Unit 3

GDP is the market value of all final goods and services produced by a country's citizens in a given period of time. A. True B. False

A. True

If Year 1 is the base year and Year 2 is the following year, then the inflation rate in Year 2 equals A. [(CPI in Year 2 − CPI in Year 1)/CPI in Year 1] × 100. B. [(CPI in Year 2 − CPI in Year 1)/CPI in Year 2] × 100. C. [(CPI in Year 1 − CPI in Year 2)/CPI in Year 1] × 100. D. [(CPI in Year 1 − CPI in Year 2)/CPI in Year 2] × 100.

A. [(CPI in Year 2 − CPI in Year 1)/CPI in Year 1] × 100.

When the consumer price index rises, the typical family A. has to spend more dollars to maintain the same standard of living. B. can spend fewer dollars to maintain the same standard of living. C. finds that its standard of living is not affected. D. can offset the effects of rising prices by saving more.

A. has to spend more dollars to maintain the same standard of living.

By far the largest category of goods and services in the CPI basket is A. housing. B. transportation. C. education & communication. D. food & beverages.

A. housing.

Gross domestic product measures A. income and expenditures. B. income but not expenditures. C. expenditures but not income. D. neither income nor expenditures.

A. income and expenditures.

The term economists use to describe a situation in which the economy's overall price level is rising is A. growth. B. inflation. C. recession. D. expansion.

B. inflation.

If the consumer price index was 100 in the base year and 106 in the following year, then the inflation rate was A. 1.06 percent. B. 6 percent. C. 10.6 percent. D. 106 percent

B. 6 percent.

Joe and Jim purchase vegetables at a grocery store, but Jim also grows vegetables in his backyard. Regarding these two practices, which of the following statements is correct? A. Only Joe's grocery store purchases are included in GDP. B. Only Joe's and Jim's grocery store purchases are included in GDP. C. Joe's and Jim's grocery store purchases are included in GDP. The vegetables from Jim's backyard garden are included at their market value. D. Joe's and Jim's grocery store purchases are included in GDP. The vegetables from Jim's backyard garden are included at their market value, if Jim provides this information.

B. Only Joe's and Jim's grocery store purchases are included in GDP.

Which of the following is the correct formula for calculating the consumer price index? A. [(CPI in Year 1 − CPI in Year 2)/CPI in Year 2] × 100 B. [(price of basket of goods and services in current year/price of basket in base year)]× 100 C. [(price of basket of goods and services in current year − price of basket in base year)/price of basket in base year] × 100 D. [(price of basket of goods and services in base year/price of basket in current year)] × 100

B. [(price of basket of goods and services in current year/price of basket in base year)]× 100

Real GDP is the yearly production of final goods and services valued at A. current prices. B. constant prices. C. expected future prices. D. the ratio of current prices to constant prices.

B. constant prices.

International studies of the relationship between GDP per person and quality of life measures such as life expectancy and literacy rates show that larger GDP per person is associated with A. longer life expectancy and a lower percentage of the population that is literate. B. longer life expectancy and a higher percentage of the population that is literate. C. very nearly the same life expectancy and a lower percentage of the population that is literate. D. very nearly the same life expectancy and a higher percentage of the population that is literate.

B. longer life expectancy and a higher percentage of the population that is literate.

The consumer price index is used to A. monitor changes in the level of wholesale prices in the economy. B. monitor changes in the cost of living over time. C. monitor changes in the level of real GDP over time. D. monitor changes in the stock market.

B. monitor changes in the cost of living over time.

Economists use the term inflation to describe a situation in which A. some prices are rising faster than others. B. the economy's overall price level is rising. C. the economy's overall price level is high, but not necessarily rising. D. the economy's overall output of goods and services is rising faster than the economy's overall price level.

B. the economy's overall price level is rising.

If in some year nominal GDP was $20 billion and the GDP deflator was 50, what was real GDP? A. $2.5 billion B. $10 billion C. $40 billion D. $100 billion

C. $40 billion

The steps involved in calculating the consumer price index and the inflation rate, in order, are as follows: A. Choose a base year, update the basket, find the prices, estimate the basket's cost, compute the index, and compute the inflation rate. B. Choose a base year, fix the basket, find the prices, compute the inflation rate, compute the basket's cost, and compute the index. C. Fix the basket, find the prices, compute the basket's cost, choose a base year and compute the index, and compute the inflation rate. D. Fix the basket, find the prices, compute the inflation rate, compute the basket's cost, and choose a base year and compute the index.

C. Fix the basket, find the prices, compute the basket's cost, choose a base year and compute the index, and compute the inflation rate.

Many things that society values, such as good health, high-quality education, enjoyable recreation opportunities, and desirable moral attributes of the population, are not measured as part of GDP. It follows that A. GDP is not a useful measure of society's welfare. B. GDP is still a useful measure of society's welfare because providing these other attributes is the responsibility of government. C. GDP is still a useful measure of society's welfare because it measures a nation's ability to purchase the inputs that can be used to help produce the things that contribute to welfare. D. GDP is still the best measure of society's welfare because these other values cannot actually be measured.

C. GDP is still a useful measure of society's welfare because it measures a nation's ability to purchase the inputs that can be used to help produce the things that contribute to welfare.

Which of the following statistics is usually regarded as the best single measure of a society's economic well-being? A. The unemployment rate B. The inflation rate C. Gross domestic product D. The trade deficit

C. Gross domestic product

GDP per person tells us the income and expenditure of the A. richest person in the economy. B. poorest person in the economy. C. average person in the economy. D. entire economy.

C. average person in the economy.

Government purchases include spending on goods and services by A. the federal government, but not by state or local governments. B. federal and state governments, but not by local governments. C. federal, state, and local governments. D. federal, state, and local governments, as well as household spending by employees of those governments.

C. federal, state, and local governments.

Countries with low GDP per person tend to have A. lower rates of child malnutrition. B. fewer infants with low birth weight. C. higher rates of infant mortality. D. more access to safe drinking water.

C. higher rates of infant mortality.

The introduction of the video cassette recorder in the 1970s exemplified a problem in measuring the cost of living; that problem is the problem of A. substitution bias. B. product-improvement bias. C. introduction of new goods. D. unmeasured quality change.

C. introduction of new goods.

The value of goods added to a firm's inventory in a certain year is treated as A. consumption, since the goods will be sold to consumers in another period. B. intermediate goods, and so is not included in that year's GDP. C. investment, since GDP aims to measure the value of the economy's production that year. D. spending on durable goods, since the goods could not be inventoried unless they were durable.

C. investment, since GDP aims to measure the value of the economy's production that year.

Consider a small economy in which consumers buy only two goods: pretzels and cookies. In order to compute the consumer price index for this economy for two or more consecutive years, we assume that A. the percentage change in the price of pretzels is equal to the percentage change in the price of cookies from year to year. B. the percentage change in the price of pretzels is equal to the percentage change in the price of cookies from year to year. C. neither the number of pretzels nor the number of cookies bought by the typical consumer changes from year to year. D. neither the price of pretzels nor the price of cookies changes from year to year.

C. neither the number of pretzels nor the number of cookies bought by the typical consumer changes from year to year.

The GDP deflator is the ratio of A. real GDP to nominal GDP multiplied by 100. B. real GDP to the inflation rate multiplied by 100. C. nominal GDP to real GDP multiplied by 100. D. nominal GDP to the inflation rate multiplied by 100.

C. nominal GDP to real GDP multiplied by 100.

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.

C. not part of GDP because it is a transfer payment.

The inflation rate is defined as the A. price level in an economy. B. change in the price level from one period to the next. C. percentage change in the price level from the previous period. D. price level minus the price level from the previous period.

C. percentage change in the price level from the previous period.

One problem with the consumer price index stems from the fact that, over time, consumers tend to buy larger quantities of goods that have become relatively less expensive and smaller quantities of goods that have become relatively more expensive. This problem is called A. price-change neglect. B. unmeasured quality change. C. substitution bias. D. relative bias.

C. substitution bias.

Two common measures of the overall level of prices are A. the inflation rate and the consumer price index. B. the inflation rate and the GDP deflator. C. the GDP deflator and the consumer price index. D. the cost of living index and nominal GDP.

C. the GDP deflator and the consumer price index.

GDP is defined as the A. value of all goods and services produced within a country in a given period of time. B. value of all goods and services produced by the citizens of a country, regardless of where they are living, in a given period of time. C. value of all final goods and services produced within a country in a given period of time. D. value of all final goods and services produced by the citizens of a country, regardless of where they are living, in a given period of time.

C. value of all final goods and services produced within a country in a given period of time.

Suppose a basket of goods and services has been selected to calculate the CPI and Year 1 has been selected as the base year. In Year 1, the basket's cost was $50; in Year 2, the basket's cost was $52; and in Year 3, the basket's cost was $55. The value of the CPI in Year 3 was A. 90.9. B. 104.0. C. 105.0. D. 110.0.

D. 110.0.

Most goods and services produced at home A. and most goods and services produced illegally are included in GDP. B. are included in GDP while most goods and services produced illegally are excluded from GDP. C. are excluded from GDP while most goods and services produced illegally are included in GDP D. and most goods and services produced illegally are excluded from GDP.

D. and most goods and services produced illegally are excluded from GDP.

The producer price index measures the cost of a basket of goods and services A. typically produced in the economy. B. produced for a typical consumer. C. sold by producers. D. bought by firms.

D. bought by firms.

A farmer produces oranges and sells them to Fresh Juice, which makes orange juice. The oranges produced by the farmer are called A. inventory goods. B. transitory goods. C. final goods. D. intermediate goods.

D. intermediate goods.

If net exports is a negative number for a particular year, then A. the value of firms' inventories declined over the course of the year. B. consumption exceeded the sum of investment and government purchases during the year. C. the value of goods sold to foreigners exceeded the value of foreign goods purchased during the year. D. the value of foreign goods purchased exceeded the value of goods sold to foreigners during the year.

D. the value of foreign goods purchased exceeded the value of goods sold to foreigners during the year.