Chapter 7

Question 1

One year nominal GDP was $286 billion and the price index was 88. Real GDP that year was:

a) $308 billion
b) $262 billion
c) $325 billion
d) $252 billion

Answer 1

$325 billion

Question 2

Nominal GDP has generally risen more rapidly than real GDP since World War II in the United States, suggesting that:

a) The general price level has increased
b) Productivity has increased substantially
c) World trade has increased
d) The general price level has declined

Answer 2

The general price level has increased

Question 3

The consumption of fixed capital in each year’s production is called:

a) Net investment
b) Inventory reduction
c) Depreciation
d) Indirect business taxes

Answer 3

Depreciation

Question 4

An example of final goods in national income accounts would be:

a) Chemicals purchased by Green Grass Lawn Care Services
b) Seedlings and saplings purchased for resale by Wendy’s Garden Center
c) New lawn mowers purchased by Cut-Rite Lawn Equipment & Supplies
d) Flowers and pots purchased by homeowner Joe Smith

Answer 4

Flowers and pots purchased by homeowner Joe Smith

Question 5

Nominal GDP differs from real GDP because:

a) Nominal GDP is based on constant prices
b) Real GDP is based on current prices
c) Nominal GDP results from adjusting for changes in the price level
d) Real GDP results from adjusting for changes in the price level

Answer 5

Real GDP results from adjusting for changes in the price level

Question 6

When local police and fire departments buy new cars for their operations, these are counted as part of:

a) G
b) I(g)
c) X(n)
d) C

Answer 6

G

Question 7

The two ways of looking at GDP are the:

a) Output approach and consumption approach
b) Income approach and saving approach
c) Expenditures approach and income approach
d) Output approach and expenditures approach

Answer 7

Expenditures approach and income approach

Question 8

Computation of GDP by the expenditures method would include the purchase of:

a) Cement by a construction company
b) Land by the U.S. Department of Interior
c) Government bonds by a commercial bank
d) Fertilizer by a farmer

Answer 8

Land by the U.S. Department of Interior

Question 9

The expenditures or output approach to GDP measures it by summing up:

a) Compensation of employees, rents, interest, dividends, corporate profits, proprietors’ income, and indirect business taxes, and subtracting the consumption of fixed capital
b) The total spending for consumption and government purchases, but subtracting public and private transfer payments
c) Compensation of employees, rents, interest, dividends, undistributed corporate profits, proprietors’ income, indirect business taxes paid, consumption of fixed capital, and net foreign factor income earned in the United States
d) The total spending for consumption, investment, net exports, and government purchases

Answer 9

The total spending for consumption, investment, net exports, and government purchases

Question 10

Over a year, a nation’s GDP at current prices rose by 15 percent while the price index increased from 100 to 110. GDP at constant prices rose by about:

a) 7 percent
b) 5 percent
c) 9 percent
d) 3 percent

Answer 10

5 percent

Question 11

Which of the following is included in GDP?

a) Welfare payments received by some households
b) Payments received from selling stocks in one’s portfolio
c) Fees received by stockbrokers
d) Cash gifts from relatives during the holidays

Answer 11

Fees received by stockbrokers

Question 12

In an economy that is experiencing a shrinking production capacity:

a) Gross domestic investment is negative
b) Depreciation is negative
c) Net private domestic investment is zero
d) Depreciation exceeds gross investment

Answer 12

Depreciation exceeds gross investment

Question 13

GDP understates the amount of economic production in the United States because it excludes:

a) Purchases of stocks and bonds
b) Transfer payments
c) Work performed by people for their own benefit
d) Spending for the U.S. military

Answer 13

Work performed by people for their own benefit

Question 14

The sale of a used automobile would not be included in GDP of the current year because it is a:

a) Purely financial transaction
b) Nonproduction transaction
c) Nonmarket transaction
d) Private transfer payment

Answer 14

Nonproduction transaction

Question 15

Net exports is a positive number when:

a) A nation’s exports of goods and services are increasing
b) A nation’s exports of goods and services exceed its imports
c) A nation exports goods and services to other nations
d) A nation’s exports of goods and services fall short of its imports

Answer 15

A nation’s exports of goods and services exceed its imports

Question 16

The U.S. Customs Service is a main source of data for:

a) X(n)
b) C
c) I(g)
d) G

Answer 16

X(n)

Question 17

The service a homeowner performs when she mows her yard is not included in GDP because:

a) This is a nonmarket transaction
b) Multiple counting would be involved
c) This is a noninvestment transaction
d) This is a nonproduction activity

Answer 17

This is a nonmarket transaction

Question 18

Value added by a firm is the market value of the firm’s output minus the:

a) Profits that the firm’s owners earn
b) Value of inputs bought from other firms
c) Total wages paid to its employees
d) Total costs of all inputs used

Answer 18

Value of inputs bought from other firms

Question 19

Subtracting the purchase of intermediate products and supplies from the value of the sales of final products determines the amount of:

a) Surplus or deficit from the economic activity
b) Profit and cost
c) Value added from the economic activity
d) Net investment for a business

Answer 19

Value added from the economic activity

Question 20

An example of intermediate goods would be:

a) Sacks of groceries bought by a dentist for his family
b) Bricks bought by a homeowner for constructing a patio
c) Cars bought by a car-rental company
d) Paper and ink bought by a publishing company

Answer 20

Paper and ink bought by a publishing company

Question 21

Gordon is a person who sells narcotics “on the street.” This type of illegal activity:

a) Is excluded from GDP figures
b) Causes GDP to be overstated
c) Would be considered double counting in calculating GDP
d) Is estimated and included in GDP figures

Answer 21

Is excluded from GDP figures

Question 22

GDP is the market value of:

a) All final goods and services produced in an economy in a given year
b) Resources (land, labor, capital, and entrepreneurship) in an economy in a given year
c) All output produced and accumulated over the years
d) Consumption and investment spending in an economy in a given year

Answer 22

All final goods and services produced in an economy in a given year

Question 23

The following are national income account data for a hypothetical economy in billions of dollars: gross private domestic investment ($320); imports ($35); exports ($22); personal consumption expenditures ($2,460); and, government purchases ($470). What is GDP in this economy?

a) $3,237 billion
b) $3,263 billion
c) $3,290 billion
d) $3,250 billion

Answer 23

$3,237 billion