9,000 billion, and U.S. GDP in 1933 was $90 billion. What judgment about the change in the economic well-being of average Americans could you make? Explain.

ANSWER: It is difficult to make any judgement about the change in the well-being of average Americans from this information. First, in order to know something about average well-being, we need to use GDP per person. We aren't given population figures to allow us to calculate that information. Second, we don't know whether the information given is in nominal or real terms. We want real GDP per capita in order to make a judgement about well-being. Third, even with information on real GDP per capita, we must recognize that there are things other than GDP per capita that affect economic well-being, although GDP per capita is perhaps the best summary measure.

TYPE: S SECTION: 5 OBJECTIVE: 5 RANDOM: Y

. Simon S. Kuznets received the Nobel Prize in economics primarily for developing the system of national income accounting used to measure GDP, NNP, and related statistics. Why was this achievement so important?

ANSWER: Without national income accounting, we would be unable to measure the health or growth of the economy. It would be more difficult to make rational economic decisions, and it would be impossible for policymakers to determine the effectiveness of their macroeconomic policies.

TYPE: S SECTION: 6 OBJECTIVE: 5 RANDOM: Y

~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

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 George's 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 firm's 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

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

ANSWER:

b. are part of South African GNP, but not part of South African GDP.

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

ANSWER:

a. will be included in U.S. GNP and in Italian GDP.

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

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 nation's 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 non-tax 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

~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

ANSWER: d. GDP actually increased by 2 percent during the first half of 2000.

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

~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 nation's 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

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

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

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 nation's 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

[141]

~ANSWER:

F

TYPE: T SECTION: INT OBJECTIVE: RANDOM: Y

[142]

~ANSWER:

T

TYPE: T SECTION: INT OBJECTIVE: RANDOM: Y

[143]

~ANSWER:

F

TYPE: T SECTION: INT OBJECTIVE: RANDOM: Y

[144]

~ANSWER:

T

TYPE: T SECTION: INT OBJECTIVE: RANDOM: Y

[145]

~ANSWER:

T

TYPE: T SECTION: 1 OBJECTIVE: 1 RANDOM: Y

[146]

~ANSWER:

T

TYPE: T SECTION: 1 OBJECTIVE: 1 RANDOM: Y

[147]

~ANSWER:

T

TYPE: T SECTION: 1 OBJECTIVE: 1 RANDOM: Y

[148]

~ANSWER:

T

TYPE: T SECTION: 2 OBJECTIVE: 2 RANDOM: Y

[149]

~ANSWER:

T

TYPE: T SECTION: 2 OBJECTIVE: 2 RANDOM: Y

[150]

~ANSWER:

F

TYPE: T SECTION: 2 OBJECTIVE: 2 RANDOM: Y

[151]

~ANSWER:

F

TYPE: T SECTION: 2 OBJECTIVE: 2 RANDOM: Y

[152]

~ANSWER:

T

TYPE: T SECTION: 2 OBJECTIVE: 2 RANDOM: Y

[153]

~ANSWER:

F

TYPE: T SECTION: 2 OBJECTIVE: 2 RANDOM: Y

[154]

~ANSWER:

T

TYPE: T SECTION: 2 OBJECTIVE: 2 RANDOM: Y

[155]

~ANSWER:

T

TYPE: T SECTION: 2 OBJECTIVE: 2 RANDOM: Y

[156]

~ANSWER:

F

TYPE: T SECTION: 2 OBJECTIVE: 2 RANDOM: Y

[157]

~ANSWER:

T

TYPE: T SECTION: 2 OBJECTIVE: 2 RANDOM: Y

[158]

~ANSWER:

F

TYPE: T SECTION: 2 OBJECTIVE: 2 RANDOM: Y

[159]

~ANSWER:

T

TYPE: T SECTION: 2 OBJECTIVE: 2 RANDOM: Y

[160]

~ANSWER:

T

TYPE: T SECTION: 2 OBJECTIVE: 2 RANDOM: Y

[161]

~ANSWER:

T

TYPE: T SECTION: 2 OBJECTIVE: 2 RANDOM: Y

[162]

~ANSWER:

T

TYPE: T SECTION: 2 OBJECTIVE: 2 RANDOM: Y

[163]

~ANSWER:

F

TYPE: T SECTION: 2 OBJECTIVE: 2 RANDOM: Y

[164]

~ANSWER:

F

TYPE: T SECTION: 2 OBJECTIVE: 2 RANDOM: Y

[165]

~ANSWER:

T

TYPE: T SECTION: 2 OBJECTIVE: 2 RANDOM: Y

[166]

~ANSWER:

T

TYPE: T SECTION: 2 OBJECTIVE: 2 RANDOM: Y

[167]

~ANSWER:

T

TYPE: T SECTION: 2 OBJECTIVE: 2 RANDOM: Y

[168]

~ANSWER:

T

TYPE: T SECTION: 2 OBJECTIVE: 2 RANDOM: Y

[169]

~ANSWER:

F

TYPE: T SECTION: 2 OBJECTIVE: 2 RANDOM: Y

[170]

~ANSWER:

F

TYPE: T SECTION: 2 OBJECTIVE: 2 RANDOM: Y

[171]

~ANSWER:

T

TYPE: T SECTION: 2 OBJECTIVE: 2 RANDOM: Y

[172]

~ANSWER:

T

TYPE: T SECTION: 2 OBJECTIVE: 2 RANDOM: Y

[173]

~ANSWER:

F

TYPE: T SECTION: 2 OBJECTIVE: 2 RANDOM: Y

[174]

~ANSWER:

T

TYPE: T SECTION: 2 OBJECTIVE: 2 RANDOM: Y

[175]

~ANSWER:

T

TYPE: T SECTION: 2 OBJECTIVE: 2 RANDOM: Y

[176]

~ANSWER:

F

TYPE: T SECTION: 2 OBJECTIVE: 2 RANDOM: Y

[177]

~ANSWER:

F

TYPE: T SECTION: 2 OBJECTIVE: 2 RANDOM: Y

[178]

~ANSWER:

F

TYPE: T SECTION: 3 OBJECTIVE: 3 RANDOM: Y

[179]

~ANSWER:

F

TYPE: T SECTION: 3 OBJECTIVE: 3 RANDOM: Y

[180]

~ANSWER:

T

TYPE: T SECTION: 3 OBJECTIVE: 3 RANDOM: Y

[181]

~ANSWER:

T

TYPE: T SECTION: 3 OBJECTIVE: 3 RANDOM: Y

[182]

~ANSWER:

F

TYPE: T SECTION: 3 OBJECTIVE: 3 RANDOM: Y

[183]

~ANSWER:

F

TYPE: T SECTION: 3 OBJECTIVE: 3 RANDOM: Y

[184]

~ANSWER:

T

TYPE: T SECTION: 3 OBJECTIVE: 3 RANDOM: Y

[185]

~ANSWER:

F

TYPE: T SECTION: 3 OBJECTIVE: 3 RANDOM: Y

[186]

~ANSWER:

F

TYPE: T SECTION: 3 OBJECTIVE: 3 RANDOM: Y

[187]

~ANSWER:

F

TYPE: T SECTION: 4 OBJECTIVE: 4 RANDOM: Y

[188]

~ANSWER:

F

TYPE: T SECTION: 4 OBJECTIVE: 4 RANDOM: Y

[189]

~ANSWER:

T

TYPE: T SECTION: 4 OBJECTIVE: 4 RANDOM: Y

[190]

~ANSWER:

T

TYPE: T SECTION: 4 OBJECTIVE: 4 RANDOM: Y

[191]

~ANSWER:

T

TYPE: T SECTION: 4 OBJECTIVE: 4 RANDOM: Y

[192]

~ANSWER:

F

TYPE: T SECTION: 4 OBJECTIVE: 4 RANDOM: Y

[193]

~ANSWER:

T

TYPE: T SECTION: 4 OBJECTIVE: 4 RANDOM: Y

[194]

~ANSWER:

F

TYPE: T SECTION: 5 OBJECTIVE: 5 RANDOM: Y

[195]

~ANSWER:

T

TYPE: T SECTION: 5 OBJECTIVE: 5 RANDOM: Y

[196]

~ANSWER:

T

TYPE: T SECTION: 5 OBJECTIVE: 5 RANDOM: Y

[197]

~ANSWER:

F

TYPE: T SECTION: 5 OBJECTIVE: 5 RANDOM: Y

[198]

~ANSWER:

F

TYPE: T SECTION: 6 OBJECTIVE: 5 RANDOM: Y

[199]

~ANSWER:

Household income is only one source of expenditure. Government and firms also buy goods and services. Even though some household income is saved and some is taxed, every transaction has both a buyer and a seller, and every dollar of spending by a buyer is a dollar of income to a seller. Hence, for the economy as a whole, total income equals total expenditure.

TYPE: S SECTION: 1 OBJECTIVE: 1 RANDOM: Y

[200]

~ANSWER:

GDP excludes some products because they are so difficult to measure. These products include services performed by individuals for themselves and their families, and most goods that are produced and consumed at home and, therefore, never enter the marketplace. In addition, illegal products are not included in GDP even if they can be measured because, by society's definition, they are bads, not goods.

TYPE: S SECTION: 2 OBJECTIVE: 2 RANDOM: Y

[201]

~ANSWER:

Market prices are used as the summary measure of the value of output in the economy because market prices measure the amount people are willing to pay for the goods; therefore, they measure, in terms of dollars, the benefit received by the buyers of the products, hence the value of the goods and services to society.

TYPE: S SECTION: 2 OBJECTIVE: 2 RANDOM: Y

[202]

~ANSWER:

Intermediate goods produced and sold during the year are not included separately as part of GDP because the value of those goods will be included in the value of the final goods produced from them. If the intermediate good is produced but not sold during the year, its value is included as inventory investment for the year in which it was produced. If inventory investment was not included as part of GDP, true production would be underestimated for the year the intermediate good went into inventory, and overestimated for the year the intermediate good is used or sold.

TYPE: S SECTION: 2 OBJECTIVE: 2 RANDOM: Y

[203]

~ANSWER:

2002 GDP includes only the value of final goods and services produced in 2002. Since the house was produced in 1999, its value will not be included in 2002 GDP. Unless some part of the $40,000 increased value of the house from 1999 to 2002 represents improvements made to the house in 2002, GDP in that year will not include any of the $100,000 value of the house.

TYPE: S SECTION: 2 OBJECTIVE: 2 RANDOM: Y

ANSWER:

a. $45,000 per household times 100 million households equals $4.5 trillion. Hence, actual output is underestimated by 50 percent because we do not include the value of this housework in GDP.

b. Even though the absolute level of actual output is seriously underestimated by failing to include housework and similar products in GDP, the percentage change in GDP likely gives a good estimate of the percentage change in actual output because we use a consistent set of rules for measuring GDP. If, however, Americans suddenly began paying others to do housework now done by themselves, the percentage change in GDP would be a less reliable estimate of the percentage change in actual output.

TYPE: S SECTION: 2 OBJECTIVE: 2 RANDOM: Y

[205]

~ANSWER:

The purchase of the an automobile from Italy is counted as consumption, but GDP measures only the value of production within the geographic borders of a country. In order to avoid including the value of the imported automobile, imports are subtracted from GDP. Hence, the value of the automobile in consumption is canceled by subtracting the value of the automobile in imports.

TYPE: S SECTION: 3 OBJECTIVE: 3 RANDOM: Y

[206]

~ANSWER:

It is difficult for the national income accountants to measure the value of goods and services which do not go through markets. Since very few goods and services produced by government go through market transactions, it is impossible to measure their values directly. It is possible, however, to measure the cost of producing those goods and services by using the value of the inputs which government buys in order to produce government goods and services.

TYPE: S SECTION: 3 OBJECTIVE: 3 RANDOM: Y

[207]

~ANSWER:

a. GDP will increase and investment will increase by an amount equal to the value of the tractor.

b. There will be no change in GDP or any of its components.

c. There will be no change in GDP, but consumption will increase and net exports will decrease by an amount equal to the value of the shirt.

d. There will be no change in GDP, but government purchases will increase and net exports will decrease by an amount equal to the wages paid to the German.

TYPE: S SECTION: 3 OBJECTIVE: 3 RANDOM: Y

ANSWER:

a. U.S. GNP will increase by the part of the purchase price received as profit by the U.S. owners of the car company.

b. U.S. GDP will be unaffected since the car was produced in France.

c. French GNP will increase by the amount paid to French labor and for French materials.

d. French GDP will increase by the value of the car.

e. U.S. net exports will fall by an amount equal to the value of the car minus the amount paid to the U.S. owners of the car company (GNP measurement), or by an amount equal to the value of the car (GDP measurement).

f. French net exports will increase by the amount paid to French labor and for French materials (GNP measurement), or by an amount equal to the value of the car (GDP measurement).

g. U.S. consumption will increase by the value of the car.

h. French consumption will be unaffected.

TYPE: S SECTION: 3 OBJECTIVE: 3 RANDOM: Y

ANSWER:

a. NNP measured in current prices is nominal NNP. Nominal NNP fell from $96 billion to $48 billion, a decline of 50 percent.

b. Real NNP is nominal NNP divided by the price index and multiplied by 100. Real NNP in 1929 was ($96 b/100) x 100 = $96 b. Real NNP in 1933 was ($48 b/75) x 100 = $64 b. Real NNP fell from $96 billion to $64 billion, a decline of 33 percent.

TYPE: S SECTION: 4 OBJECTIVE: 4 RANDOM: Y

[210]

~ANSWER:

Real income is nominal income adjusted for general increase in prices. If my paycheck is higher this year than last, my nominal income has increased. Whether my real income has increased or not depends on what has happened since last year to the level of prices of things I buy with my income. If the percentage increase in prices is less than the percentage increase in my nominal income, then my real income has increased. Otherwise, my real income has not increased.

TYPE: S SECTION: 4 OBJECTIVE: 4 RANDOM: Y

[211]

~ANSWER:

It is difficult to make any judgement about the change in the well-being of average Americans from this information. First, in order to know something about average well-being, we need to use GDP per person. We aren't given population figures to allow us to calculate that information. Second, we don't know whether the information given is in nominal or real terms. We want real GDP per capita in order to make a judgement about well-being. Third, even with information on real GDP per capita, we must recognize that there are things other than GDP per capita that affect economic well-being, although GDP per capita is perhaps the best summary measure.

TYPE: S SECTION: 5 OBJECTIVE: 5 RANDOM: Y

[212]

~ANSWER:

Without national income accounting, we would be unable to measure the health or growth of the economy. It would be more difficult to make rational economic decisions, and it would be impossible for policymakers to determine the effectiveness of their macroeconomic policies.

TYPE: S SECTION: 6 OBJECTIVE: 5 RANDOM: Y