Economics Test 2

As applied to the price level, the "rule of 70" indicates that the number of years required for the price level to double can be found by:

dividing the annual rate of inflation into "70"

as the consumption and saving schedules relate to real GDP, and increase in taxes will shift

downward both the consumption and saving schedules

saving is $25 billion at the $125 billion equilibrium level of output in a closed, private economy. Actual investment must be

equal to $25 billion

two basic determinants of investment spending are

expected returns and real interest rates

*Gross private domestic investment (Ig)

expenditures for newly produced capital goods (such as machinery, equipment, tools, and buildings) and for additions to inventories.

*Net Exports (Xn)

exports less imports.

Refer to above data. If year 2 is the base year, then in determining real GDP for year 1

Nominal GDP in year 1 should be inflated, and the value of real GDP is larger than nominal

the sale of a used automobile would not be included in GDP of the current year because it is a

Non production transaction

Dividends

Part of after tax profits that corporations choose to pay out to their stockholders. They flow to households; the ultimate owners of a corporation.

Disposable Income (DI)

Personal income less personal taxes; income available for personal consumption expenditures and personal saving.

Durable goods*

Products (consumer good) that have expected lives of 3 years or more. ex. cars, homes, computers, furnitures, home appliances.

Intermediate goods*

Products that are purchased for resale or further processing or manufacturing.

*Personal consumption expenditures (C)

The expenditures of households for durable and nondurable consumer goods and services

National income accounting

The techniques used to measure the overall production of the economy and other related variables for the nation as a whole

a price index

a comparison of real GDP in one period relative to another

Cost-push inflation may be caused by:

a negative supply shock

Transfer payments*

a payment of money (or goods or services) by a government to a household or firm for which the payer receives no good or service directly in return.

GDP (Gross Domestic Product)*

aggregate output, the market value of all final goods and services produced within the borders of a country during a specific period of time, typically a year.

GDP is the market value of

all final goods and services produced in an economy in a given year

Consumption of fixed capital

allowance , an estimate of the amount of capital worn out or used up (consumed) in producing the gross domestic product; also called depreciation

Adding the market value of all final and intermediate goods and serves in an economy in a given year would result in

an amount greater than GDP for that year

adding the market value of all final and intermediate goods and services in an economy in a given year would result in

an amount greater than GDP for that year

the amount by which aggregate expenditures exceed those associated with the full-employment level of domestic output can best be described as

an inflationary expenditure gap

Services

an intangible act or use for which a consumer, firm, or government is willing to pay.

which of the following will not increase a nation's real GDP

average price level

Recurring upswings and downswings in an economy's real GDP over time are called:

business cycles

Stock market transactions*

buying and selling of stocks and bonds. This creates nothing in the way of current production and is not included in GDP. (services provided by the stockbroker are included in GDP because their services are currently provided)

Refer to the above information. The rate of inflation:

cannot be determined from the data

in national income accounting, the consumption category of expenditures includes purchases of

consumer durable goods, consumer nondurable goods, and services

GDP can be calculated by summing

consumption, investment, government purchases, and net exports

Inflation initiated by increases in wages or other resource prices is labeled:

cost-push inflation

real GDP measures

current output at base year prices

other things being equal, an increase in an economy's exports will

decrease domestic aggregate expenditures and the equilibrium level of GDP

Given the expected rate of return on all possible investment opportunities in the economy, a(n)

decrease in the real rate of interest will tend to increase the level of investment

to close an inflationary expenditure gap of $20 billion in an economy with a marginal propensity to consume of 0.8, it would be necessary to

decrease the aggregate expenditures schedule by $20 billion

a decrease in disposable income

decreases consumption by moving downward along a given consumption schedule

if prices increased, we need to adjust nominal GDP values to give us measure of GDP for various years in constant-dollar terms. We refer to that adjustment as

deflating GDP

If the consumer price index falls from 120 to 116 in a particular year, the economy has experienced:

deflation of 3.33 percent

The phrase "too much money chasing too few goods" best describes:

demand-pull inflation

in an economy that is experiencing a shrinking production capacity

depreciation exceeds gross investment

Nominal GDP is

the sum of all monetary transactions that occur in the economy in a year

National income

the total of all sources of private income (employee compensation, rents, interest, proprietors' income, and corporate profits) plus government revenue from taxes on production and imports.

GDP tends to underestimate the productive activity in the economy because it excludes the value of output from

the underground economy

GDP excludes most nonmarket transaction. Therefore, GDP tends to

underestimate the amount of production in the economy

value added by a firm is the market value of the firm's output minus the

value of inputs bought from other firms

which of the following is not a component of GDP in the expenditures approach

workers' wages and other compensation

Multiple counting*

wrongly including the value of intermediate goods in the gross domestic product; counting the same good or service more than once.

for a nation's real GDP per capita to rise during a year

real GDP must increase more rapidly than population

Refer to above table. What was real GDP in Year 2?

$4,911

Refer to a the above data. If year 2 is the base year, then GDP in year 5 is

$60

Assume that the real output of a developing nation increases from $120 billion to $140 billion while its population expands from 100 to 110 million. As a result, real income per capita has increased by about

$72 per person

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

$75 billion

GDP in an economy is $111,050 billion. Consumer expenditures are $7,735 billion, government purchases are $1,989 billion, and gross investment is $1,410 billion. Net exports are

$84 billion

Refer to above data. In year 4 nominal GDP would be

$90

a nation's captial stock was valued at $300 billion at the start of the year and $365 billion at the end. Consumption of private fixed capital in the year was $25 billion. Assuming stable prices, gross investment was

$90 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

-$84 billion

if the slope of the consumption schedule is 0.8, then the slope of the saving schedule is

0.20

an increase in spending of $20 billion increases real GDP from $600 billion to $700 billion. The marginal propensity to consume must be

0.80 and the multiplier is 5

The consumer price index was 177.1 in 2001 and 179.9 in 2002. Therefore, the rate of inflation in 2002 was about:

1.6 percent

Refer to above data. If year 2 is the base year, then the percentage increase in real GDP from year 2 to year 4 is

100 percent

Refer to the above table. What is the GDP price index in year 1?

108.3

If the Consumer Price Index rises from 300 to 333 in a particular year, the rate of inflation in that year is:

11 percent

In an economy, the total expenditures for a market basket of goods in year 1 (the base year) was $5,000 billions. In year 2 the total expenditure for the same market basket of goods was $5,500 billion. What was the GDP price index for the economy in year 2?

110

Refer to above data. If year 2 is the base year, the price index for year 3 is

133

Suppose that new computer software for accounting and analysis at a business has a new useful life of only one year and costs $200,000 before it needs to be upgraded to a new version. The revenue generated by this software is expected to be $250,000. The expected rate of return from this new computer software is

25%

The country's real GDP declined between years

3 and 4

a nation's real GDP was $250 billion in 2013 and $265 billion in 2014. Its population was 122 billion in 2013 and 125 million in 2014. What is the growth rate of real GDP per capita in 2014

3.4%

If Fred's annual real income rises by 8 percent each year, his annual real income will double in about:

8-9 years

21) Providing a constant number of workers with additional capital with which to work will ________ labor productivity at a(n) ________ rate. A) increase; decreasing B) increase; constant C) decrease; decreasing D) increase; increasing

A

8) Which of the following would be likely to increase the doubling time for an economy's real GDP? A) the rate of population growth slows B) better education increases the productivity of workers C) an increase in the technology used for producing goods and services D) government policies improve the health of the population

A

9) The gross domestic product (GDP) concept accounts for society's valuation of the relative worth of goods and services by using a ________. A) monetary measure C) measure of volume B) utility measure D) measure of physical weigh

A

A recession is a decline in A) real GDP that lasts six months or longer. B) the inflation rate that lasts six months or longer. C) potential GDP that lasts six months or longer. D) the unemployment rate that lasts six months or longer.

A

nominal GDP differs from real GDP because

real GDP results from adjusting for changes in the price level

If an economy produces 100 pencils and 100 pens, and pencils sell for twice as much as pens, A. Pencils are waited twice as important in the economy compared to pens B. Nothing can be said about the relative importance of pens and pencils in the economy C. Pencils are weighted as equally important in the economy as pens D. Pens are waited twice as important in the economy compared to pencils

A

Recently a teachers' union argued that the standard of living of teachers working for the school district was falling. The negotiating team for the school board replied that this was not true because the teachers had received significant increases in nominal income through collective bargaining. Could the union statement be correct? A) yes, because real income may fall if price increases are Proportionately greater than the increases in nominal income B) No, because real income may rise if price increases are proportionately greater than declines in nominal income C) no, because real income may rise if price increases are proportionately greater than the increases in nominal income D) yes, because real income may fall if price increases are proportionately smaller than the increases in nominal income

A

The IRS will be likely to collect more tax revenue if A. There is a shift in employment from black markets to formal markets B. Businesses hire more undocumented workers C. There is an increase in household production D. There is an increase in illegal sports betting

A

Nominal GDP differs from real GDP because: A) Real GDP results from adjusting for changes in the price level B) Nominal GDP results from adjusting for changes in the price level C) Nominal GDP is based on constant prices D) Real GDP is based on current prices

A) Real GDP results from adjusting for changes in the price level

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.

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

A) compensation of employees.

(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

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.

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

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

A) Nominal GDP

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

A) Received

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.

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.

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.

*Price index

An index number that shows how the weighted average price of a "market basket" of goods changes over time. Price index (in hundredths) = nominal GDP / real GDP

Undistributed corporate profits

Any after tax profits that are not distributed to shareholders are saved, or retained, by corporations to be invested later in new plants and equipment. (retained earnings)

15) Economic growth can best be portrayed as a(n) A) movement from a point inside to a point outside of the production possibilities frontier. B) outward shift of the production possibilities frontier. C) movement from a point near the vertical axis to a point near the horizontal axis on the production possibilities frontier. D) inward shift of the production possibilities frontier.

B

16) In the year 2020, Alpha has a real GDP of $80 billion and Omega has a real GDP of $10 billion. If Alpha has a growth rate of 2% and Omega has a growth rate of 4%, in what year will Omega catch up to Alpha? A) 2092 B) 2108 C) 2024 D) 2018

B

23) Government expenditures for social security and unemployment insurance are, for GDP accounting purposes, considered ________. A) transfer payments, and are included in government spending as part of GDP B) transfer payments, and are not included in government spending as part of GDP C) government purchases, and are not included in government spending as part of GDP D) government purchases, and are included in government spending as part of GDP

B

A recession is defined as a period in which:

real domestic output falls

5) GDP is $7 trillion. If consumption is $3.5 trillion, investment is $1.4 trillion, and government purchases are $2.1 trillion, then ________. A) net exports cannot be determined from the available information B) exports are equal to imports C) exports exceed imports D) imports exceed exports

B

(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

Over a 10-year period, the Consumer Price Index doubled. On the basis of this information and using the rule of 72, we can say that the average annual rate of inflation over this period was approximately A) 10%. B) 7%. C) 5%. D) 9%.

B

GDP is the market value of: A) All output produced and accumulated over the years B) All final goods and services produced in an economy in a given year C) Consumption and investment spending in an economy in a given year D) Resources (land, labor, capita, and entrepreneurship) in an economy in a given year

B) All final goods and services produced in an economy in a given year

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.

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.

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 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

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.

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.

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.

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.

11) GDP measured using base year prices is called ________. A) nominal GDP C) real GDP B) constant GDP D) deflated GDP

C

12) GDP measured using current prices is called ________. A) real GDP B) deflated GDP C) nominal GDP D) constant GDP

C

14) Which of the following is not an example of a final good or service perspective of the national income accounts)? A) New lawn mowers sold to consumers by Cut-Rite Lawn Equipment & Supplies in their retail store B) A new string trimmer purchased by Green Grass Lawn Care Services, which employees will use to maintain customer's yards C) Seedlings and saplings purchased for resale by Wendy's Garden Center D) Flowers and pots purchased by homeowner Joe Smith for his garden

C

18) Society can increase its output and income by increasing its A) markets and prices. B) spending and taxes. C) resources and/or the productivity of the resources. D) private and public sectors of the economy.

C

20) To calculate real GDP, ________. A) sum the quantities of all final goods and services produced in an economy in a year B) multiply the quantities of all goods and service produced in an economy in a year by their price in that year and then total the result C) multiply the quantities of final goods and services produced in an economy in a year by their prices in a base year and then sum the values D) multiply the quantities and prices of final goods and services produced in an economy in a year by their prices in that year and then sum the values

C

24) The recurrent ups and downs in the level of economic activity extending over several years are referred to as A) noncyclical fluctuations. C) business cycles. B) business startups. D) economic phases.

C

A principle of diminishing returns to capital states that if the amount of labor and other inputs employed is held constant, then the greater the amount of capital any use the A. Les is produced B. Less production is wasted C. The less and additional unit of capital adds to production D. The more an additional unit of capital adds to production

C

The following are national income account data for a hypothetical economy in billions of dollars: gross private domestic investment ($320); imports ($35); exports ($22); personal consumption expenditures ($2,460); and, government purchases ($470). What is GDP in this economy? A) $3,250 billion B) $3,263 billion C) $3,237 billion D) $3,290 billion

C) $3,237 billion

(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)

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 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

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

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

(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

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

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

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

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

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.

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.

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.

*GDP Equation

C+Ig+G+Xn

10) Nominal GDP is the market value of ________. A) all consumption and investment spending in an economy in a given year B) all output produced and accumulated over the years C) resources (land, labor, capital, and entrepreneurship) in an economy in a given year D) all final goods and services produced in an economy in a given year

D

13) To increase future living standards by pursuing higher current rates of investment spending, an economy must A) reduce the current capital stock. B) decrease the amount of future research and development spending. C) allow higher rates of current consumption. D) reduce current rates of consumption spending.

D

17) One common measure of the "standard of living" in a nation is ________. A) population size B) the unemployment rate C) real GDP D) real GDP per capita

D

19) Gamma has $30,000 of capital per worker, while Omega has $7,500 of capital per worker. In all other respects, the two countries are the same. According to the principle of diminishing returns to capital, an additional unit of capital will ________ in Omega compared to Gamma, holding other factors constant. A) have no effect on output C) increase output less B) increase output by the same amount D) increase output more

D

22) Environmental pollution is accounted for in ________. A) PI B) DI C) GDP D) None of these

D

25) Suppose a government wants to reduce its budget deficit. It could ________. A) decrease taxes B) encourage home production C) increase government spending D) reduce the number of activities that are considered illegal

D

The two ways of looking at GDP are the: A) Output approach and expenditures approach B) Output approach and consumption approach C) Income approach and saving approach D) Expenditures approach and income approach

D) Expenditures approach and income approach

If the price index is 130, this means that: A) Prices are .13 times that in the base year B) Nominal GDP must be inflated to determine the real GDP C) Prices are 130 percent higher than in the base year D) Prices are 30 percent higher than in the base year

D) Prices are 30 percent higher than in the base year

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

D) $150.

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

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.

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 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

if the slope of a linear consumption schedule increases in a private closed economy, then it can be concluded that the

MPC has increased

GDP measured using current price is called

Nominal GDP

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.

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

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

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

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.

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.

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.

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.

Which of the following would most likely occur during the expansionary phase of the business cycle?

Demand-pull inflation

*Government Purchases (G)

Expenditures by government for goods and services that government consumes in providing public goods and for public capital that has a long lifetime; the expenditures of all governments in the economy for those final goods and services.

when local police and fire departments buy new cars for their operations these are counted as part of

G

*Real GDP

GDP adjusted for inflation, GDP in a year divided by the GDP price index for that year, the index expressed as a decimal. Real GDP = Nominal GDP / Price Index (in hundredths)

Expenditures approach*

GDP as the sum of all the money spent in buying it. The method that adds all expenditures made for final goods and services to measure the gross domestic product.

real GDP refers to

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

in a private closed economy, there will be an unplanned increase in inventories when

GDP exceeds aggregate expenditures

Net domestic product (NDP)

Gross domestic product less the part of the year's output that is needed to replace the capital goods worn out in producing the output; the nation's total output available for consumption or additions to the capital stock.

in the aggregate expenditures model of the economy, a downward shift in aggregate expenditures can be caused by a decrease in

government spending or an increase in taxes

in an inflationary expenditure gap, the equilibrium level of real GDP is

greater than full-employment income

Net Private Domestic Investment

gross private domestic investment less consumption of fixed capital; the addition to the nation's stock of capital during a year

suppose the GDP is in equilibrium at full employment and the MPC is .80. If government wants to increase its purchase of goods and services by $16 billion without changing equilibrium GDP, taxes should be

increased by $20 billion

in November 2009, Econland Motors produced an automobile that was delivered to a local dealership in 2009. The auto was then sold to Sharon Smith for personal use in Feb of 2010. Following national income accounting practices, this auto would be counted as part of

investment in 2009 and negative investment in 2010

Gordon James is a person who sells narcotics "on the street". This type of illegal activity

is excluded from GDP figures

The annual rate of inflation can be found by subtracting:

last year's price index from this year's price index and dividing the difference by last year's price index.

The following are examples of final goods in national income accounting except

lumber and steel beams of purchased by construction company

in an economy that has stationary production capacity

net investment is zero

Demand-pull inflation:

occurs when total spending exceeds the economy's ability to provide output at the existing price level.

To avoid multiple counting in nations income accounts

only final goods and services should be counted

if GDP exceeds aggregate expenditures in a private closed economy

planned investment will exceed saving

the aggregate expenditures model is built upon which of the following assumptions

prices are fixed

a GDP price index of 130 in year A means that

prices in year A are on average 30 percent higher than in the base year

Inflation means that:

prices on average are rising, although some particular prices may be falling.

Nondurable goods*

products (consumer good) with less than 3 years of expected life. ex. food, clothing, gasoline, etc.

Final goods*

products that are purchased by their end users. Not for resale or further processing or manufacturing

economic growth can best be portrayed as

rightward shift of the production possibilities curve

Public transfer payment*

social security payments, welfare payments, and veterans' payments that the government makes directly to households. Since the recipients contribute nothing to current production in return, these aren't counted in GDP

Private transfer payments*

such payments include, money that parents give children or the cash gifts given at christmas. they produce no output. They simply transfer funds from one private individual to another and do not enter GDP

Corporate income taxes

taxes that are levied on the a corporations' profits. They flow to the government.

*Nominal GDP

the GDP measured in terms of the price level at the time of measurement (unadjusted for inflation)

nominal GDP is adjusted for price changes through the use of

the GDP price index

Personal income (PI)

the earned and unearned income available to resource suppliers and others before the payment of personal taxes

Value added

the market value of a firms's output less the value of the inputs the firm has bought from others.

Income approach*

the method that adds all the income generated by the production of final goods and services to measure gross domestic product.

which of the following do national income accountants consider to be investment?

the purchase of a new house

the slope of the consumption schedule between 2 points on the schedule is

the ratio of the change in consumption to the change in disposable income between those 2 points