Chapters 23, 24, 26 & 28 Review Questions

Chapters 23, 24, 26 & 28 Review Questions

Multiple Choice

Identify the letter of the choice that best completes the statement or answers the question.

____1.For an economy as a whole,

a. / wages must equal profit.
b. / consumption must equal saving.
c. / income must equal expenditure.
d. / household spending on goods must equal household spending on services.

____2.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 tangible goods produced within a country in a given period of time.
c. / the quantity of all final goods and services supplied within a country in a given period of time.
d. / the quantity of all final goods and services demanded within a country in a given period of time.

____3.To compute GDP, we

a. / add up the wages paid to all workers.
b. / add up the costs of producing all final goods and services.
c. / add up the market values of all final goods and services.
d. / take the difference between the market value of all final goods and services and the cost of producing those final goods and services.

____4.Which of the following transactions adds to U.S. GDP for 2006?

a. / In 2006, Marvin Windows manufactures 20 windows that will eventually be installed in an office building in Minneapolis. The windows remain in Marvin’s inventory at the end of 2006.
b. / An Irish marketing consultant works in Boston during the summer of 2006 and earns $30,000 during that time.
c. / When John and Jennifer were both single, they lived in separate apartments and each paid $750 in rent. John and Jennifer got married in 2006 and they bought a house that, according to reliable estimates, could be rented for $1,600 per month.
d. / All of the above transactions adds to GDP for 2006.

____5.Suppose an apartment complex converts to a condominium, so that the former renters are now owners of their housing units. Suppose further that a current estimate of the value of the condominium owners' housing services is the same as the rent they previously paid. What happens to GDP as a result of this conversion?

a. / GDP necessarily increases.
b. / GDP necessarily decreases.
c. / GDP is unaffected because neither the rent nor the estimate of the value of housing services is included in GDP.
d. / GDP is unaffected because previously the rent payments were included in GDP, and now the rent payments are replaced in GDP by the estimate of the value of housing services.

____6.Estimates of the values of which of the following non-market goods or services are included in GDP?

a. / the value of unpaid housework
b. / the value of vegetables and other foods that people grow in their gardens
c. / the estimated rental value of owner-occupied homes
d. / All of the above are included.

____7.A movie company makes 500,000 DVDs of one of its latest releases. It sells 300,000 of them before the end of the second quarter, and holds the others in its warehouse. How will the 200,000 unsold DVDs be treated in the GDP statistics?

a. / Since the DVDs eventually will be bought by consumers, they are included as consumption in the second quarter.
b. / Since the DVDs were not purchased this quarter, they will be counted as an increase in third-quarter GDP.
c. / The DVDs will be counted as a change in inventory in the second quarter and so will be included in second-quarter GDP.
d. / The DVDs will be counted as a change in inventory in the second quarter, and when sold in the third quarter will raise third-quarter GDP.

____8.Anna, a U.S. citizen, works only in Germany. The value she adds to production in Germany is included

a. / in U.S. GDP, but it is not included in German GDP.
b. / in German GDP, but it is not included in U.S. GDP.
c. / in both German GDP and U.S. GDP.
d. / in neither German GDP nor U.S. GDP.

____9.Which of the following examples of production of goods and services would count as part of U.S. GDP?

a. / Samantha, a Canadian citizen, grows sweet corn in Minnesota and sells it to a grocery store in Canada.
b. / Ian, an American citizen, grows peaches for his family in the back yard of their Atlanta home.
c. / Brian, an American citizen, grows marijuana in his Seattle home and sells it to his friends and neighbors.
d. / None of the above examples of production would count as part of U.S. GDP.

____10.How does U.S. gross domestic product (GDP) differ from U.S. gross national product (GNP)?

a. / GNP = GDP minus losses from depreciation
b. / GNP = GDP + income earned by U.S. citizens abroad - income that foreign citizens earned in the U.S.
c. / GNP = GDP + income earned by corporations
d. / GNP = GDP - indirect business taxes + business subsidies

____11.Unemployment compensation is

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

____12.Which of the following components or sub-components of GDP can be either positive or negative?

a. / consumers' spending on durable goods
b. / firms' spending on capital equipment
c. / net exports
d. / All of the above are correct.

____13.In the equation Y = C + I + G + NX,

a. / Y represents the economy’s total expenditure.
b. / C represents household expenditures on services and durable goods.
c. / all of the variables are always positive numbers.
d. / All of the above are correct.

____14.In a certain economy in 2005, government purchases exceeded investment by $2,000; investment amounted to 1/6 of GDP; consumption amounted to 1/2 of GDP; and the economy’s imports exceeded its exports by $500. It follows that GDP amounted to

a. / $4,500.
b. / $7,500.
c. / $9,000.
d. / $10,500.

____15.Real GDP

a. / evaluates current production at current prices.
b. / evaluates current production at the prices that prevailed in some specific year in the past.
c. / is not a valid measure of the economy's performance, since prices change from year to year.
d. / is a measure of the value of goods only; it excludes the value of services.

____16.Suppose that the country of Samiam produces only eggs and ham. In 2005 it produced 100 dozen eggs at $3 per dozen and 50 pounds of ham at $4 per pound. In 2004, the base year, eggs sold for $1.50 per dozen and ham sold for $5 per pound. For 2005,

a. / nominal GDP is $500, real GDP is $400, and the GDP deflator is 80.
b. / nominal GDP is $500, real GDP is $400, and the GDP deflator is 125.
c. / nominal GDP is $400, real GDP is $400, and the GDP deflator is 100.
d. / nominal GDP is $400, real GDP is $500, and the GDP deflator is 125.

____17.If a small country has current nominal GDP of $25 billion and the GDP deflator is 125, what is real GDP?

a. / $312.5 billion
b. / $207.5 billion
c. / $31.25 billion
d. / None of the above is correct.

____18.Dave, a student who knits ski caps with tassels and sells them on the Quad, sells the same number of caps this year as last year, but at 20 percent higher prices. Which of the following statements is correct?

a. / Dave must be better off than last year because his income is higher.
b. / Dave cannot be better off than last year because he sold the same number of caps both years.
c. / We do not have enough information to determine whether Dave is better off this year than last year.
d. / Dave is better off this year only if there was no inflation over the past year.

____19.In the calculation of the CPI, coffee is given greater weight than tea if

a. / consumers buy more coffee than tea.
b. / the price of coffee is higher than the price of tea.
c. / it costs more to produce coffee than it costs to produce tea.
d. / coffee is more readily available than is tea to the typical consumer.

Table 24-1

year / Peaches / Pecans
2005 / $11 per bushel / $6 per bushel
2006 / $9 per bushel / $10 per bushel

____20.Refer to Table 24-1. Suppose the typical consumer basket consists of 10 bushels of peaches and 15 bushels of pecans. Using 2005 as the base year, the CPI for 2006 is

a. / 100.
b. / 120.
c. / 200.
d. / 240.

____21.The market basket used to calculate the CPI in Aquilonia is 4 loaves of bread, 6 gallons of milk, 2 shirts and 2 pants. In 2005, bread cost $1.00 per loaf, milk cost $1.50 per gallon, shirts cost $6.00 each and pants cost $10.00 per pair. In 2006, bread cost $1.50 per loaf, milk cost $2.00 per gallon, shirts cost $7.00 each and pants cost $12.00 per pair. Using 2005 as the base year, what was Aquilonia’s inflation rate in 2006?

a. / 30 percent
b. / 24.4 percent
c. / 21.6 percent
d. / It is impossible to determine without knowing the base year.

____22.In an imaginary economy, consumers buy only sandwiches and magazines. The fixed basket consists of 20 sandwiches and 30 magazines. In 2006, a sandwich cost $4 and a magazine cost $2. In 2007, a sandwich cost $5. The base year is 2006. If the inflation rate in 2007 was 16 percent, then how much did a magazine cost in 2007?

a. / $2.08
b. / $2.32
c. / $2.50
d. / $2.64

____23.Let 2004 be the base year; then

a. / Inflation rate in 2005 =
b. / Inflation rate in 2005 =
c. / Inflation rate in 2005 =
d. / Inflation rate in 2005 =

____24.Let 2002 be the base year; then

a. / Inflation rate in 2005 =
b. / Inflation rate in 2005 =
c. / Inflation rate in 2005 =
d. / Inflation rate in 2005 =

____25.If this year the CPI is 110 and last year it was 100, then

a. / the cost of the CPI basket of goods and services has increased this year by 110 percent.
b. / the price level as measured by the CPI has increased by 10 percent.
c. / the inflation rate for this year has increased by 10 percent over last year’s inflation rate.
d. / All of the above are correct.

____26.Assume an economy experienced a positive rate of inflation between 2003 and 2004 and again between 2004 and 2005. However, the inflation rate was lower between 2004 and 2005 than it was between 2003 and 2004. Which of the following scenarios is consistent with this assumption?

a. / The CPI was 100 in 2003, 110 in 2004, and 105 in 2005.
b. / The CPI was 100 in 2003, 120 in 2004, and 135 in 2005.
c. / The CPI was 110 in 2003, 106 in 2004, and 100 in 2005.
d. / All of the above are correct.

____27.Which of these changes in the price index produces the greatest rate of inflation: 106 to 112, 112 to 118, or 118 to 124?

a. / 106 to 112
b. / 112 to 118
c. / 118 to 124
d. / All three changes show the same rate of inflation.

____28.Suppose the price of gasoline increases rapidly, and that consumers respond by buying a smaller quantity of gasoline. The consumer price index

a. / reflects this price increase accurately.
b. / understates the price increase due to the so-called income bias.
c. / overstates the price increase due to the so-called income bias.
d. / overstates the price increase due to the so-called substitution bias.

____29.Suppose the price of a quart of milk rises from $1 to $1.25 and the price of a T-shirt rises from $8 to $10. If the CPI rises from 150 to 175, then people likely will buy

a. / more milk and more T-shirts.
b. / more milk and fewer T-shirts.
c. / less milk and more T-shirts.
d. / less milk and fewer T-shirts.

____30.When the quality of a good deteriorates, the purchasing power of the dollar

a. / increases, so the CPI overstates the change in the cost of living if the quality change is not accounted for.
b. / increases, so the CPI understates the change in the cost of living if the quality change is not accounted for.
c. / decreases, so the CPI overstates the change in the cost of living if the quality change is not accounted for.
d. / decreases, so the CPI understates the change in the cost of living if the quality change is not accounted for.

____31.To which of the problems in the construction of the CPI is the invention of pocket-sized computers most relevant?

a. / substitution bias
b. / introduction of new goods
c. / unmeasured quality change
d. / income bias

____32.Which of the following statements best represents economists' beliefs about the bias in the CPI as a measure of the cost of living?

a. / Economists agree that the bias in the CPI is a very serious problem.
b. / Economists agree that the bias in the CPI is not a serious problem.
c. / Economists agree on the severity of the CPI bias, but there is still debate on what to do about it.
d. / There is still debate among economists on the severity of the CPI bias and what to do about it.

____33.Most studies in the 1990s concluded that the consumer price index overstated inflation by about

a. / 3 percentage points, and that number of percentage points likely still applies now.
b. / 3 percentage points, but improvements in recent years to the CPI probably have reduced the overstatement of inflation to something less than 3 percentage points.
c. / 1 percentage point, and that number of percentage points likely still applies now.
d. / 1 percentage point, but improvements in recent years to the CPI probably have reduced the overstatement of inflation to something less than 1 percentage point.

____34.Which of the following is the most accurate statement?

a. / In the late 1970s, the late 1980s and early 1990s, the GDP deflator showed high rates of inflation, but the consumer price index showed low rates of inflation.
b. / In the late 1970s, both the GDP deflator and the consumer price index showed high rates of inflation, and in the late 1980s and early 1990s, both measures showed low rates of inflation.
c. / In the late 1970s, both the GDP deflator and the consumer price index showed low rates of inflation, and in the late 1980s and early 1990s, both measures showed high rates of inflation.
d. / In the late 1970s, the late 1980s and early 1990s, both the GDP deflator and the consumer price index showed high rates of inflation.

____35.The consumer price index (CPI) and the GDP deflator are two alternative measures of the overall price level. Which of the following statements about the two measures is correct?

a. / The CPI involves a base year; the GDP deflator does not involve a base year.
b. / The CPI can be used to compute the inflation rate; the GDP deflator cannot be used to compute the inflation rate.
c. / The CPI reflects the prices of goods and services produced domestically; the GDP deflator reflects the prices of all goods and services bought by consumers.
d. / The CPI reflects a fixed basket of goods and services; the GDP deflator reflects current production of goods and services.

____36.Tiffany is offered a Job in Minneapolis that pays $80,000. She is offered a similar job in Memphis that pays $64,000. Which set of CPIs would make the two salaries have almost the same purchasing power?

a. / 90 in Minneapolis and 80 in Memphis
b. / 90 in Minneapolis and 72 in Memphis
c. / 90 in Minneapolis and 66 in Memphis
d. / None of the above is correct.

____37.Ruth collected Social Security payments of $220 a month in 1985. If the price index rose from 90 to 105 between 1985 and 1986, then her Social Security payments for 1986 should have been about

a. / $252.43.
b. / $253.00.
c. / $256.67.
d. / None of the above is correct.

____38.Which of the following statements is correct about the relationship between the nominal interest rate and the real interest rate?

a. / The real interest rate is the nominal interest rate times the rate of inflation.
b. / The real interest rate is the nominal interest rate minus the rate of inflation.
c. / The real interest rate is the nominal interest rate plus the rate of inflation.
d. / The real interest rate is the nominal interest rate divided by the rate of inflation.

____39.In the United States, real interest rates were

a. / high in the 1970s and 1990s.
b. / low in the 1970s and 1990s.
c. / high in the 1970s and low in the 1990s.
d. / low in the 1970s and high in the 1990s.

____40.In the United States in the late 1970s, nominal interest rates were high and inflation rates were very high. As a result, real interest rates were

a. / very high.
b. / moderately high.
c. / low, and in some years they were negative.
d. / low, but never negative.

____41.Assume the consumer price index was 225 in 2006 and 234 in 2007. The nominal interest rate during this period was 6.5 percent. What was the real interest rate during this period?

a. / 2.5 percent
b. / 4.0 percent
c. / 7.5 percent
d. / 10.5 percent

____42.When opening a restaurant you may need to buy ovens, freezers, tables, and cash registers. Economists call these expenditures

a. / capital investment.
b. / investment in human capital.
c. / business consumption expenditures.
d. / None of the above is correct.

____43.When a country saves a larger portion of its GDP, it will have

a. / more capital and higher productivity.
b. / more capital and lower productivity.
c. / less capital and higher productivity.
d. / less capital and lower productivity.

____44.A bond is a

a. / financial intermediary.
b. / certificate of indebtedness.
c. / certificate of partial ownership in an enterprise.
d. / None of the above is correct.

____45.The length of time until a bond matures is called the

a. / perpetuity.
b. / term.
c. / maturity.
d. / intermediation.

____46.Compared to long-term bonds, other things the same, short-term bonds generally have

a. / more risk and so pay higher interest.
b. / less risk and so pay lower interest.
c. / less risk and so pay higher interest.
d. / about the same risk and so pay about the same interest.

____47.On which bond is default most likely?

a. / a junk bond
b. / a municipal bond
c. / a U.S. government bond
d. / a corporate bond issued by Proctor and Gamble.

____48.Assuming that the bonds below have the same term and principal and that the state or local government which issues the municipal bond has a good credit rating, which list has bonds ordered from the one that pays the most interest to the one that pays the least interest?

a. / corporate bond, municipal bond, U.S. government bond
b. / corporate bond, U.S. government bond, municipal bond
c. / municipal bond, U.S. government bond, corporate bond
d. / U.S. government bond, municipal bond, corporate bond

____49.Suppose the city of Cincinnati has a high credit rating.

a. / The high credit rating and the tax status of municipal bonds should both make the interest rate lower than otherwise.
b. / The high credit rating and the tax status of municipal bonds should both make the interest rate higher than otherwise.
c. / The high credit rating should make the interest rate higher than otherwise. The tax status of municipal bonds should make the interest rate lower than otherwise.
d. / The high credit rating should make the interest rate lower than otherwise. The tax status of municipal bonds should make the interest rate higher than otherwise.

____50.Stock represents

a. / a claim to a share of the profits of a firm.
b. / ownership in a firm.
c. / equity finance.
d. / All of the above are correct

____51.Which of the following people purchased the correct asset to meet their objective?