Macroeconomics - Chapter 7 Questions

Arthur sells $100 worth of cotton to Bob. Bob turns the cotton into cloth, which he sells to Camille for $300. Camille uses the cloth to make prom dresses that she sells to Donita for $700. Donita sells the dresses for $1,200 to kids attending the prom. The total contribution to GDP of this series of transactions is: A) $1,200. B) $500. C) $2,300. D) $1,100.

A) $1,200.

In 2012, Trailblazer Bicycle Company produced a mountain bike that was delivered to a retail outlet in November 2012. The bicycle was sold to E.Z. Ryder in March 2013. This bicycle is counted as: A) consumption in 2012 and as negative investment in 2013. B) negative investment in 2012 and as consumption in 2013. C) negative investment in 2012 and as investment in 2013. D) investment in 2012 and as negative investment in 2013.

D) investment in 2012 and as negative investment in 2013.

The agency responsible for compiling the National Income Product Accounts for the U.S. economy is the: A) Council of Economic Advisers. B) Bureau of Economic Analysis. C) National Bureau of Economic Research. D) Bureau of Labor Statistics.

B) Bureau of Economic Analysis.

If prices increased, we need to adjust nominal GDP values to give us a measure of GDP for various years in constant-dollar terms. We refer to that adjustment as: A) Inflating GDP B) Deflating GDP C) Compounding GDP D) Indexing GDP

B) Deflating GDP

The value of corporate stocks and bonds traded in a given year is: A) Included in the calculation of GDP because they make a contribution to the current production of goods and services B) Excluded from the calculation of GDP because they make no contribution to current production of goods and services C) Included in the calculation of net private domestic investment D) Included in the calculation of gross private domestic investment

B) Excluded from the calculation of GDP because they make no contribution to current production of goods and services

Which of the following DO national income accountants consider to be investment? A) The purchase of an automobile for private, nonbusiness use. B) The purchase of a new house. C) The purchase of corporate bonds. D) The purchase of gold coins.

B) The purchase of a new house.

In national income accounting, the consumption category of expenditures includes purchases of: A) both new and used consumer goods. B) automobiles for personal use but not houses. C) consumer durable and nondurable goods but not services. D) consumer nondurable goods and services but not consumer durable goods.

B) automobiles for personal use but not houses.

Transfer payments are: A) excluded when calculating GDP because they only reflect inflation. B) excluded when calculating GDP because they do not reflect current production. C) included when calculating GDP because they are a category of investment spending. D) included when calculating GDP because they increase the spending of recipients.

B) excluded when calculating GDP because they do not reflect current production.

If in some year gross investment was $120 billion and net investment was $65 billion, then in that year the country's capital stock: A) may have either increased or decreased. B) increased by $65 billion. C) increased by $55 billion. D) decreased by $55 billion.

B) increased by $65 billion.

If depreciation exceeds gross investment: A) the economy's stock of capital may be either growing or shrinking. B) the economy's stock of capital is shrinking. C) the economy's stock of capital is growing. D) net investment is zero.

B) the economy's stock of capital is shrinking.

(The following national income data are in billions of dollars.) Figure 12 Refer to the above data. Net domestic product equals: A) $1,039 billion B) $1,044 billion C) $1,054 billion D) $1,076 billion

C) $1,054 billion GDP = C + I + G +NX NDP = GDP - Consumption of Fixed Capital (Depreciation on capital goods of country) 475 - 11 + 315 + 300 + 1079 = GDP - 25 = NDP

A business buys $5,000 worth of inputs from other firms in order to produce a product. The business makes 100 units of the product and each of them sells for $65. The value added by the business to these products is: A) $5,000 B) $6,500 C) $1,500 D) $1,000

C) $1,500

(GDP figures are in billions of dollars.) Figure 9 Refer to the above table. What was real GDP in Year 2? A) $4,820 billion B) $4,875 billion C) $4,911 billion D) $5,320 billion

C) $4,911 billion

Assume an economy that makes only one product and that year 3 is the base year. Output and price data for a five-year period are as follows. Answer the question on the basis of these data. (Figure 6) Refer to the data. Real GDP for year 5 is: A) $160. B) $49. C) $40. D) $64.

C) $40. To calculate real GDP, take nominal GDP (units of output * price per unit) / price index (price per unit of year / price per unit of base year)

The expenditures or output approach to GDP measures it by summing up: A) 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 B) Compensation of employees, rents, interest, dividends, corporate profits, proprietors' income, and indirect business taxes, and subtracting the consumption of fixed capital C) The total spending for consumption, investment, net exports, and government purchases D) The total spending for consumption and government purchases, but subtracting public and private transfer payments

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

Refer to the graph above. Which of the following statements is correct on the basis of the information shown? A) Real GDP must be deflated in each year after 2000 to determine nominal GDP B) Nominal GDP must be inflated in each year since 2000 to determine real GDP C) Nominal GDP must be deflated in each year before 2000 to determine real GDP D) Nominal GDP must be inflated in each year before 2000 to determine real GDP

D) Nominal GDP must be inflated in each year before 2000 to determine real GDP

GDP measured using current prices is called: A) Nominal GDP B) Real GDP C) Constant GDP D) Deflated GDP

A) Nominal GDP

When local police and fire departments buy new cars for their operations, these are counted as part of: A) C B) Ig C) G D) Xn

C) G

Refer to the data (Figure 6) Real GDP in year 3 is: A) $100. B) $450. C) $225. D) $150.

D) $150.

If real GDP in a particular year is $80 billion and nominal GDP is $240 billion, the GDP price index for that year is: A) 100. B) 200. C) 240. D) 300.

D) 300.

If nominal GDP in some year is $280 and real GDP is $160, then the GDP price index for that year is: A) 175. B) 57. C) 160. D) 280.

A) 175. Price index = nominal GDP / real GDP * 100

Which of the following is a final good or service? A) A haircut purchased by a father for his 12 year-old son. B) Fertilizer purchased by a farm supplier. C) Diesel fuel bought for a delivery truck. D) Chevrolet windows purchased by a General Motors assembly plant.

A) A haircut purchased by a father for his 12 year-old son.

National income accountants define investment to include: A) any increase in business inventories. B) the addition of cash to a savings account. C) the purchase of common or preferred stock. D) the purchase of any durable good, for example, an automobile or a refrigerator.

A) any increase in business inventories.

The largest component of national income is: A) compensation of employees. B) rents. C) interest. D) corporate profits.

A) compensation of employees.

Which of the following is included in GDP? A) Welfare payments received by some households B) Fees received by stockbrokers C) Cash gifts from relatives during the holidays D) Payments received from selling stocks in one's portfolio

B) Fees received by stockbrokers

All of the following are examples of intermediate goods, except: A) Flour bought by a bakery B) Oven bought by a bakery C) Office supplies bought by an accounting firm D) Gasoline bought by a trucking company

B) Oven bought by a bakery

The largest expenditure component of GDP is: A) Government purchases B) Personal consumption expenditures C) Gross private domestic investment D) Net exports

B) Personal consumption expenditures

GDP is the: A) national income minus all nonincome charges against output. B) monetary value of all final goods and services produced within the borders of a nation in a particular year. C) monetary value of all economic resources used in producing a year's output. D) monetary value of all goods and services, final and intermediate, produced in a specific year.

B) monetary value of all final goods and services produced within the borders of a nation in a particular year.

National income accountants can avoid multiple counting by: A) including transfer payments in their calculations. B) only counting final goods. C) counting both intermediate and final goods. D) only counting intermediate goods.

B) only counting final goods.

The growth of GDP may understate changes in the economy's economic well-being over time if the: A) distribution of income becomes increasingly unequal. B) quality of products and services improves. C) environment deteriorates because of pollution. D) amount of leisure decreases.

B) quality of products and services improves.

(The following national income data for an economy are in billions of dollars.) Figure 11 Refer to the above data. The national income in this economy can be estimated by adding items: A) 1 through 7 B) 8 through 11 C) 2 through 7 D) 1 through 13

C) 2 through 7

Consider the following data for a nation: Figure 1 The country's real GDP declined between years: A) 1 and 2 B) 2 and 3 C) 3 and 4 D) 4 and 5

C) 3 and 4

(The following national income data for an economy are in billions of dollars.) Figure 11 Refer to the above data. The expenditures approach to GDP calculation can be done by adding: A) 1 through 7 B) 2 through 7 C) 8 through 11 D) 8 through 13

C) 8 through 11

Economy A: gross investment equals depreciation Economy B: depreciation exceeds gross investment Economy C: gross investment exceeds depreciation Refer to the information. Positive net investment is occurring in: A) economy A only. B) economy B only. C) economy C only. D) economies A and B only.

C) economy C only.

In year 1, nominal GDP for the United States was $2,250 billion and in year 2 it was $2,508 billion. The GDP deflator was 72 in year 1 and 79 in year 2. Between year 1 and year 2, real GDP rose by: A) 11.4 percent B) 9.7 percent C) 2.4 percent D) 1.6 percent

D) 1.6 percent``

Consumers in an economy buy only three general types of products, A, B, and C. Changes in the prices of these items over a period are shown below: Figure 14 Using year 1 as the base year, the country's price index in year 2 is: A) 100.0 B) 103.9 C) 105.2 D) 106.3

D) 106.3 (sum of year 2's average price per unit) / (sum of year 1's average price per unit) (8 + 22 + 55) / (10 + 20 + 50) * 100

Assume an economy that makes only one product and that year 3 is the base year. Output and price data for a five-year period are as follows. Answer the question on the basis of these data. (Figure 6) Refer to the data. If year 3 is chosen as the base year, the price index for year 1 is: A) 140. B) 40. C) 167. D) 60.

D) 60. To calculate the Price Index, take the price of the Market Basket of the year of interest and divide by the price of the Market Basket of the base year, then multiply by 100 3/5 * 100

Which of the following transactions would be included in GDP? A) Mary buys a used book for $5 at a garage sale. B) Nick buys $5,000 worth of stock in Microsoft. C) Olivia receives a tax refund of $500. D) Peter buys a newly constructed house.

D) Peter buys a newly constructed house.

Disinvestment occurs when: A) Businesses sell machinery and equipment to one another B) The prices of investment goods rise faster than the prices of consumer goods C) Businesses have larger inventories at the end of the year than they had at the start D) The consumption of private fixed capital exceeds gross private domestic investment

D) The consumption of private fixed capital exceeds gross private domestic investment

If the economy adds to its inventory of goods during some year: A) gross investment will exceed net investment by the amount of the inventory increase. B) this amount should be ignored in calculating that year's GDP. C) this amount should be subtracted in calculating that year's GDP. D) this amount should be included in calculating that year's GDP.

D) this amount should be included in calculating that year's GDP.

Personal income (PI) refers to all income: A) Received B) Earned C) Earned but not received D) Received but not earned

A) Received

Assume an economy that makes only one product and that year 3 is the base year. Output and price data for a five-year period are as follows. Answer the question on the basis of these data. (Figure 6) Refer to the data. The nominal GDP for year 4 is: A) $49. B) $55. C) $40. D) $35.

A) $49. Unit of Output * Price Per Unit

(The following national income data for an economy are in billions of dollars.) Figure 11 Refer to the above data. Which items need to be accounted for in going from National Income to GDP? A) 1, 12, and 13 B) 2, 11, and 12 C) 13 only D) 1 and 2

A) 1, 12, and 13

That portion of corporate profits which is included in personal income is: A) Dividends B) Corporate income taxes C) Consumption of fixed capital D) Undistributed corporate profits

A) Dividends

The following are examples of final goods in national income accounting, except: A) Lumber and steel beams purchased by a construction company B) Tractor purchased by a construction company C) Laptop computer purchased by an executive for personal use D) Desktop computer purchased by an executive for business use

A) Lumber and steel beams purchased by a construction company

Business inventories increase when firms produce: A) More than they sell, and the inventory increase is added to GDP B) Less than they sell, and the inventory increase is added to GDP C) More than they sell, and the inventory increase is subtracted from GDP D) Less than they sell, and the inventory increase is subtracted from GDP

A) More than they sell, and the inventory increase is added to GDP

When gross private domestic investment exceeds depreciation, it can be concluded that: A) Net investment is positive B) Net investment is negative C) The economy is exporting more than it imports D) The economy is importing more than it exports

A) Net investment is positive

Which of the following is included in the expenditures approach to GDP? A) Spending on meals by consumers at restaurants B) Expenditures on used clothing at garage sales C) Value of stocks and bonds bought by businessmen D) Government spending on welfare payments

A) Spending on meals by consumers at restaurants

"Net foreign factor income" in the national income accounts refers to the difference between: A) The income Americans gain from supplying resources abroad and the income that foreigners earn by supplying resources in the U.S. B) The value of products sold by Americans to other nations and the value of products bought by Americans from other nations C) The value of investments that Americans made abroad and the value of investments made by foreigners in the U.S. D) The income earned by Americans in the U.S. minus the income earned by foreigners in the U.S.

A) The income Americans gain from supplying resources abroad and the income that foreigners earn by supplying resources in the U.S.

Net exports are negative when: A) a nation's imports exceed its exports. B) the economy's stock of capital goods is declining. C) depreciation exceeds domestic investment. D) a nation's exports exceed its imports.

A) a nation's imports exceed its exports.

In calculating GDP, governmental transfer payments, such as Social Security or unemployment compensation, are: A) not counted. B) counted as investment spending. C) counted as government spending. D) counted as consumption spending.

A) not counted.

If intermediate goods and services were included in GDP: A) the GDP would be overstated. B) the GDP would then have to be deflated for changes in the price level. C) nominal GDP would exceed real GDP. D) the GDP would be understated.

A) the GDP would be overstated.

Firm A produces something that Firm B uses as an input. The product of Firm B, in turn, is purchased and used as an input by Firm C, and so on down the line through Firm E, which produces the end product. The total value added by Firms A-E from the production of the end product described here is: Figure 8 A) $3,000 B) $3,800 C) $6,500 D) $10,300

B) $3,800

Consider the following data for a firm over a period of time. The contribution of the firm to domestic output by the value-added method is: Figure 10 A) $5,000 B) $40,000 C) $45,000 D) $50,000

B) $40,000 Revenue (result) - Supplies (cost in)

Answer the question on the basis of the following data. All figures are in billions of dollars. Refer to the data (Figure 5). GDP is: A) $390. B) $417. C) $422. D) $492.

B) $417.

(GDP figures are in billions of dollars.) Figure 9 Refer to the above table. What is the GDP price index in Year 1? A) 105.2 B) 108.3 C) 109.6 D) 111.5

B) 108.3

Suppose nominal GDP in 2009 was $100 billion and in 2010 it was $260 billion. The general price index in 2009 was 100 and in 2010 it was 180. Between 2009 and 2010 the real GDP rose by approximately: A) 160 percent. B) 44 percent. C) 37 percent. D) 80 percent.

B) 44 percent.

Government purchases in national income accounts would include payments for: A) Social Security checks to retirees B) Salaries for current U.S. military officers C) Public assistance for welfare recipients D) Unemployment benefits

B) Salaries for current U.S. military officers

Which of the following is not economic investment? A) The purchase of a new drill press by the Ajax Manufacturing Company. B) The purchase of 100 shares of AT&T by a retired business executive. C) Construction of a suburban housing project. D) The piling up of inventories on a grocer's shelf.

B) The purchase of 100 shares of AT&T by a retired business executive.

Answer the question based on the following price and output data over a five-year period for an economy that produces only one good. Assume that year 2 is the base year. Figure 15 Refer to the above data. If year 2 is the base year, then Real GDP in year 5 is: A) $120 B) $90 C) $60 D) $30

C) $60 Real GDP = Nominal GDP / Price Index Nominal GDP = Units of Output * Price Per Unit Price Index = Price Per Unit Year / Price Per Unit Base Year

A nation's capital stock was valued at $300 billion at the start of the year and $350 billion at the end. Consumption of private fixed capital in the year was $25 billion. Assuming stable prices, gross investment was: A) $25 billion B) $50 billion C) $75 billion D) $90 billion

C) $75 billion

GDP in an economy is $11,050 billion. Consumer expenditures are $7,735 billion, government purchases are $1,989 billion, and gross investment is $1,410 billion. Net exports must be: A) +$53 billion B) -$47 billion C) -$84 billion D) -$161 billion

C) -$84 billion

The following are national income account data for a hypothetical economy in billions of dollars: government purchases ($1,050); personal consumption expenditures ($4,800); imports ($370); exports ($240); gross private domestic investment ($1,130). Personal consumption expenditures are approximately what percentage of this economy? A) 60 percent B) 65 percent C) 70 percent D) 75 percent

C) 70 percent 1050 + 4800 -130 + 1130 + 6850 government purchases + personal consumption expenditures + (exports - imports) + gross private domestic investment

Answer the question based on the following price and output data over a five-year period for an economy that produces only one good. Assume that year 2 is the base year. Figure 15 Refer to the above data. If year 2 is the base year, then the percentage increase in real GDP from year 2 to year 4 is: A) 40 percent B) 60 percent C) 80 percent D) 100 percent

C) 80 percent %IncreaseGDP = (Year4GDP - Year2GDP) / Year2GDP

In an economy, the value of inventories was $75 billion in 2009 and $63 billion in 2010. In calculating total investment for 2010, national income accountants would: A) Decrease it by $75 billion B) Increase it by $63 billion C) Decrease it by $12 billion D) Increase it by $138 billion

C) Decrease it by $12 billion

Gross domestic private investment, as defined in national income accounts, would include the following, except: A) Changes to business inventories B) All domestic construction done by the private sector C) Government construction of new highways and dams D) The value of all capital goods bought by business firms

C) Government construction of new highways and dams

Computation of GDP by the expenditures method would include the purchase of: A) Fertilizer by a farmer B) Cement by a construction company C) Land by the U.S. Department of Interior D) Government bonds by a commercial bank

C) Land by the U.S. Department of Interior

In an economy that has stationary production capacity: A) GDP is zero B) Capital consumption (or depreciation) is zero C) Net investment is zero D) Gross investment is zero

C) Net investment is zero

The GDP deflator or price index equals: A) Gross private domestic investment less the consumption of fixed capital B) Gross national product less net foreign factor income earned in the United States C) Nominal GDP divided by real GDP D) Real GDP divided by nominal GDP

C) Nominal GDP divided by real GDP

If the price index in year A is 130, this means that: A) Prices in year A are on average 130 percent higher than in the base year B) Prices in year A are on average 13 times that in the base year C) Prices in year A are on average 30 percent higher than in the base year D) Nominal GDP is 130 percent higher than real GDP in year A

C) Prices in year A are on average 30 percent higher than in the base year

Which of the following is not included in personal consumption expenditures? A) New furniture and appliances bought by homeowners B) Payments for cable and Internet services to homes C) Purchases of mutual funds by consumers D) Food purchased at supermarkets

C) Purchases of mutual funds by consumers

In national income accounting, the consumption category of expenditures includes purchases of: A) both new and used consumer goods. B) consumer durable goods and consumer nondurable goods but not services. C) consumer durable goods, consumer nondurable goods, and services. D) changes in business inventories.

C) consumer durable goods, consumer nondurable goods, and services.

The largest component of total expenditures in the United States is: A) net exports. B) government purchases. C) consumption. D) gross investment.

C) consumption.

Tom Atoe grows fruits and vegetables for home consumption. This activity is: A) excluded from GDP in order to avoid double counting. B) excluded from GDP because an intermediate good is involved. C) productive but is excluded from GDP because no market transaction occurs. D) included in GDP because it reflects production.

C) productive but is excluded from GDP because no market transaction occurs.

The value of U.S. imports is: A) added to exports when calculating GDP because imports reflect spending by Americans. B) subtracted from exports when calculating GDP because imports do not constitute spending by Americans. C) subtracted from exports when calculating GDP because imports do not constitute production in the United States. D) added when calculating GDP because imports do not constitute production in the United States.

C) subtracted from exports when calculating GDP because imports do not constitute production in the United States.

In 1933, net private domestic investment was a minus $6.0 billion. This means that: A) gross private domestic investment exceeded depreciation by $6.0 billion. B) the economy was expanding in that year. C) the production of 1933's GDP used up more capital goods than were produced in that year. D) economy produced no capital goods at all in 1933.

C) the production of 1933's GDP used up more capital goods than were produced in that year.

Which of the following is a private transfer payment? A) Unemployment benefits received by newly laid-off workers B) The sale of used clothing at a thrift store C) The Social Security benefits paid to a retired worker D) A check for $250 sent by a parent to a daughter at college

D) A check for $250 sent by a parent to a daughter at college

Adding the market value of all final and intermediate goods and services in an economy in a given year would result in: A) The calculation of GDP for that year B) The calculation of NDP for that year C) An amount less than GDP for that year D) An amount greater than GDP for that year

D) An amount greater than GDP for that year

Economy A: gross investment equals depreciation Economy B: depreciation exceeds gross investment Economy C: gross investment exceeds depreciation Other things equal, the information suggests that the production capacity in economy: A) B is growing more rapidly than that in either economy A or C. B) A is growing more rapidly than that in either economy B or C. C) A is growing less rapidly than that in economy B. D) C is growing more rapidly than that in economy B.

D) C is growing more rapidly than that in economy B.

Real GDP refers to: A) the value of the domestic output after adjustments have been made for environmental pollution and changes in the distribution of income. B) GDP data that embody changes in the price level but not changes in physical output. C) GDP data that do not reflect changes in both physical output and the price level. D) GDP data that have been adjusted for changes in the price level.

D) GDP data that have been adjusted for changes in the price level.

Money spent on the purchase of a new house is included in the GDP as a part of: A) Household expenditures on durable goods B) Personal consumption expenditures C) Personal saving D) Gross domestic private investment

D) Gross domestic private investment

Refer to the diagram. (Figure 7). Which of the following statements is correct? A) The price index is greater than 100 for every year shown on the graph. B) Nominal GDP must be deflated in each year prior to 2000 to determine real GDP. C) Real GDP has grown in this economy, but nominal GDP has not. D) Nominal GDP must be deflated in each year since 2000 to determine real GDP.

D) Nominal GDP must be deflated in each year since 2000 to determine real GDP.

Suppose Smith pays $100 to Jones. A) We can say with certainty that the GDP has increased by $100. B) We can say with certainty that the GDP has increased, but we cannot determine the amount. C) We can say with certainty that the nominal GDP has increased, but we can't say whether real GDP has increased or decreased. D) We need more information to determine whether GDP has changed.

D) We need more information to determine whether GDP has changed.

GDP understates the amount of economic production in the United States because it excludes: A) Spending for the U.S. military B) Transfer payments C) Purchases of stocks and bonds D) Work performed by people for their own benefit

D) Work performed by people for their own benefit

Refer to the diagram. (Figure 7). The base year used in determining the price indices for this economy: A) cannot be determined from the information given. B) is some year before 2000. C) is more recent than 2000. D) is 2000.

D) is 2000. Base year is when Nominal GDP / Real GDP = 1 Real GDP = Nominal GDP

The fact that nominal GDP has risen faster than real GDP: A) suggests that the base year of the GDP price index has been shifted. B) tells us nothing about what has happened to the price level. C) suggests that the general price level has fallen. D) suggests that the general price level has risen.

D) suggests that the general price level has risen.

The concept of net domestic investment refers to: A) the amount of machinery and equipment used up in producing the GDP in a specific year. B) the difference between the market value and book value of outstanding capital stock. C) gross domestic investment less net exports. D) total investment less the amount of investment goods used up in producing the year's output.

D) total investment less the amount of investment goods used up in producing the year's output.