STUDYGUIDE chapter 7

In which phase of the business cycle does a recession occur?

contraction

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?

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

Investment is equal to all purchases of newly produced capital goods

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

The base year is the year

that serves as a reference point or benchmark.

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

the increased value of shares of stock

Sophia just bought shares of IBM stock for $25,000 and paid a $350 commission to her broker. How did this impact GDP?

GDP increased by $350

Net exports equals

exports minus imports.

Government purchases consist of the total dollar amount(s) spent on goods and services by the

federal, state, and local governments

Real GDP is always measured in

base-year dollars

Real GDP is GDP

in base-year prices

Suppose that nondurable goods spending is $200 billion, durable goods spending is $400 billion, new residential housing spending is $500 billion, and spending on services is $700 billion. What does consumption equal?

$1,300 billion

Refer to Exhibit 7-5.(on other side) What was Country Z's economic growth rate between year 3 and year 4?

2.3%

Which of the following statements is false? A.The market value of all nonmarket goods is omitted from GDP B.If a good is produced but not sold, it is included in GDP C.The sale of used goods is omitted from GDP. D.The market value of a person mowing his or her own lawn is omitted from GDP.

The market value of all nonmarket goods is omitted from GDP

Refer to Exhibit 7-6. (on other side) Given the information provided in this table, did country ABC experience a recession during 2019 (based upon the standard definition of a recession)?

We cannot say whether or not country ABC is in a recession without knowing what its Real GDP was each quarter.

A business cycle refers to the

recurrent swings (up and down) in Real GDP.

In 1950, the country with the highest per-capita GDP was

the United States

Which of the following statements is true? A.Government purchases includes the spending on goods and services by all levels of government (federal, state, and local). B.Government purchases is the largest component of GDP. C.U.S. imports refer to the physical quantity of foreign-produced goods that are purchased by residents of the United States. D.Net exports are equal to exports plus imports.

Government purchases includes the spending on goods and services by all levels of government (federal, state, and local).

Suppose that in year 1 every adult in the country works 40 hours a week and GDP is $6.7 trillion. In year 2 every adult in the country works 45 hours a week and GDP is $7.5 trillion. Which of the following statements is true?

There is not enough information provided to determine whether GDP per capita is higher in year 1 than in year 2.

The expenditure approach to computing GDP measures

U.S. and foreign spending on only U.S. goods

Refer to Exhibit 7-4.(on other side) Did Country A experience a recession (based on the standard definition) in 2019?

Yes, because its Real GDP declined during two consecutive quarters in 2019.

An example of income received but not earned is

government transfer payments

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

they want to avoid the problem of double counting.

Which of the following is a nonmarket good?

the self-portrait you painted hanging in your den

The sale of __________ goods is omitted from current GDP because __________.

used goods; these goods were counted in an earlier year

Which of the following is always a characteristic of the contraction phase of the business cycle?

a decline in Real GDP

Look at the following data: GDP = 1,150 billion; investment = $200 billion; exports = $55 billion; government purchases = $145 billion; consumption = $850 billion. What does import spending equal?

$100 billion

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 _________.

$150; $550

Suppose investment is equal to $950 billion, purchases of newly produced capital goods is $670 billion, and changes in business inventories is -$120 billion. What does purchases of new residential housing equal?

$400 billion

Refer to Exhibit 7-1.(on other side) What is the value of gross domestic product?

$6,062

Refer to Exhibit 7-2. (on other side) Assuming that 1990 is the base year, Real GDP in 2019 is

$92

If Real GDP was $9,542 billion in year 2 and it had been $9,300 billion in year 1, what was the approximate economic growth rate during this time period?

2.6 percent

Which of the following statements is true? A.The main items that comprise indirect business taxes include excise taxes, income taxes, and depreciation. B.Capital consumption allowance is also known as fixed investment. C.National income is the sum of four components: consumption, investment, government purchases and net exports. D.A sales tax is an example of an indirect business tax.

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

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

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 statements is false? A.Domestic income is the total income earned by the people and businesses within a country's borders. B.National income is the total income earned by U.S. citizens and businesses, no matter where they reside or are located. C.Corporate profits is the largest component of national income. D.National income = compensation of employees + proprietors' income + corporate profits + rental income + net interest.

Corporate profits is the largest component of national income.

Country A has a higher GDP than country B. What does this mean?

It means that the total market value of the final goods and services produced in country A is greater than the total market value of the final goods and services produced in country B.

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

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

Which of the following is included in GDP calculations? A.transfer payments B.certain nonmarket goods and services C.sales of used goods D.legal and illegal underground activities

certain nonmarket goods and services

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

consumption expenditures.

Refer to Exhibit 7-5. (on other side) During year 3, Country Z experienced economic _____________ and _________________.

decline; inflation (rising price level)

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

expenditure; income

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

gross domestic product

If in the process of calculating GDP, the market value of all intermediate goods is added to the market value of all final goods, this would

overstate the actual value of GDP

In 1820 the country with the highest per capita GDP was ______________________. In 1900 the country that ranked #1 in terms of per capita GDP was ___________________ and fifty years later the top ranking was held by _________________________.

the Netherlands; New Zealand; the United States.

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

the capital consumption allowance

The standard definition of "recession" is

two consecutive quarters of falling Real GDP