Chapter 7/Taking the Nation’s Economic Pulse 1
Chapter 7
Taking the Nation’s Economic Pulse
Questions 1 Through 10 are a Suggested Chapter Quiz.
1.Which of the following would be included in this year’s GDP?
a.the value of a used car, at its sale price
b.the value of a new domestic automobile, at its sale price
c.a sale of Microsoft stock from one individual to another
d.the face value of a life insurance policy paid to a woman at the death of her husband
2.When the expenditure approach is used to measure GDP, the major components of GDP are
a.consumption, investment, indirect business taxes, and depreciation.
b.employee compensation, rents, interest, self-employment income, and corporate profits.
c.employee compensation, corporate profits, depreciation, and indirect business taxes.
d.consumption, investment, government consumption and gross investment, and net exports.
3.If you wanted to measure whether the output of an economy was increasing or decreasing across time periods, you would use the real GDP data rather than the nominal GDP data because
a.exports are excluded from real GDP but not nominal.
b.real GDP incorporates the impact of federal budget deficits and surpluses; nominal GDP does not.
c.real GDP reflects the impact of transfer payments on the economy, but nominal GDP does not.
d.real GDP adjusts for changes in the general level of prices, but nominal GDP does not.
4.Which of the following is GDP designed to measure?
a.the total market value of goods and services produced domestically during the year
b.changes in the cost of purchasing the typical consumer market basket of goods from one year to another
c.the total size of the domestic underground economy
d.the standard of living of the average citizen
5.The GDP deflator is designed to
a.adjust nominal GDP for changes in the unemployment rate.
b.adjust nominal GDP so as to include the problem of externalities.
c.adjust nominal GDP for changes in the price level.
d.calculate changes in the price of food and other consumer goods.
6.A real estate salesperson sells a house in 1999 that was built in 1990. How does this transaction get counted in the GDP statistics?
a.The price of the house and the real estate salesperson's commission are both included in 1999's GDP.
b.Neither the price of the house or the commission is included in 1999's GDP.
c.The real estate salesperson's commission but not the price of the house is included in 1999's GDP.
d.The price of the house would be included in both 1990's GDP and the GDP for 1999.
7.Suppose that the nominal value of GDP increased by approximately 2 percent during a given year, but real GDP decreased by 3 percent. Which of the following best explains these events?
a.The money supply decreased by approximately 5 percent.
b.Prices fell by approximately 5 percent.
c.Prices increased by approximately 5 percent.
d.The real productive capacity of the economy increased by approximately 5 percent.
8.If national income accountants fail to make an adequate adjustment for increases in the quality of goods and services over time,
a.real GDP will overstate the growth rate of real output.
b.the GDP deflator will underestimate inflation.
c.the GDP deflator will overestimate inflation.
d.real GDP will overstate the growth of real output, and the GDP deflator will understate inflation.
9.The primary value of real GDP is its ability to measure year to year changes in
a.real output.
b.income inequality.
c.real social welfare.
d.the general level of prices.
10.Last year your job at the university cafeteria paid you $9 an hour and the price of a ten-minute long distance call to your girlfriend in California was $4. This year your cafeteria job pays $9.90 per hour and the ten-minute phone call now costs $4.10. You are clearly
a.worse off because of inflation.
b.worse off because the phone call is now relatively more expensive.
c.better off because your wage rate went up.
d.better off because the phone call now costs less work.
Answer Key 1 through 10
*1. (b), 2. (d), 3. (d), 4. (a), 5. (c), 6. (c), 7. (c), 8. (c), 9. (a), 10. (d)
GDP—A Measure of Output
11.Gross domestic product is
a.the market value of all goods and services exchanged within a country during a time period.
b.the market value of all domestic assets, regardless of whether they are owned by citizens or foreigners.
c.the compensation received during a period for labor services plus interest, rents, and corporate profits.
*d.the market value of final goods and services produced within a country during a time period.
12.Gross domestic product is equal to the market value of all goods and services
a.exchanged during a period.
*b.produced domestically during a period.
c.produced by the citizens of a nation during a period.
d.produced domestically during a period minus the depreciation of productive assets.
13.Gross domestic product is a measure of both
a.the market value of a nation’s capital assets (physical capital) and the costs that were incurred producing those assets.
b.the expenditures on and sales revenues derived from all goods and services exchanged during a period.
*c.the market value of the output produced during a period and the cost of producing that output.
d.the asset holdings of people and the happiness that they derived from the ownership of those assets.
14.Gross domestic product is the expenditures on
a.all goods and services exchanged during the period.
*b.all final goods and services produced domestically during the period.
c.all goods and services produced during the period minus depreciation of productive assets during the period.
d.all retail sales during the period.
15.Gross domestic product
a.is the sum of all exchanges of goods and services during a period.
b.includes financial transactions such as the purchase of stocks or bonds traded during a period.
c.is the sum of expenditures for both intermediate and final user goods.
*d.is the sum of the total spending on all final-user goods and services produced domestically during a period.
16.Gross domestic product is the sum of the purchase price multiplied by the quantity of
a.goods and services exchanged during the period.
*b.final goods and services produced domestically during the period.
c.goods and services produced domestically during the period minus the depreciation of productive assets.
d.final goods and services plus intermediate goods produced domestically during the period.
17.The economist responsible for developing the basic concepts of the national income accounting system is
a.John Maynard Keynes.
b.Alfred Marshall.
*c.Simon Kuznets.
d.Adam Smith.
18.Simon Kuznets, winner of the 1971 Nobel Prize in economics, is famous for his contributions in
a.changing the United States from gross national product to gross domestic product accounting.
b.explaining the importance of international trade in determining output.
c.pointing out the superiority of the expenditure approach to measuring GDP.
*d.developing the basic concepts and measurement procedures used in national income accounting.
19.A firm purchases $600,000 worth of raw materials and pays wages and salaries of $100,000 and dividends of $200,000. If the firm sells its output for $1 million, the firm’s value added to GDP is
a.$300,000.
*b.$400,000.
c.$900,000.
d.$1,000,000.
20.A firm purchases $400,000 worth of raw materials and pays wages and salaries of $300,000 and dividends of $100,000. If the firm sells its output for $1 million, the firm’s value added to GDP is
a.$400,000.
*b.$600,000.
c.$800,000.
d.$1,000,000.
21.Which one of the following transactions would be included in GDP?
a.Ms. Kim pays $50 for a used picture frame at a neighborhood garage sale.
b.Mr. Doe donates $500 to his town’s junior college scholarship fund.
*c.Ms. Bartolini pays $500 to fix the front end of her car damaged in a recent accident.
d.Ms. Smith pays $5,000 to purchase 100 shares of Microsoft stock.
22.A professional gambler moves from a state where gambling is illegal to a state where gambling is legal. Most of his income was, and continues to be, from gambling. His move
*a.necessarily raises GDP.
b.necessarily decreases GDP.
c.doesn't change GDP because gambling is never included in GDP.
d.doesn't change GDP because in either case his income is included.
23.General Motors Corporation (a U.S.-based firm) produces a Saab vehicle in Sweden, and sells it in the United States. In which country's GDP is it included?
a.Sweden and the United States
b.The United States because it was sold there
c.The United States because GM is a U.S. company
*d.Sweden because it was produced there
24.If Honda (a Japan-based firm) produces a car in Ohio and exports it to Japan, in which country's GDP will the car be counted?
a.Japan's, because Honda is a Japanese company
b.Japan's because that is where the car is purchased
*c.The GDP of the United States because that is where it was built
d.Both Japan and the United States
25.In computing GDP, market prices are used to value final goods and services because
*a.market prices reflect the values of goods and services to the buyer.
b.market prices do not change much over time, so it is easy to make comparisons between years.
c.if market prices are out of line with how people value goods, the government sets price ceilings and price floors.
d.None of the above is correct; market prices are not used in computing GDP.
26.U.S. GDP and U.S. GNP are related as follows:
*a.GNP = GDP - Income earned by foreigners in the U.S. + Income earned by U.S. citizens abroad.
b.GNP = GDP + Income earned by foreigners in the U.S. - Income earned by U.S. citizens abroad.
c.GNP = GDP + Value of exported goods - Value of imported goods.
d.GNP = GDP - Value of exported goods + Value of imported goods.
27.Suppose a country had $2.4 billion of net exports and bought $4.8 billion of goods and services from foreign countries. This country would have
*a.$7.2 billion of exports and $4.8 billion of imports.
b.$7.2 billion of imports and $4.8 billion of exports.
c.$4.8 billion of exports and $2.4 billion of imports.
d.$4.8 billion of imports and $2.4 billion of exports.
28.Suppose a country had net exports of $8.3 billion and sold $52.4 billion of goods and services abroad. This country had
a.$60.7 billion of imports and $52.4 billion of imports.
b.$60.7 billion of exports and $52.4 of imports.
c.$52.4 billion of imports and $44.1 billion of exports.
*d.$52.4 billion of exports and $44.1 billion of imports.
29.Which of the following expenditures are not included in the consumption component of GDP?
a.maid service
*b.purchase of a new home
c.a new videocassette recorder
d.a restaurant meal
e.tax preparation service
30.U.S. imports are
*a.not added to U.S. GDP because they are produced abroad
b.added to U.S. GDP because they are consumed domestically
c.added to U.S. GDP because they represent an increase in inventories
d.added to U.S. GDP as government purchases because the government decides what goods may be imported
e.not added to U.S. GDP because they are intermediate goods
31.U.S. exports are
a.not included in U.S. GDP because they are consumed abroad
*b.included in U.S. GDP because they are produced domestically
c.included in U.S. GDP because they represent an increase in inventories
d.included in U.S. GDP as government purchases because the government decides what goods may be exported
e.not included in U.S. GDP because they are not subject to a tariff
32.If U.S. net exports are negative,
a.U.S. consumers are spending less on foreign goods than foreign consumers are spending on U.S. goods
*b.U.S. consumers are spending more on foreign goods than foreign consumers are spending on U.S. goods
c.the government must promote imports to balance international trade
d.U.S. consumers are spending more on foreign goods than they are spending on U.S. goods
e.U.S. disposable income is low
33.The amount of U.S. exports purchased by the rest of the world is primarily determined by
a.real disposable income in the United States
*b.real disposable income in other nations
c.the real interest rate in other nations
d.the real interest rate in the United States
e.the government budget deficits in other nations
34.Gross private domestic investment
a.excludes all investment in the United States by foreign firms.
b.includes all capital in the United States.
c.includes net additions to the capital stock plus all new corporate stocks and bonds.
*d.includes business expenditures on new factories, tools, and machinery.
35.Gross private domestic investment includes business
a.purchases of capital goods, all new construction, and purchases of consumer durable
goods.
*b.purchases of capital goods, all new construction, and inventory investment.
c.purchases of capital goods, all new commercial construction, and inventory investment.
d.purchases of capital goods, all new residential construction, and inventory investment.
e.purchases of all types of durable goods, all new construction, and inventory investment.
36.New residential housing is counted in GDP as a(n)
a.durable consumption good.
b.household durable good.
*c.investment good.
d.inventory expansion.
e.long-term durable good.
37.Which of the following would increase the GDP of the United States?
a.A Californian buys a case of wine from a winery in France.
*b.A Frenchman buys a case of wine from a winery in California.
c.A Californian spends $3,000 on a vacation in the French Alps.
d.A French investor purchases 100 shares of a computer company located in Silicon Valley.
38.Which of the following transactions would be included in this year’s GDP?
a.Johnson purchases a five-year-old house from Smith.
*b.Johnson rents a five-year-old house from Smith.
c.Johnson purchases 100 shares of AT&T stock from Smith.
d.Johnson purchases an antique at Smith’s garage sale.
39.Which of the following would not affect this year’s GDP?
a.the paint you purchased when painting your house
b.the new car your parents purchased and gave to you as a birthday present
c.a Gateway computer purchased by the U.S. government
*d.the value of a used car you purchased, at its sale price
40.Which of the following would be included in 2007 GDP?
a.the purchase price of a 2001 Honda bought in 2007
b.damages sustained due to a hurricane
*c.the 2007 expenditures on repairs required as the result of a hurricane
d.the purchase price of 100 shares of Microsoft stock bought in 2007
41.A business produced $10 million of goods in 2007 but sold only $9 million. Is the $1 million increase in inventory counted as part of the 2007 gross domestic product?
a.No, because inventories are intermediate goods.
b.No, because if these inventories were sold in 2008, they would be counted twice.
*c.Yes, because these inventories are part of the output of the economy in 2007.
d.Yes, but they will be added to the 2007 GDP only if they are sold in 2008.
42.Which of the following would count as an investment expenditure in national income accounting?
a.General Motors hires 10 electrical engineers.
*b.Boeing purchases a new metal stretching machine used to produce airplane wings.
c.Ms. Quantum buys 100 shares of Microsoft stock.
d.A large corporation spends $10,000 per month on long-distance phone charges.
43.Which of the following does not contribute to GDP?
*a.You lose $50 playing cards with friends.
b.You pay a doctor $200 to treat an arm that you broke in an accident.
c.You pay $300 for this month’s rent on your apartment.
d.Your economics textbook is revised, and you buy the new edition.
44.Which of the following will contribute to GDP?
a.Your spouse cleans your house every Thursday.
b.You sell an old bicycle for $100.
c.You find your lost economics textbook.
*d.You pay a doctor $200 to treat an arm that you broke in an accident.
45.Which of the following transactions would enter directly into the determination of GDP?
a.a bicycle you purchased at a garage sale
b.the retirement check your uncle received for spending 25 years in the Marine Corps
*c.the DVD player you purchased from Best Buy
d.the five shares of Microsoft stock your grandparents gave you for making an A in economics
46.If a used car dealer purchases a used car for $3,000, refurbishes it, and sells it for $8,000, the
a.dealer contributes value added equal to $5,000, but nothing is added to GDP.
*b.dealer contributes value added equal to $5,000, and consequently $5,000 is added to GDP.
c.dealer contributes nothing to production because only existing goods are involved.
d.dealer contributes value added equal to $8,000, but only $5,000 is added to GDP.
47.If a local shop buys a used motorcycle for $1,000, refurbishes it, and resells it for $2,500, the
a.shop contributes value added equal to $1,500, but nothing is added to GDP.
*b.shop contributes value added equal to $1,500, and consequently $1,500 is added to GDP.
c.shop contributes nothing to production because only existing goods are involved.
d.shop contributes value added equal to $2,500, but only $1,500 is added to GDP.
48.Which of the following would increase GDP?
a.buying a used car
*b.buying a newly constructed house
c.buying an imported rug
d.giving a domestically produced rug to charity
49.Which of the following would increase GDP?
a.buying a 10-year-old house
b.purchasing 100 shares of McDonald’s stock
*c.a $1,000 expenditure on roof repairs after a Florida hurricane
d.a $1,000 contribution to the Red Cross to assist the victims of a Florida hurricane
50.Which of the following transactions would increase GDP?
*a.a new tricycle purchased at a department store sale by the parents of a three-year-old child
b.the retirement check your uncle received for spending 25 years in the Marine Corps
c.the five shares of Microsoft stock your grandparents gave you for making an A in economics
d.the $200 you lost when your wallet was stolen
51.Which of the following will increase GDP?
a.You buy an old tricycle at a garage sale.
*b.You buy a dead bolt to protect your home against burglars.
c.The price of the Microsoft shares you own increases by $10.
d.The face value of a life insurance policy paid to a woman upon the death of her husband.
52.Which of the following transactions would increase GDP?
*a.a $500 bill to repair the transmission of your car
b.a television you purchased at a garage sale
c.100 shares of Citibank stock that you purchased
d.the Social Security retirement check your grandmother received
53.Which of the following events will increase GDP?
a.losing $500 playing blackjack in your dorm
b.selling an antique writing desk for $500 cash