Chapter 19 Review Questions

b. rent; profit

Complete the following sentence: Total income in the economy equals the sum of wages, interest, _________ and ________. a. dividends; transfer payments b. rent; profit c. taxes; transfer payments d. disposable income; net exports

a. personal income minus personal tax payments plus government transfer payments.

Disposable personal income is equal to a. personal income minus personal tax payments plus government transfer payments. b. personal income minus government transfer payments plus personal tax payments. c. personal income minus Social Security payments. d. the income households have to consume, save, and pay taxes.

b. households

Fill in the blank. The flow of funds from ___________ into the financial system makes it possible for government and firms to borrow. a. government and firms b. households c. investment banks d. exports

b. by adding the value in dollar terms of all of the final goods and services produced domestically

How does the Bureau of Economic Analysis of the U.S. Department of Commerce measure GDP? a. by adding the quantities produced of every good and service in the economy b. by adding the value in dollar terms of all of the final goods and services produced domestically c. by ascribing a historic value to all of the quantities produced in the economy d. in some cases, by adding quantities, and in others by adding the value of goods and services produced

c. GDP would be much higher than it is, but the well-being of the typical person would not

If Americans still worked sixty hour weeks, as they did in 1890, a. both GDP and the well-being of the typical person would be much higher than they are. b. both GDP and the well-being of the typical person would be lower than they are. c. GDP would be much higher than it is, but the well-being of the typical person would not necessarily be higher. d. GDP would be lower than it is, but the well-being of the typical person would be higher.

d. prices have decreased 2 percent between the base year and 2010.

If the GDP deflator in 2010 has a value of 98.0, then a. the inflation rate in 2010 is 2 percent. b. the inflation rate in 2010 is -2 percent. c. prices have increased 9.8 percent between the base year and 2010. d. prices have decreased 2 percent between the base year and 2010.

d. all of the income in the economy.

If we add up the value of every final good and service produced in the economy, we must get a total that is exactly equal to the value of a. investment. b. net national product. c. disposable personal income. d. all of the income in the economy.

a. nominal GDP is larger than real GDP in years after the base year.

In an economy with rising prices, compared to the base year, a. nominal GDP is larger than real GDP in years after the base year. b. nominal GDP is equal to real GDP in years after the base year. c. nominal GDP is larger than real GDP in years before the base year. d. nominal GDP is equal to real GDP in years before the base year.

b. real GDP and the price deflator using chain weights.

Over time, prices may change relative to each other. To allow for this, the Bureau of Economic Analysis calculates a. nominal GDP using chain weights. b. real GDP and the price deflator using chain weights. c. real GDP and nominal GDP using only base-year prices. d. real GDP using the prices in the current year.

d. all of the above

Which of the following would be considered a factor of production? a. capital b. natural resources c. entrepreneurship d. all of the above

c. Multiply the quantities in 2011 by the prices in 2000, and add up the results.

Suppose that the base year is 2000, and we want to calculate real GDP for 2011. Which procedure would you use? a. Multiply the quantities in 2000 by the prices in 2011, and add up the results. b. Multiply the quantities in 2011 by the prices in 2011, and add up the results. c. Multiply the quantities in 2011 by the prices in 2000, and add up the results. d. Multiply the quantities in 2011 by the prices in 2011, and subtract them from nominal GDP in 2000.

b. disposable personal income.

The best measure of the income households actually have available to spend is a. national income. b. disposable personal income. c. net national product. d. gross domestic product.

c. value added.

The difference between the price the firm sells a good for and the price it paid other firms for intermediate goods is called a. producer surplus. b. fixed investment. c. value added. d. profit.

b. smaller than the value of GDP.

The total national income actually received by a country's residents is a. larger than the value of GDP. b. smaller than the value of GDP. c. exactly equal to the value of GDP. d. smaller or larger than the value of GDP depending on the year.

c. add government transfer payments

To calculate personal income from national income, which of the following must be done by the BEA? a. add corporate retained earnings b. add profits c. add government transfer payments d. all of the above

a. nominal GDP was lower than real GDP in 2000.

Using the year 2010 as the base year, and assuming that prices during 2000 were lower on average than prices in 2010, we can conclude that a. nominal GDP was lower than real GDP in 2000. b. nominal GDP was higher than real GDP in 2000. c. nominal GDP was equal to real GDP during 2000. d. neither nominal GDP nor real GDP were good measures of GDP.

c. GDP is overestimated because of double counting.

What happens if we measure GDP by adding up the value of every good and service produced in the economy? a. This is the accurate measure of nominal GDP but not real GDP. b. This is the accurate measure of real GDP but not nominal GDP. c. GDP is overestimated because of double counting. d. GDP is underestimated because of double counting.

c. Most economists would answer "no" because the purpose of measuring GDP is to see how the economy performs over fairly long periods of a decade or more.

According to most economists, is not counting household production or production in the underground economy a serious shortcoming of GDP? a. Most economists would answer "no" because these types of production do not affect the most important use of the GDP measure, which is to see how the economy is performing over short periods of time. b. Most economists would answer "yes" because these types of production are likely to grow significantly from one year to the next. c. Most economists would answer "no" because the purpose of measuring GDP is to see how the economy performs over fairly long periods of a decade or more. d. Most economists would answer "yes" because these types of production are likely to be a large component of the economy (or large percentage of measured GDP), especially in countries like the United States.

d. we can measure GDP by calculating the total value of expenditures on final goods and services, or we can measure GDP by calculating the value of total income.

An important conclusion to draw from the circular-flow diagram is that a. personal consumption expenditures are equal to the value of GDP. b. only the value of total income equals the value of GDP, not the value of expenditures. c. only the total value of expenditures equals the value of GDP, not the value of income. d. we can measure GDP by calculating the total value of expenditures on final goods and services, or we can measure GDP by calculating the value of total income.

a. devote more resources to pollution reduction.

As the value of a country's GDP increases, the country is likely to a. devote more resources to pollution reduction. b. devote fewer resources to pollution reduction. c. include the value of pollution in calculating GDP. d. exclude the value of pollution in calculating GDP.

c. the market value of all final goods and services produced in a country during a period of time.

Gross domestic product is best defined as a. the total quantity of goods and services produced in a country during a period of time. b. the total value of all goods that can be found in a country. c. the market value of all final goods and services produced in a country during a period of time. d. the amount of all incomes earned by all citizens of a country, including those living overseas.

b. growth in real GDP.

Growth in the economy is almost always measured as a. growth in nominal GDP. b. growth in real GDP. c. growth in net national product. d. the growth of personal disposable income.

c. are important but unaccounted for in the Commerce Department's estimate of GDP.

Household production and the underground economy a. are fully accounted for in GDP figures gathered by the Commerce Department. b. are not considered formal production of goods and services and, therefore, are not included when calculating GDP. c. are important but unaccounted for in the Commerce Department's estimate of GDP. d. are irrelevant because they constitute only a very small fraction of GDP for most countries.

b. spending by federal, state, and local governments

In calculating GDP, which levels of government spending are included in government purchases? a. spending by the federal government only b. spending by federal, state, and local governments c. spending by the federal government and some state governments, but not local governments d. spending by governments only as they relate to national security, social welfare, and other national programs

b. large; high; extensive

In many developing countries, the informal sector is ________ because taxes are ________ and government regulations are ___________. a. large; low; minimal b. large; high; extensive c. small; low; minimal d. small; low; extensive

c. indirect business taxes.

In the National Income and Product Accounts (NIPA), sales taxes are referred to as a. subsidies. b. excise taxes. c. indirect business taxes. d. government revenue.

a. households

In the circular-flow diagram, who supplies factors of production in exchange for income? a. households b. firms c. the government d. all of the above

d. all of the above

Which of the following is counted in the gross private domestic investment category used by the Bureau of Economic Analysis when measuring GDP? a. business fixed investment b. residential investment c. changes in business inventories d. all of the above

b. the value of goods and services evaluated at base year prices.

Real GDP is a. the value of goods and services evaluated at current year prices. b. the value of goods and services evaluated at base year prices. c. equal to the value of nominal GDP in every year except for the base year. d. a measure of output that was replaced by nominal GDP some time ago.

d. the study of how fast prices in general are increasing

Which of the following is a macroeconomic study? a. the study of how households and businesses make choices b. the study of how households and businesses interact in markets c. the study of how the government attempts to influence the choices of households and businesses d. the study of how fast prices in general are increasing

c. by counting only the value of the computer and ignoring the value of the components

When a consumer purchases a new computer, how is that purchase counted in GDP? a. by adding the value of the various components of the computer to the final price paid for the computer by the consumer b. by subtracting the value of the components from the price paid by the consumer c. by counting only the value of the computer and ignoring the value of the components d. None of the above. The production and sale of the computer would not be counted in GDP.

b. GDP will be much larger than GNP.

When a significant fraction of domestic production takes place in foreign-owned facilities, a country's difference between GDP and GNP is as follows: a. GNP will be a more accurate measure of the level of production within the country's borders. b. GDP will be much larger than GNP. c. GNP will be almost identical to GDP. d. GNP will be closer to zero.

a. Exports are added to the other categories of expenditures.

When accounting for exports and imports in GDP, which of the following is correct? a. Exports are added to the other categories of expenditures. b. Imports are added to the other categories of expenditures. c. Both exports and imports are added to the other categories of expenditures. d. Both exports and imports are subtracted from the other categories of expenditures.

a. consumption

Which is the largest component of GDP? a. consumption b. investment c. government purchases d. exports

b. real GDP

Which measure of GDP represents changes in the quantity of goods and services produced in the economy, holding prices constant? a. nominal GDP b. real GDP c. net national product d. None of the above. All GDP measures represent changes in both prices and quantities.

d. intermediate goods

Which of the following are not considered as final goods, as used in the definition of GDP? a. consumption goods b. investment goods c. exports d. intermediate goods

d. depreciation

Which of the following do we subtract from GNP to obtain NNP? a. the production of fixed capital b. consumption c. investment d. depreciation

d. a new house

Which of the following goods and services would be excluded from personal consumption expenditures in the Bureau of Economic Analysis (BEA) statistics? a. medical care b. education c. a haircut d. a new house

a. only this year's production of goods and services

Which of the following is counted in this year's GDP? a. only this year's production of goods and services b. only goods that are both produced and sold within the United States c. new goods produced and sold this year plus the value of used goods resold this year d. this year's production of goods and services added to the value of GDP last year

a. the purchase of new machines, factories, or houses

Which of the following is included in the economist's definition of investment? a. the purchase of new machines, factories, or houses b. the purchase of a share of stock c. the purchase of a rare coin or a deposit in a savings account d. all of the above

c. government taxes

Which of the following is not a component of GDP from the expenditure point of view? a. consumption b. investment c. government taxes d. net exports

c. It only counts final goods and services and not intermediate goods.

Which of the following is not a shortcoming of GDP as a measure of welfare? a. It does not include the value of leisure. b. It is not adjusted for the effects of pollution caused by the production of goods and services. c. It only counts final goods and services and not intermediate goods. d. It is not adjusted for crime and other social problems.

b. GDP includes both intermediate and final goods.

Which of the following is not true of GDP? a. GDP is measured by adding up the market values of goods produced, not the quantities of goods produced. b. GDP includes both intermediate and final goods. c. GDP includes only current production. d. GDP is calculated by the Bureau of Economic Analysis (BEA).

d. Consumer spending on services was greater than the sum of spending on durable and nondurable goods.

Which of the following is true about the consumption component of U.S. GDP in 2010? a. Consumer spending on durable and nondurable goods was greater than consumption of services. b. Consumer spending on durable goods was greater than the sum of spending on nondurable goods and on services. c. Consumer spending on nondurable goods was greater than the sum of spending on nondurable goods and on services. d. Consumer spending on services was greater than the sum of spending on durable and nondurable goods.

d. Purchases by state and local governments are greater than purchases by the federal government.

Which of the following is true about the government purchases component of U.S. GDP in 2010? a. The entire amount was composed of federal government purchases because state and local governments are not included. b. Most of the spending on education and law enforcement occurs at the federal level. c. Purchases by the federal government are greater than purchases by state and local governments. d. Purchases by state and local governments are greater than purchases by the federal government.