Chapter 7 Study Guide

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Refer to Exhibit 7-1. What is the value of personal income?

A. $4,252

Refer to Exhibit 7-1. What is the value of gross domestic product?

A. $6,062

The typical U.S. business cycle, measured peak to peak, lasts approximately

A. 4 to 5 years.

Why do economists prefer to compare Real GDP figures for various years instead of GDP figures?

A. Because when GDP in one year is higher than in another year, there is no way to tell why it is higher. Is it because output is higher, prices are higher, etc.? This is not the case with Real GDP. If Real GDP is higher in one year than in another year, it is because output is higher.

Which of the following illustrates double counting?

A. The total market value of the steel used to produce a car and the total market value of the car itself are summed.

Is it possible for a country with a relatively large GDP to have a relatively small per-capita GDP?

A. Yes, since the country with a relatively large GDP could have a relatively large population.

Leisure is

A. a good that is not counted in GDP.

To macroeconomists, investment is mainly the purchases of goods and services

A. by businesses.

The expenditure approach to measuring GDP sums

A. consumption, investment, government purchases, and net exports.

To derive net domestic product (NDP) from gross domestic product (GDP), we must subtract

A. depreciation or capital consumption allowance from GDP.

The two ways of measuring Gross Domestic Product are the __________ approach and the __________ approach.

A. expenditure; income

Gross Domestic Product (GDP) is the total market value of all

A. final goods and services produced annually within a country's borders.

An example of income received but not earned is

A. government transfer payments.

Look at the following data: personal income = $4,900 billion; personal taxes = $900 billion; transfer payments = $980 billion. What is disposable income?

B. $4,000 billion

Sophia just bought shares of stock in IBM for $20,000 and paid a $300 commission to her broker. How did this impact GDP?

B. GDP increased by $300.

National income equals

B. compensation of employees + proprietors' income + corporate profits + rental income + net interest.

In the definition of GDP, the words "total market value" refer to total

B. dollar value at current prices.

In the United States, which is the largest dollar figure?

B. gross domestic product

Real GDP is GDP

B. in base-year prices.

Increases in import spending

B. lower GDP.

A business cycle refers to the

B. recurrent swings (up and down) in Real GDP.

Disposable income is

B. that portion of personal income that can be used for consumption and saving.

Which of the following is counted in GDP?

B. the services of a real estate broker

Underground activities are not counted in GDP because

B. there are no written records of underground activities.

The standard definition of "recession" is

B. two consecutive quarters of falling Real GDP.

An example of income earned but not received is

C. undistributed profits.

Depreciation refers to a decrease in the value of a good caused by

C. "wear and tear" of capital goods over time.

An economy produces 10X, 20Y, and 30Z in a year. Base-year prices for these goods are $1, $2, and $3, respectively. Current-year prices for these goods are $2, $3, and $4, respectively. What is Real GDP?

C. $140

Suppose there are five goods in the economy, A-E. The current-year quantity of each is 10A, 20B, 30C, 40D, and 50E. Current-year prices are $1 for each unit of A, $2 for each unit of B, $3 for each unit of C, $4 for each unit of D, and $5 for each unit of E. Base-year prices are $1 for each good. Real GDP in the current year equals _________ and GDP equals _________.

C. $150; $550

Refer to Exhibit 7-5. What was Country Z's economic growth rate between year 1 and year 2?

C. 5.3%

The largest component of national income in the United States is

C. A sales tax is an example of an indirect business tax.

Which of the following statements is false?

C. Corporate profits is the largest component of national income.

If GDP in year 1 is the same dollar amount as the GDP in year 2, does it follow that Real GDP in year 1 is the same as Real GDP in year 2?

C. No, since prices may not be the same in the two years.

In the business cycle, what is the difference between the recovery phase and the expansion phase?

C. The expansion phase is the period when Real GDP increases beyond the recovery phase.

Which of the following statements is false?

C. The market value of a person mowing his or her own lawn is omitted from GDP.

In the United States, the largest expenditure component in GDP is

C. consumption expenditures.

Net exports equals

C. exports minus imports.

What is the proper sequence of the phases of a business cycle?

C. peak, contraction, trough, recovery, expansion

GDP can rise as a result of a rise in __________________, and Real GDP can rise as a result of a rise in _______________________.

C. prices or output; output only.

The best reason economists take only final goods and services into account when calculating GDP is that

C. they want to avoid the problem of double counting.

Look at the following data: consumption = $915 billion; exports = $40 billion; imports = $33 billion; inventory investment = $123 billion; fixed investment = $500 billion; government purchases = $300 billion. GDP is equal to

D. $1,845 billion

Refer to Exhibit 7-1. What is the value of disposable income?

D. $4,207

Refer to Exhibit 7-1. What is the value of net domestic product?

D. $5,767

If Real GDP was $8,742 billion in year 2 and it had been $8,509 billion in year 1, what was the approximate economic growth rate during this time period?

D. 2.74 percent

Which of the following statements is true?

D. Indirect business taxes are not part of national income because they are not considered a payment to a factor of production.

"Economic growth" has occurred if the

D. Real GDP this year exceeds the Real GDP of last year.

When computing national income, which of the following is included in compensation of employees?

D. all of the above A. wages and salaries paid to employees B. employers' contributions to Social Security and employee benefit plans C. the monetary value of fringe benefits, tips, and paid vacations

Which of the following statements is true?

D. b and c B. Capital consumption allowance is also known as depreciation. C. A sales tax is an example of an indirect business tax.

Gross Domestic Product is computed by using

D. current-year prices.

Refer to Exhibit 7-5. During year 3, Country Z experienced economic _____________ and _________________.

D. decline; inflation (rising price level)

Investment is equal to all purchases of newly produced capital goods

D. plus changes in business inventories plus purchases of new residential housing.

Macroeconomists define consumption as

D. purchases by the household sector.

Personal income is

D. the amount of income that individuals actually receive.

Which of the following would not be included in the measurement of GDP?

D. the increased value of shares of stock

Refer to Exhibit 7-1. What is the value of national income?

E. $4,542

Which of the following statements is true?

E. a, b, and c A. Another name for capital consumption allowance is depreciation. B. When there are two consecutive quarterly declines in Real GDP the economy is said to be in recession (based on the standard definition). C. The expansion of a business cycle refers to increases in Real GDP beyond the recovery.

Which of the following statements is true?

E. a, b, and c A. National income accountants consider the portion of corporate profits that is used to pay corporate profits taxes to be income earned by households but not received. B. Net domestic product (NDP) is a smaller dollar amount than GDP. C. Personal income includes transfer payments.

Net domestic product is the total value of

E. all final goods and services produced within a country's borders in a year minus capital consumption allowance.

Which of the following is a macroeconomic measurement used to gauge macroeconomic activity?

E. all of the above A. Net domestic product B. National income C. Personal income D. Disposable income

Business firms make which of the following two types of investment?

E. fixed investment and inventory investment


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