Measuring GDP and Economic Growth

Chapter4
MeasuringGDPandEconomicGrowth
1GrossDomesticProduct
1) Grossdomesticproductisthetotal________producedwithinacountryinagiventimeperiod.
A) marketvalueofallfinalandintermediategoodsandservices
B) marketvalueofallgoodsandservices
C) amountoffinalandintermediategoodsandservices
D) marketvalueofallfinalgoodsandservices
Answer: D
Topic: GDP
Skill: Recognition
Questionhistory: Previousedition,Chapter4
AACSB: ReflectiveThinking
2) Grossdomesticproduct
A) includesallthegoodsandnoneoftheservicesproducedinaneconomyinagiventime
period.
B) measuresthevalueoftheaggregateproductionofgoodsandservicesinacountryduring
agiventimeperiod.
C) measuresthevalueoflaborpaymentsgeneratedinaneconomyinagiventimeperiod.
D) isgenerallylessthanfederalexpenditureinanytimeperiod.
Answer: B
Topic: GDP
Skill: Recognition
3) Grossdomesticproductisameasureofthetotalvalueofall
A) salesinaneconomyoveraperiodoftime.
B) consumerincomeinaneconomyoveraperiodoftime.
C) capitalaccumulationinaneconomyoveraperiodoftime.
D) finalgoodsandservicesproducedinaneconomyoveraperiodoftime.
Answer: D
Topic: GDP
Skill: Recognition
Copyright2012PearsonEducation,Inc.
Chapter4MeasuringGDPandEconomicGrowth493
4) Grossdomesticproduct(GDP)isthe________inagiventimeperiod.
A) valueofpersonalconsumptionexpenditures,grossprivatedomesticinvestment,and
federalgovernmentexpenditures
B) sumofwageandsalarycompensationofemployeesandcorporateprofits
C) valueofallfinalandintermediategoodsandservicesproducedbytheeconomyexcluding
thosegoodsexportedtoforeignnations
D) marketvalueoffinalgoodsandservicesproducedbytheeconomy
Answer: D
Topic: GDP
Skill: Recognition
5) Grossdomesticproduct(GDP)measuresthe
A) numberoffinalgoodsandservicesproducedintheeconomyinagiventimeperiod.
B) numberoffinalgoodsandservicessoldintheeconomyinagiventimeperiod.
C) marketvalueofoldandnewfinalgoodsandservicessoldintheeconomyinagiventime
period.
D) marketvalueoffinalgoodsandservicesproducedintheeconomyinagiventimeperiod.
Answer: D
Topic: GDP
Skill: Recognition
6) GDPisdefinedasthemarketvalueofall________inagiventimeperiod.
A) finalgoodsproducedinacountry
B) finalgoodsandservicesproducedbycitizensofaparticularcountryregardlessofwhere
intheworldtheyarelocated
C) finalgoodsandservicesproducedinacountrybyonlythecitizensofthecountry
D) finalgoodsandservicesproducedinacountry
Answer: D
Topic: GDP
Skill: Recognition
7) InthedefinitionofGDP,marketvaluerefersto
A) valuingproductioninproductionunits.
B) notcountingintermediateproducts.
C) valuingproductionaccordingtothemarketprice.
D) whentheproductiontookplace.
Answer: C
Topic: MarketValue
Skill: Recognition
Questionhistory: Modified10thedition
494ParkinMacroeconomics,TenthEdition
8) IntheUnitedStates,GDPistypicallymeasured
A) monthly.
B) quarterly.
C) daily.
D) weekly.
Answer: B
Topic: TimePeriod
Skill: Recognition
9) IfNike,anAmericancorporation,producessneakersinThailandthiswould
A) countaspartofU.S.GDPsinceitisaU.S.corporation.
B) countforbothThailandsGDPandU.S.GDP.
C) addtoThailandsGDPbutnottoU.S.GDP.
D) addtoneitherU.S.GDPnorThailandsGDP.
Answer: C
Topic: Production
Skill: Recognition
10) IfFritoLay,anAmericansnackcompany,opensanewmanufacturingfacilityinMexicoand
producessnackswhicharedistributedinSouthAmerica,thenMexicosGDP________andU.S.
GDP________.
A) increases;doesnotchange
B) doesnotchange;increases
C) increases;decreases
D) increases;increases
Answer: A
Topic: Production
Skill: Recognition
Questionhistory: New10thedition
11) ThewordfinalinthedefinitionofGDPrefersto
A) notcountingintermediategoodsorservices.
B) thetimeperiodwhenproductiontookplace.
C) valuingproductionatmarketprices.
D) countingtheintermediategoodsandservicesusedtoproduceGDP.
Answer: A
Topic: FinalGood
Skill: Recognition
12) Aloafofbreadpurchasedbyoneofyourinstructorswouldbebestdescribedas
A) anintermediategood.
B) afinancialasset.
C) ausedgood.
D) afinalgood.
Answer: D
Topic: FinalGood
Skill: Recognition
13) Whichofthefollowingisafinalgood?
A) thememorychipsinyournewsmartphone
B) ashareofIBMstock
C) flourpurchasedatthestoretobakecookies
D) flourusedbythebakerytobakecookies
Answer: C
Topic: FinalGood
Skill: Recognition
14) In2011,Ozziepurchaseda2008FordEscortfromhisneighborforhisson,purchaseda2007
oneownerCamryfromLarchmontToyotaforhiswife,boughta2011newFordforhimself,
andsoldhis2000DodgeCaravantohisteenagenephew.Which,ifany,ofthesetransactions
willbeincludedinGDPin2011?
A) allfourtransactions
B) allthreepurchasesbutnotthesale
C) thepurchaseoftheFordandtheCaravan
D) onlythepurchaseoftheFord
Answer: D
Topic: FinalGood
Skill: Conceptual
15) Whichofthefollowingexpendituresassociatedwiththeproductionofanewhigh -performance

SUVwillbedirectlyincludedinGDP?
A) thesaleofbondstofinancetheconstructionoftheassemblyplant
B) thepurchaseofusedweldingrobotstoassembletovehicles
C) thepurchaseofnewtirestobeinstalledonthenewvehicles
D) thepurchaseofnewmachinetoolstomanufacturetheengines
Answer: D
Topic: FinalGood
Skill: Conceptual
16) IntermediategoodsareexcludedfromGDPbecause
A) theirinclusionwouldinvolvedoublecounting.
B) theyrepresentgoodsthathaveneverbeenpurchasedsotheycannotbecounted.
C) theirinclusionwouldunderstateGDP
D) thepremiseofthequestionisincorrectbecauseintermediategoodsaredirectlyincludedin
calculatingGDP.
Answer: A
Topic: IntermediateGoodsandServices
Skill: Recognition
17) Atonofcoalpurchasedbyyourlocalutilitytoburntomakeelectricitywouldbebestdescribed
as
A) anintermediategood.
B) afinancialasset.
C) ausedgood.
D) afinalproduct.
Answer: A
Skill: Recognition
18) Whichofthefollowingexpendituresisforanintermediategood?
A) Thegovernmentbuysnewtiresforitsmilitaryvehicles.
B) AU.S.tirefirmsellsnewtirestoCanada.
C) GeneralMotorsbuysnewtirestoputonthecarsitsbuilding.
D) Youbuynewtiresforyourusedcar.
Answer: C
Skill: Conceptual
19) GDPdoesnotdirectlyincludeintermediategoodsbecause
A) intermediategoodsarenotvaluable.
B) intermediategoodsarenotusefultoconsumers.
C) thatwouldcounttheintermediategoodstwice.
D) thatwouldunderstatethetruesizeofGDP.
Answer: C
Skill: Conceptual
20) ThecalculationofthefinalgoodsandservicessoldinaneconomywouldNOTinclude
A) thepurchaseofalawnmowerbyahousehold.
B) GeneralMotorspurchasesoftiresfornewautomobiles.
C) FordMotorCompanyspurchaseofanewindustrialrobottobeusedtoproducecars.
D) thepurchaseofaservicebyahousehold.
Answer: B
Skill: Conceptual
21) IncomputingGDP,itisessentialto
A) avoiddoublecounting.
B) includegovernmenttransferpayments.
C) includegovernmenttaxrevenues.
D) countallintermediateproductsdirectlyastheyareproduced.
Answer: A
Skill: Conceptual
22) Doublecounting(countingthesamethingtwice)inGDPaccountingisavoidedbynotincluding
A) netexports.
B) intermediategoods.
C) illegalactivities.
D) depreciation.
Answer: B
Skill: Conceptual
23) GDPcountsonlyfinalgoodsandservicesbecausethis
A) methodavoidsincludinganygoodsthatareproducedthisyearandsoldnextyear.
B) methodavoidsdoublecountingofgoodsgoingthroughseveralstagesofproduction.
C) amountcanbemoreeasilydeterminedinthemarketplace.
D) methodavoidsunderstatingthevalueofGDPproducedduringagivenyear.
Answer: B
Topic: FinalGoodsandIntermediateGoods
Skill: Recognition
24) Thecircularflowmodelshowsthatconsumergoodsandservicesproducedbybusinessfirms
aresoldinthe
A) goodsmarket.
B) factormarket.
C) labormarket.
D) financialmarket.
Answer: A
Topic: CircularFlow
Skill: Recognition
25) Thefactormarketcanbestbedescribedaswhere
A) householdsbuygoodsandservices.
B) firmsbuygoodsandservices.
C) firmsbuytheservicesoflabor,landandcapital.
D) governmentssellgoodsandservices.
Answer: C
Topic: CircularFlow
Skill: Recognition
26) Inthecircularflowofincome
A) householdsdemandgoodsandservicesthataresuppliedbyfirms,andthefirmsdemand
factorsthataresuppliedbyintermediatefirms.
B) householdsdemandgoodsandservicesthataresuppliedbyfirms,whilesupplying
factorsthataredemandedbyfirms.
C) householdssellgoodsandserviceswhilefirmssellfactors.
D) householdsbuygoodsandserviceswhilefirmssellgoodsandservices.Firmsobtainlabor
fromhouseholds,capitalfromgovernment,andrawmaterialsfromotherfirms.
Answer: B
Topic: CircularFlow
Skill: Recognition
27) Thecircularflowshowsthatthehouseholdsectorearnsitsincomeby
A) sellingfactorsofproduction.
B) buyingfactorsofproduction.
C) sellinggoodsandservices.
D) sellingfinancialassets.
Answer: A
Topic: CircularFlow
Skill: Recognition
28) Thecircularflowofincomeshowsthat
A) householdstransactonlyinthegoodsmarket.
B) governmentspurchasegoodsandservices.
C) firmsgenerallyarethedemandersinthegoodsmarketsandsuppliersinthefactor
markets.
D) Noneoftheaboveanswersiscorrect.
Answer: B
Topic: CircularFlow
Skill: Recognition
29) Whichofthefollowingistrueregardingthecircularflowdiagram?
I.
Aggregateincomeistheflowofincomeearnedbyfirms.
II. Retainedearningsareconsideredincomeearnedbyfirmsratherthanpartofhouseholds
income.
III. Thegovernment,households,andfirmsallhavetransactionsinthegoodsmarket.
A) Ionly
B) IandII
C) IandIII
D) IIIonly
Answer: D
Topic: CircularFlow
Skill: Conceptual
30) Ifwecomparethefoursourcesofspendingintheeconomyweseethat
A) householdconsumptionisthesmallest.
B) governmentexpenditureisthelargest.
C) businessinvestmentisthelargest.
D) householdconsumptionisthelargest.
Answer: D
Topic: CircularFlow
Skill: Recognition
31) Comparedtotheothersourcesofspending,netexportsis
A) largeandnegative.
B) smallandnegative.
C) largeandpositive.
D) smallandpositive.
Answer: B
Topic: CircularFlow
Skill: Recognition
32) Thecircularflowdiagramshowsthat
A) theflowofpaymentstothefactorsusedtoproducegoodsandservicesexceedstheflowof
paymentsforfinalgoodsandservices.
B) goodsandfactormarketsareindependent.
C) thetotalamountofincomegeneratedbytheeconomyequalsthetotalpurchasesoffinal
goodsandservices.
D) consumptionexpenditureequalssaving.
Answer: C
Topic: CircularFlow
Skill: Recognition
33) Thecircularflowdiagramshows
A) hownominalGDPisdistinctfromrealGDP.
B) howthepricesoffactorsaredetermined.
C) theeffectsofinflationinasimpleeconomy.
D) theflowsbetweendifferentsectorsoftheeconomy.
Answer: D
Topic: CircularFlows
Skill: Conceptual
34) Thecircularflowdiagramindicatesthat
A) householdsselltheservicesoffactorsofproductiontofirms.
B) firmsbuytheservicesoffactorsofproductionfromthegovernment.
C) householdssellgoodsandservicestothegovernment.
D) firmsbuygoodsandservicesfromhouseholds.
Answer: A
Skill: Conceptual
35) Inthecircularflowmodelofaneconomy,households
A) receiveincomefrombuyersofgoodsandservices.
B) receiveincomefromthesaleoffactorsinthegoodsmarkets.
C) payfirmsfortheuseoftheirfactors.
D) receiveincomefromproducersfortheuseoffactorsinthefactormarkets.
Answer: D
Skill: Conceptual
36) Inthecircularflowdiagram,aggregateexpenditureincludesthesumof
A) savingandinvestment.
B) consumptionandinvestment.
C) consumption,investment,andsaving.
D) incomeandsaving.
Answer: B
Topic: CircularFlow,AggregateExpenditures
Skill: Conceptual
37) Inthecircularflowofeconomicactivity
A) aggregateexpendituremeasuresthedollarvalueofpurchasesoffactors.
B) aggregateexpendituremeasuresthedollarvalueofpurchasesoffinalgoodsandservices.
C) aggregateincomemeasuresthedollarvalueoflaborresourcesonly.
D) aggregateexpenditureismeasuredasitmovesthroughthefinancialmarkets.
Answer: B
Skill: Conceptual
38) Inthecircularflowdiagram,aggregateexpenditureincludes
A) consumptionexpenditure,saving,investmentandgovernmentexpenditure
B) consumptionexpenditure,saving,investmentandnetexports
C) consumptionexpenditure,investment,governmentexpenditureandnetexports
D) consumptionexpenditure,saving,governmentexpenditureandnetexports
Answer: C
Skill: Recognition
39) Intheabovefigure,flowBrepresents________.
A) householdpurchasesofgoodsandservices
B) householdborrowing
C) householdincome
D) firmspaymentsforlaborservices
Answer: A
Topic: CircularFlow
Skill: Analytical
40) Intheabovefigure,flowBrepresentshouseholds________.
A) income
B) consumptionexpenditures
C) saving
D) investment
Answer: B
Topic: CircularFlow
Skill: Analytical
41) Intheabovefigure,householdincomeisshownbyflow
A) A.
B) B.
C) C.
D) F.
Answer: A
Topic: CircularFlow
Skill: Analytical
42) Intheabovefigure,consumptionexpenditureisshownbyflow
A) A.
B) B.
C) C.
D) F.
Answer: B
Topic: CircularFlow
Skill: Analytical
43) Whichofthefollowingareequaltooneanother?
I. aggregateproduction
II. aggregateexpenditure
III. aggregateincome
A) IequalsII,butnotIII.
B) IequalsIII,butnotII.
C) IIequalsIII,butnotI.
D) IequalsIIequalsIII.
Answer: D
Topic: ExpenditureEqualsIncome
Skill: Conceptual
44) Choosethebeststatement.
A) GDPequalsaggregateexpenditureandequalsaggregateincome.
B) Anincreaseingovernmentpurchasesincreasesaggregateexpenditurebutdoesnot
changeGDP.
C) Anincreaseincompensationofemployeesincreasesaggregateincomebutdoesnot
changeGDP.
D) GDPalwaysequalsaggregateexpenditureandsometimesequalsaggregateincome.
Answer: A
Skill: Conceptual
45) Accordingtothecircularflowdiagram,thedollarvalueofanationsoutputisequalto
A) profits.
B) totalincome.
C) netincomeminustaxes.
D) wages.
Answer: B
Skill: Recognition
46) Totaloutputandtotalincomeinthecircularflowmodel
A) aremeasuresoftheeconomyslevelofsavings.
B) includeonlyintermediategoods.
C) areequaltoeachother.
D) arerelatedbecausenationalincomeislessthannationalproduct.
Answer: C
Skill: Recognition
47) Thecircularflowshowsthat
A) aggregateproductionequalsaggregateexpenditure.
B) aggregateexpenditureislessthanaggregateincome.
C) GDPequalsaggregateincome.
D) BothanswersAandCarecorrect.
Answer: D
Skill: Conceptual
48) Comparingaggregateexpenditureandaggregateincomesshowsthat
A) aggregateexpenditureisusuallygreaterthanaggregateincome.
B) aggregateincomeisusuallygreaterthanaggregateexpenditure.
C) theyareequal.
D) aggregateincomecannotequalaggregateexpenditureifwehaveanysavings.
Answer: C
Skill: Conceptual
49) Grossdomesticproduct(GDP)is
A) thevalueofallfinalgoodsandservicesproducedinacountryduringayear.
B) thesumofconsumptionexpenditure,investment,governmentexpenditureongoodsand
services,andnetexports.
C) thesumofcompensationofemployees,proprietorsincome,netinterest,rentalincome,
corporateprofits,depreciation,andindirectbusinesstaxesminussubsidies.
D) alloftheabove
Answer: D
Skill: Recognition
50) Grossdomesticproductcanbecalculated
A) eitherbyvaluingthenationsoutputofgoodsandservicesorbyvaluingtheincome
generatedintheproductionprocess.
B) byaddingupthepersonalconsumptionofallmembersofthesociety.
C) byaddingupthevalueofallintermediategoodsusedintheeconomy.
D) byaddinguptheincometaxreturnsofallmembersofthesociety.
Answer: A
Skill: Recognition
51) Grossdomesticproductisthe
A) valueofthefinalgoodsandservicesproducedinacountryduringaspecifictime.
B) totalamountthatbuyersspentonthefinalgoodsandservicesproducedinacountry
duringaspecifictime.
C) totalamountofincomeearnedinproducingthefinalgoodsandservicesinacountry
duringaspecifictime.
D) Alloftheaboveanswersarecorrect.
Answer: D
Skill: Recognition
52) Whichofthefollowingiscorrect?
A) AggregateexpenditureequalsGDPbutislessthanaggregateincome.
B) AggregateincomeisgreaterthanGDPbutequaltoaggregateexpenditure.
C) AggregateincomeisgreaterthanaggregateexpenditurebutequaltoGDP.
D) Aggregateincome,aggregateexpenditureandGDPareallequal.
Answer: D
Skill: Recognition
53) GDPequals
A) C+S+G+(X-M)
B) C+I+G+(X+M)
C) C+I+G+(X-M)
D) C+S+G+(X-M)
Answer: C
Skill: Recognition
54) Depreciationisdefinedasthe
A) decreaseinthestockofcapitalduetowearandtear.
B) increaseinthestockofcapitalduetoinvestmentbyfirms.
C) increaseinthestockofcapitalduetowearandtear.
D) decreaseinthestockofcapitalduetoinvestmentbyfirms.
Answer: A
Topic: Depreciation
Skill: Recognition
55) SupposeMailBoxesEtc.buysanewcopierforitsstorefor$1000.Ayearlater,whenthefirm
wantstoupgradetoanewcopier,itfindsthattheoldcopierisonlyworth$750.Overtheyear
thecopierwasused,________hasoccurred.
A) replacementinvestment
B) grossinvestment
C) depreciation
D) netinvestment
Answer: C
Topic: Depreciation
Skill: Conceptual
56) Netinvestmentequals
A) capitalstockminusdepreciation.
B) grossinvestmentminusdepreciation.
C) thetotalquantityofplant,equipmentandbuildings.
D) grossinvestment/depreciation.
Answer: B
Topic: NetInvestmentandGrossInvestment
Skill: Recognition
57) Whichofthefollowingrelationshipsiscorrect?
A) NetInvestment=GrossInvestment+ Depreciation
B) Consumptionexpenditure= NetInvestment- Depreciation
C) GrossInvestment=NetInvestment+ Depreciation
D) Depreciation=GrossInvestment- Consumptionexpenditure
Answer: C
Skill: Recognition
58) Grossinvestmentequalsnetinvestmentplus
A) capital.
B) capitalgains.
C) depreciation.
D) dividendspaidtotheownersofthecompany.
Answer: C
Skill: Recognition
59) Grossinvestmentisequalto
A) depreciationminusnetinvestment.
B) netinvestmentpluscapitalstock.
C) depreciationplusnetinvestment.
D) netinvestmentminuscapitalstock.
Answer: C
Skill: Recognition
60) Grossinvestmentequals
A) netinvestment-depreciation+ changeininventories.
B) netinvestment+depreciation.
C) netinvestment+changeininventories.
D) depreciation+changeininventories.
Answer: B
Skill: Recognition
61) ________isgrossinvestmentminus________.
A) Thecapitalstock;netinvestment
B) Thecapitalstock;depreciation
C) Depreciation;replacementinvestment
D) Netinvestment;depreciation
Answer: D
Skill: Recognition
62) Thedifferencebetweengrossinvestmentandnetinvestmentis
A) thecapitalstock.
B) depreciation.
C) therealinterestrate.
D) equaltosaving.
Answer: B
Skill: Recognition
63) Ifdepreciationislessthangrossinvestment,thennetinvestmentis
A) positive.
B) negative.
C) zero.
D) Thissituationcouldneveroccurbecauseitisimpossiblefordepreciationtobelessthan
grossinvestment.
Answer: A
Skill: Conceptual
64) Netinvestment
A) equalsgrossinvestmentplusdepreciation.
B) istheonlymeasureofinvestmentusedtocalculateGDP.
C) equalsgrossinvestmentminusdepreciation.
D) isequivalenttotheexistingcapitalstockintheeconomy.
Answer: C
Skill: Recognition
65) Netinvestmentequals
A) grossinvestment+depreciation.
B) depreciation+additiontoinventories.
C) savings-depreciation.
D) grossinvestment-depreciation.
Answer: D
Skill: Recognition
66) Netinvestmentisthe
A) totalamountofgrossinvestmentminusdepreciation.
B) valueofsoftwareandothernetworkrelatedproducts.
C) profitorlossinthestockmarket.
D) valueofthedepreciatedcapitalmultipliedbythechangesinthepricelevel.
Answer: A
Skill: Recognition
67) WhichofthefollowingisNOT afinalgood?

A) anewcomputersoldtoanNYUstudent
B) anewcarsoldtoAvisforuseintheirfleetofrentalcars
C) apursesoldtoaforeignvisitor
D) ahotdogsoldtoaspectatorataChicagoBearsfootballgame
Answer: B
Topic: StudyGuideQuestion,GDP
Skill: Conceptual
68) GDPequals
A) aggregateexpenditure.
B) aggregateincome.
C) thevalueoftheaggregateproductioninacountryduringagiventimeperiod.
D) alloftheabove
Answer: D
Topic: StudyGuideQuestion,ExpenditureEqualsIncome
Skill: Conceptual
2MeasuringU.S.GDP
1) TwomethodsofmeasuringGDPare
A) theincomeapproachandtheexpenditureapproach.
B) theincomeapproachandthereceiptsapproach.
C) thegoodsapproachandtheservicesapproach.
D) thesavingapproachandtheinvestmentapproach.
Answer: A
Topic: MeasuringU.S.GDP
Skill: Recognition
2) GDPcanbecomputedasthesumof
A) allsalesthathavetakenplaceinaneconomyoveraperiodoftime.
B) thetotalexpendituresofconsumersandbusinessoveraperiodoftime.
C) thetotalexpendituresofconsumption,investment,andgovernmentexpenditureongoods
andservicesoveraperiodoftime.
D) thetotalexpendituresofconsumption,investment,governmentexpenditureongoodsand
services,andnetexportsoveraperiodoftime.
Answer: D
Topic: ExpenditureApproach
Skill: Recognition
3) GDPusingtheexpenditureapproachequalsthesumofpersonalconsumptionexpenditures
plus
A) grossprivateinvestment.
B) grossprivateinvestmentplusgovernmentexpenditureongoodsandservices.
C) grossprivateinvestmentplusgovernmentexpenditureongoodsandservicesminus
importsofgoodsandservices.
D) grossprivateinvestmentplusgovernmentexpenditureongoodsandservicesplusnet
exportsofgoodsandservices.
Answer: D
Skill: Recognition
4) TheexpenditureapproachmeasuresGDPbyadding
A) compensationofemployees,rentalincome,corporateprofits,netinterest,andproprietors
income.
B) compensationofemployees,rentalincome,corporateprofits,netinterest,proprietors
income,subsidiespaidbythegovernment,indirecttaxespaid,anddepreciation.
C) compensationofemployees,rentalincome,corporateprofits,netinterest,proprietors
income,indirecttaxespaid,anddepreciationandsubtractingsubsidiespaidbythe
government.
D) consumptionexpenditure,grossprivatedomesticinvestment,netexportsofgoodsand
services,andgovernmentexpenditureongoodsandservices.
Answer: D
Skill: Recognition
5) ThefourcategoriesofexpenditureusedbytheexpenditureapproachmethodtocalculateGDP
are
A) consumptionexpenditure,taxes,savingandinvestment.
B) consumptionexpenditure,investment,netimportsandsaving.
C) saving,taxes,governmentexpenditureandinvestment.
D) consumptionexpenditure,investment,governmentexpenditureandnetexports.
Answer: D
Skill: Recognition
6) Intheequation,GDP=C+ I+ G+ X- M,G refersto

A) federalgovernmentexpendituresplusalltransferpayments.
B) local,state,andfederalgovernmentspendingforallpurposes.
C) thetaxesandexpendituresofallgovernmentunits.
D) local,state,andfederalgovernmentexpenditureongoodsandservices,butdoesnot
includetransferpayments.
Answer: D
Skill: Recognition
7) ThecomponentsoftheexpenditureapproachtomeasuringGDPincludeallofthefollowing
EXCEPT
A) netexports.
B) governmentexpenditureongoodsandservices.
C) investment.
D) theimplicitpaymentsforunpaidhouseholdwork.
Answer: D
Skill: Recognition
8) AllofthefollowingarecomponentsoftheexpenditureapproachtomeasuringGDPEXCEPT
A) ShaniqspurchaseofamealattheOliveGardeninAtlanta.
B) aSenatorfromIowabeingpaidthemonthlysalary.
C) thearmybuyingnewM1Abramtanks.
D) FordMotorCompanybuyingnewDellcomputersforuseinitsmarketingdepartmentin
Dearborn,Michigan.
Answer: B
Skill: Analytical
AACSB: AnalyticalSkills
9) ThelargestcomponentofGDPintheexpenditureapproachis
A) personalconsumptionexpenditures.
B) grossprivatedomesticinvestment.
C) governmentexpenditureongoodsandservices.
D) netexports.
Answer: A
Topic: ExpenditureApproach,ConsumptionExpenditures
Skill: Recognition
10) Ofthefollowing,thelargestcomponentofGDPis
A) personalconsumptionexpenditure.
B) grossprivatedomesticinvestment.
C) governmentexpenditureongoodsandservices.
D) netexportsofgoodsandservices.
Answer: A
Skill: Recognition
11) WhichofthefollowingisNOTpartoftheexpenditureapproachtomeasuringGDP?
A) grossprivatedomesticinvestment
B) netexportsofgoodsandservices
C) netinterest
D) personalconsumptionexpenditures
Answer: C
Skill: Recognition
12) TomeasureGDPusingtheexpenditureapproachyoumustcollectdataon
A) inflation.
B) exports.
C) wages.
D) saving.
Answer: B
Skill: Recognition
13) AggregateexpendituresincludeallofthefollowingEXCEPT
A) consumptionoffood.
B) purchasesofintermediategoods.
C) purchasesofapieceofcapitalequipment.
D) purchasesofgunsbythegovernment.
Answer: B
Skill: Recognition
14) GrossDomesticProductisequaltothesumofconsumptionexpenditure,investment,net
exports,and________.
A) governmentexpendituresongoodsandservices
B) saving
C) profits
D) nettaxes
Answer: A
Skill: Recognition
15) WhichofthefollowingitemsisnotacomponentoftheexpenditureapproachtomeasuringU.S.
GDP?
A) purchasesoffoodmadebyfamilies
B) socialsecuritypaymentsmadebythegovernment
C) purchasesofU.S.-mademoviesbyEuropeans
D) purchasesofnewhomesmadebyfamilies
Answer: B
Skill: Recognition
16) IntheexpenditureapproachtoGDP,thelargestcomponentis
A) governmentexpenditureongoodsandservices.
B) personalconsumptionexpenditures.
C) grossprivatedomesticinvestment.
D) netexports.
Answer: B
Skill: Conceptual
17) LetCrepresentconsumptionexpenditure,S saving,I grossprivatedomesticinvestment,G

governmentexpenditureongoodsandservices,andX-Mnetexportsofgoodsandservices.
ThenGDPequals
A) C+S+G+X-M.
B) C+S+G-X-M.
C) C+I+G+X-M.
D) C+I+G-X-M.
Answer: C
Skill: Conceptual
18) Consumptionexpenditureisthepaymentbyhouseholdsforconsumptionof
A) goodsbutnotservices.
B) servicesbutnotgoods.
C) goodsandservices.
D) servicesandforsaving.
Answer: C
Skill: Recognition
19) ThelargestcomponentofGDPis
A) grossprivatedomesticinvestment.
B) personalconsumptionexpenditures.
C) netexportsofgoodsandservices.
D) governmentexpenditureongoodsandservices.
Answer: B
Skill: Recognition
20) Personalconsumptionexpendituresinclude
A) expendituresbyhouseholdsongoodsandservicesproducedonlyintheUnitedStates.
B) expendituresbyhouseholdsongoodsandservicesproducedintheUnitedStatesandthe
restoftheworld.
C) thepurchaseofnewhomes.
D) thepurchaseofusedgoodsandnewgoods.
Answer: B
Skill: Recognition
21) Whichofthefollowingpurchasesisincludedinpersonalconsumptionexpenditureswhen
determininggrossdomesticproduct?
A) purchaseofanewhousebecauseofthearrivalofanewbaby
B) purchaseofanewofficebuilding
C) vacationexpensesforaspringtriptoFortLauderdale
D) purchasesofjeanstoaddtoastoresinventory
Answer: C
Skill: Conceptual
22) PersonalconsumptionexpendituresincludeallofthefollowingEXCEPTspendingon
A) consumerdurablegoods.
B) consumernondurablegoods.
C) consumerservices.
D) newhousing.
Answer: D
Skill: Conceptual
23) AllofthefollowinghouseholdexpendituresareincludedinconsumptionexpenditureEXCEPT
A) paymenttoadentistforfillingatooth.
B) purchaseofcorporatestock.
C) purchaseofanewpurse.
D) purchaseofhairstyling.
Answer: B
Skill: Conceptual
24) Grossprivatedomesticinvestmentisallpurchasesofnewlyproducedbusinesscapitalgoods
andbuildings
A) minusthechangeinbusinessinventories.
B) plusthechangeinbusinessinventoriesplusresidentialconstruction.
C) plusfixedinvestmentminusinventoryinvestment.
D) pluspurchasesofcapitalgoodsproducedinpreviousyearstoreplaceanydepreciated
capitalgoods.
Answer: B
Topic: ExpenditureApproach,Investment
Skill: Recognition
25) Thedifferencebetweengrossinvestmentandnetinvestmentis
A) inflation.
B) depreciation.
C) initialcapital.
D) consumption.
Answer: B
Skill: Recognition
26) Goodsthatareproducedthisyear,storedininventories,andthensoldtoconsumersnextyear
A) countinthisyearsGDP.
B) countinnextyearsGDP.
C) countinboththisyearsandnextyearsGDP.
D) arenotcountedasapartofGDP.
Answer: A
Skill: Recognition
27) Anew2010HondaCivicproducedin2010andpurchasedin2011is
A) partofGDPin2010.
B) partofGDPin2011.
C) notpartofGDPineitheryearbecauseitwasproducedinoneyearandsoldinanother
year.
D) partofGDPinboth2010and2011.
Answer: A
Skill: Recognition
28) Whichofthefollowingareexamplesofthegrossprivatedomesticinvestmentcomponentof
GDP?
I.
thepurchaseofproductionmachinerybyIBM
II. anincreaseinthefinishedgoodsinventoryatIntel
A) Ionly
B) IIonly
C) bothIandII
D) neitherInorII
Answer: C
Skill: Conceptual
29) Inthecalculationofgrossdomesticproductbytheexpenditureapproach,theinvestment
componentis
A) netinvestment.
B) grossinvestmentminusdepreciation.
C) grossinvestmentplusdepreciation.
D) grossinvestment.
Answer: D
Skill: Conceptual
30) AnexampleofinvestmentincomputingrealGDPusingtheexpenditureapproachisthe
purchaseof
A) anewsetoftoolsbyanautomechanic,foruseinrepairingcars.
B) 100sharesofIBMstock.
C) a100yearoldhousebyamarriedcouple.
D) computerchipsbyDelltoputintheirpersonalcomputers.
Answer: A
Skill: Conceptual
31) Anexampleofinvestmentinthenationalincomeaccountsisthepurchaseof
A) anewvanbyapotter,whopacksitwithhiswaresandtravelstoartshows.
B) 100sharesofCanadianstockontheNewYorkStockExchange.
C) a100-year-oldhousethatwasjustputontheprotectedhistoricsiteslistintheyearin
question.
D) aU.S.governmentbond.
Answer: A
Skill: Conceptual
32) Inthenationalincomeaccounts,thepurchaseofanewhousecountsas
A) consumptionexpenditure.
B) investment.
C) atransfer.
D) anadditiontoinventory.
Answer: B
Skill: Conceptual
33) AllofthefollowingareincludedingrossprivatedomesticinvestmentexpenditureEXCEPTa
A) businessspurchaseofafleetofcars.
B) householdspurchaseofanewhouse.
C) businessspurchaseofanothercompanysstock.
D) aretailstorespurchaseofshoestoaddtoitsinventory.
Answer: C
Skill: Conceptual
34) Inthenationalincomeaccounts,governmentexpenditureongoodsandservicesrefertothose
purchasesmadeby
A) federalandstategovernmentsonly.
B) thefederalgovernmentonly.
C) stateandlocalgovernmentsonly.
D) alllevelsofgovernment.
Answer: D
Topic: ExpenditureApproach,GovernmentExpenditure
Skill: Recognition
35) Inthenationalincomeaccounts,governmentexpenditureongoodsandservicesexclude
A) transferpayments.
B) stateandlocalgovernmentpurchases.
C) localgovernmentpurchasesbutincludestategovernmentpurchases.
D) spendingonnationaldefense.
Answer: A
Skill: Recognition
36) Whichofthefollowingisincludedinthegovernmentexpenditurecomponentofthe
expenditureapproachtoGDP?
A) stategovernmentexpenditureonlocalschools
B) transferpayments
C) changesininventories
D) taxes
Answer: A
Topic: TheExpenditureApproach,GovernmentPurchases
Skill: Recognition
37) Whichoneofthefollowingtransactionsinaparticularyearisincludedingrossdomestic
productforthatyear?
A) SocialSecuritypaymentstoretirees
B) ThegovernmentpaysacomputerservicescompanythatassistedinthedeliveryofSocial
Securitypaymentstoretirees.
C) Acarisproducedinthepreviousyearandremainsininventoryfortheentireyearunder
consideration.
D) Astay-at-homeparentperformshouseworkthatthefamilywouldotherwisehavepaida
maid$20,000ayeartoperform.
Answer: B
Skill: Recognition
38) WhichofthefollowingisincludedingovernmentexpenditureswhenmeasuringGDP?
A) SocialSecuritypayments
B) unemploymentcompensationpayments
C) pensionpaymentmadetopastpresidents
D) thecurrentpresidentssalary
Answer: D
Skill: Conceptual
39) Transferpayments
A) areincludedinthegovernmentexpenditurecategoryingrossdomesticproduct.
B) refertoallpaymentsmadetohouseholdsbygovernments.
C) refertopaymentsmadebythegovernmentthatarenotmadetopurchaseagoodor
service.
D) aremadebyhouseholdstofirmsinexchangeforgoodsandservices.
Answer: C
Skill: Recognition
40) InthecomputationofGDP,socialsecuritypaymentscountas
A) transferpaymentsandareincludedinGDP.
B) transferpaymentsandarenotincludedinGDP.
C) governmentexpenditureongoodsandservicesandareincludedinGDP.
D) governmentexpenditureongoodsandservicesandarenotincludedinGDP.
Answer: B
Skill: Recognition
41) WhichofthefollowingitemsisNOT partofgovernmentexpenditureongoodsandservicesin

theGDPaccounts?
A) gasolinepurchasesforgovernmentcarpools
B) SocialSecurityexpenditures
C) newcomputerhardwareforusebytheIRS
D) drapestobrightenupthepresidentsoffice
Answer: B
Skill: Conceptual
42) TransferpaymentsarenotincludedinGDPbecause
A) theirmarketvaluecannotbeaccuratelydetermined.
B) theydonotgenerateadditionalincome.
C) theyarenotpurchasesofgoodsorservices.
D) theirvalueisincludedingovernmentexpenditure.
Answer: C
Skill: Conceptual
43) WhichofthefollowingtransferpaymentsisincludedinGDP?
A) SocialSecuritypayments
B) welfarepayments
C) veteransbenefits
D) noneoftheabove
Answer: D
Skill: Conceptual
44) WhichofthefollowingisNOT partofGDPcalculatedusingtheexpenditureapproach?

A) GeneralMotorspurchasesofnewcapitalequipment
B) expendituresbythefederalgovernmentfornationaldefense
C) socialsecuritypaymentsmadetotheelderly
D) thepurchaseofnewhomesbyconsumers
Answer: C
Skill: Conceptual
45) Transferpaymentsarenotpartofgovernmentexpenditureongoodsandservicesbecause
transferpayments
A) arenotpredictablegiventhenatureoftheirappropriationandallocation.
B) donotrepresentthepurchaseofafinalgoodorservice.
C) arenotalwaysspentongoodsproducedintheU.S.
D) Thepremiseofthequestionisincorrectbecausetransferpaymentsarepartofgovernment
purchasesofgoodsandservices.
Answer: B
Skill: Conceptual
46) GovernmentexpendituresincludedintheexpenditureapproachtoGDPinclude________.
A) socialsecurityandeducation
B) netexports
C) buyinganewbomber
D) BothanswersAandCarecorrect
Answer: C
Skill: Conceptual
47) Netexportsofgoodsandservicesequalthe
A) exportsofgoodsandservicesdividedbytheimportsofgoodsandservices.
B) exportsofgoodsandservicesplustheimportsofgoodsandservices.
C) exportsofgoodsandservicesminustheimportsofgoodsandservices.
D) importsofgoodsandservicesminustheexportsofgoodsandservices.
Answer: C
Topic: ExpenditureApproach,NetExports
Skill: Recognition
48) Netexportsisnegativeif
A) thevalueofexportsexceedsthevalueofimports.
B) thevalueofimportsexceedsthevalueofexports.
C) thetariffpaymentsareincludedinthevalueofimportedandexporteditems.
D) toomuchproductionoccursintheexportingcountryduringtheyear.
Answer: B
Skill: Recognition
49) In2010,netexportsintheUnitedStateswere
A) zero.
B) positive.
C) negative.
D) greaterthanpersonalconsumptionexpenditures.
Answer: C
Skill: Recognition
50) TocalculateGDPusingtheexpenditureapproach,inpartitisnecessaryto
A) addimportsandexports.
B) addimportsandsubtractexports.
C) addexportsandsubtractimports.
D) subtractbothexportsandimports.
Answer: C
Skill: Recognition
51) Anincreaseinexportsofgoodsorserviceswithnochangeinimportsofgoodsorservices
A) decreasesGDP.
B) increasesGDP.
C) mayincreaseordecreaseGDPdependingonwhetheritistheexportofgoodsorthe
exportofservicesthatincreased.
D) hasnoeffectonGDP.
Answer: B
Skill: Conceptual
52) Byitself,anincreaseinexports
A) increasesGDP.
B) decreasesGDP.
C) meansimportsdecreasebythesameamount.
D) caneitherincreaseordecreaseGDP,dependingonwhethertheexportsaredurableor
nondurable.
Answer: A
Skill: Conceptual
53) IfFordsells200Explorersforatotalof$400,000toGermany,whiletheUnitedStatesimports
100BMWsforatotalof$500,000fromGermany,
A) U.S.GDPincreasesbecauseitsellsmoreExplorers.
B) U.S.GDPdecreasesbecausenetexportsarenegative.
C) GermanysGDPdecreases.
D) U.S.netexportsispositive.
Answer: B
Skill: Conceptual
54) AnU.S.firmbuysanewindustrialsewingmachinefromacompanylocatedinFrance.Which
ofthefollowingistrue?
I.
U.S.netexportsdecrease.
II. U.S.investmentincreases.
A) onlyI
B) onlyII
C) bothIandII
D) neitherInorII
Answer: C
Topic: TheExpenditureApproach,NetExports
Skill: Conceptual
55) IfanAmericanfirmproducesgoodsthataresoldtoaGermanhousehold,then
A) GermanGDPincreasesbutnotU.S.GDP.
B) U.S.GDPincreases.
C) thetransactionisconsideredanexportintheGermanGDPaccounts.
D) netexportsintheUnitedStateswillnotchangebecauseanexportimmediatelygenerates
anoffsettingimport.
Answer: B
Skill: Conceptual
56) InthecalculationofGDPbytheexpenditureapproach,exportsfromtheUnitedStatesmustbe
A) subtractedbecausetheyareincludedintheconsumptionofaforeigncountry.
B) ignoredbecausetheyarenotboughtbyU.S.citizens.
C) subtractediftheyareboughtbyforeignfirmsforinvestmentpurposes.
D) added.
Answer: D
Skill: Conceptual
Item
Personalconsumptionexpenditure
Governmentexpenditureongoods
andservices
Nettaxes
Grossprivatedomesticinvestment
Importsofgoodsandservices
Exportsofgoodsandservices
Millionsof
dollars
80
30
35
20
10
20
57) Usingtheinformationinthetableabove,calculatethevalueofGDP.
A) $185million
B) $145million
C) $195million
D) $140million
Answer: D
Skill: Analytical
58) Usetheinformationinthetableabovetocalculatethevalueofnetexports.
A) $10million
B) $0
C) -$10million
D) $30million
Answer: A
Skill: Analytical
59) LastyearinthecountryofNerfimportsequaledexports.NerfsGDPwas$500million,its
consumerexpenditurewas$380million,anditsinvestmentwas$20million.Nerfsgovernment
expenditureongoodsandserviceswere________.
A) $100million
B) $900million
C) $500million
D) zero
Answer: A
Skill: Analytical
Item
Governmentexpenditureon
goodsandservices
Compensationofemployees
Grossprivatedomestic
investment
Rentalincome
Personalconsumption
expenditures
Netinterest
Netexportsofgoodsand
services
Indirectbusinesstaxesand
depreciation
Billionsofdollars
250
1,675
325
20
1425
40
100
300
60) Theabovetableshowssome(butnotall)nationalincomeaccountingdataforahypothetical
country.Accordingtothesedata,thevalueofGDPis________billion.
A) $2100
B) $1850
C) $2000
D) $2050
Answer: A
Skill: Analytical
Item
Personalconsumption
expenditure
investment
Governmentexpenditure
ongoodsandservices
Exportsofgoodsand
services
Importsofgoodsand
services
Depreciation
Indirectbusinesstaxes
Dollars
1500
355
590
70
50
200
75
61) Basedonthedataintheabovetable,grossdomesticproductequals
A) $2,190.
B) $2,840.
C) $2,465.
D) $2,750.
Answer: C
Skill: Analytical
Item
Personalconsumption
expenditure
investment
goodsandservices
Nettaxes
Billionsofdollars
100
10
50
30
30
50
62) TheabovetableshowsdatafromtheGDPaccountsofHypothetica.HypotheticasGDPis
________billion.
A) $270
B) $210
C) $190
D) $160
Answer: D
Skill: Analytical
63) Ifimportsare$100millionlessthanexports,governmentexpendituresare$500million,
consumerexpendituresare$1billion,andgrossinvestmentspendingis$500million,thenGDP
is
A) $1billion.
B) $1.9billion.
C) $2billion.
D) $2.1billion.
Answer: D
Skill: Analytical
64) Ifconsumptionexpendituresare$500million,netinvestmentis$100million,depreciation
equals$5million,importsare$50million,exportsare$55million,governmentexpenditureon
goodsandservicesis$220million,andgovernmenttransferpaymentsare$20million,then
GDPis
A) $790million.
B) $800million.
C) $830million.
D) $850million.
Answer: C
Skill: Analytical
Component
Nettaxes
Personalconsumption
expenditure
Depreciation
Grossinvestment
Exports
Imports
Householdsaving
Amount
(billionsofdollars)
1,635
5,566
622
1,784
1,234
957
1,138
1,202
65) Usingthedatainthetableabove,whatisthevalueofGDP?
A) $13,516billion
B) $10,679billion
C) $9,541billion
D) $8,403billion
Answer: D
Skill: Analytical
66) Usingthedataintheabovetable,whatisthevalueofnetexports?
A) -$181billion
B) $181billion
C) $957billion
D) -$957billion
Answer: A
Skill: Analytical
67) Usingthedataintheabovetable,whatisthevalueofnationalsaving?
A) $1,202billion
B) $2,837billion
C) $1,053billion
D) -$85billion
Answer: C
Topic: NationalSaving
Skill: Analytical
Component
Nettaxes
Personalconsumption
expenditure
Depreciation
Grossinvestment
Netexports
Compensationof
employees
Amount
(dollars)
10
50
8
20
26
-10
65
68) Usingtheinformationinthetableabove,calculategrossdomesticproduct.
A) $118
B) $108
C) $86
D) $78
Answer: C
Skill: Analytical
69) Usingtheinformationinthetableabove,calculatethegovernmentsbudgetdeficitorsurplus.
A) $2
B) -$4
C) -$10
D) $4
Answer: C
Skill: Analytical
Component
Personalconsumption
expenditure
Government
expenditure
Grossinvestment
Netinvestment
Exports
Imports
Amount
(billionsof
dollars)
3,720
430
610
520
650
720
70) Usingtheinformationinthetableabove,calculategrossdomesticproduct.
A) $5,130billion
B) $5,320billion
C) $4,760billion
D) $4,690billion
Answer: D
Skill: Analytical
71) Usingtheinformationinthetableabove,netexportsequals
A) $1,370billion.
B) $650billion.
C) $20billion.
D) -$70billion.
Answer: D
Topic: NetExports
Skill: Analytical
72) Usingtheinformationinthetableabove,depreciationequals
A) -$90billion.
B) $90billion.
C) -$70billion.
D) someamountthatcannotbedetermined.
Answer: B
Topic: Depreciation
Skill: Analytical
Governmentpurchasesofgoodsandservices
Depreciation
Grossprivatedomesticinvestment
Personalincometaxes
Nettaxes
Netexportsofgoodsandservices
Personalconsumptionexpenditures
Netinterest
$240
240
400
140
120
80
640
100
73) Fromthedataintheabovetable,GDPequals
A) $1,120.
B) $1,280.
C) $1,290.
D) $1,360.
Answer: D
Skill: Analytical
74) TheapproachtoGDPthatsumscompensationofemployees,rentalincome,corporateprofits,
netinterest,proprietorsincome,depreciation,andindirecttaxesandsubtractssubsidiesisthe
A) opportunitycostapproach.
B) expenditureapproach.
C) addedcostapproach.
D) incomeapproach.
Answer: D
Topic: IncomeApproach
Skill: Recognition
75) TheincomeapproachtomeasuringGDPsumstogether
A) compensationofemployees,rentalincome,corporateprofits,netinterest,proprietors
income,subsidiespaidbythegovernment,indirecttaxespaid,anddepreciation.
B) compensationofemployees,rentalincome,corporateprofits,netinterest,proprietors
income,indirecttaxespaid,anddepreciationandsubtractssubsidiespaidbythe
government.
C) thesalesofeachfirmintheeconomy.
D) thecostsofeachfirmintheeconomyandthensubtractsindirectbusinesstaxesand
depreciation.
Answer: B
Skill: Recognition
76) ProprietorsincomeisacomponentofwhichapproachtomeasuringGDP?
A) incomesapproach
B) expenditureapproach
C) costapproach
D) outputapproach
Answer: A
Skill: Recognition
77) TheincomeapproachtomeasuringGDP
A) determinesthecostofproduction,thenadjustsittoequalthemarketvalueofproduction.
B) sumsallincomesearnedintheUnitedStatesandmakesnootheradjustmentsbecause
otheradjustmentsarenotnecessary.
C) measuresthecostofproducingGDPratherthanthemarketvalue.
D) sumsthevalueateachstageofproductionplusthevalueofdepreciation.
Answer: A
Skill: Recognition
78) ThefivecategoriesofincomeusedintheincomeapproachtothemeasurementofGDPare
A) consumption,saving,rentalincome,corporateprofits,andinvestment.
B) employeecompensation,netinterest,rentalincome,corporateprofits,andproprietors
income.
C) employeecompensation,consumption,rentalincome,corporateprofits,andproprietors
income.
D) employeecompensation,saving,rentalincome,corporateprofits,andinvestment.
Answer: B
Skill: Recognition
79) WhichofthefollowingexpressionsequalsGDP?
A) compensationofemployees+consumption+ depreciation+ netinvestment
B) compensationofemployees+netinterest+ rentalincome+ depreciation+corporate
profits+proprietorsincome+indirecttaxes-subsidies
C) compensationofemployees+netexports+ depreciation+ corporateprofits
D) compensationofemployees+grossinvestment+ rentalincome+ depreciation+corporate
profits+indirecttaxes-subsidies
Answer: B
Skill: Recognition
80) WhichofthefollowingisacomponentoftheincomesapproachtoGDP?
A) consumptionexpenditure
B) wagesandsalaries
C) investment
D) governmentexpenditureongoodsandservices
Answer: B
Skill: Recognition
81) TheincomeapproachmeasuresGDPbyaddingtogethercompensationofemployees,
proprietorsincome,________.
A) netinvestment,saving,andfarmersincome
B) netinterest,rentalincome,andcorporateprofits
C) netinvestment,rentalincome,andcorporateprofits
D) netsaving,investmentincome,andprofits
Answer: B
Skill: Recognition
82) WhichofthefollowingitemsisNOT acomponentoftheincomeapproachtomeasuringU.S.

GDP?
A) interestearnedonsavingsdeposits
B) profitsmadebybusinesses
C) incomeearnedbybusinessesthatexportgoods
D) investment
Answer: D
Skill: Recognition
83) WhichofthefollowingisNOT apartoftheincomeapproachtodeterminingGDP?

A) rentalincome
B) grossprivatedomesticinvestment
C) netinterest
D) indirectbusinesstaxes
Answer: B
Skill: Recognition
84) WhichofthefollowingisNOT oneofthecomponentsforcomputingGDPbaseduponthe

incomeapproach?
A) investment
B) corporateprofits
C) compensationofemployees
D) netinterest
Answer: A
Skill: Recognition
85) WhichofthefollowingisNOT includedintheincomeapproachtomeasuringGDP?

A) netinterest
B) netexports
C) corporateprofits
D) compensationofemployees
Answer: B
Skill: Recognition
86) InthecountryofDarrowby,netdomesticincomeatfactorcostis$2.0million.Grossdomestic
productis$3.0million,anddepreciationis$0.5million.Indirecttaxeslesssubsidies________.
A) are$1million
B) are$0.5million
C) cannotbecalculated
D) are-$0.5million
Answer: B
Skill: Analytical
Item
Netinterestandrentalincome
Corporateprofits
Proprietorsincome
Billionsof
dollars
80
30
10
20
87) Usetheinformationinthetableaboveplusthefactthatindirecttaxeslesssubsidiesare$10
billionanddepreciationis$30billiontocalculatethevalueofGDP.
A) $180billion
B) $150billion
C) $140billion
D) $130billion
Answer: A
Skill: Analytical
88) Thelargestcomponentofnationalincomeis
A) compensationofemployees.
B) rentalincome.
C) corporateprofits.
D) proprietorsincome.
Answer: A
Topic: IncomeApproach,CompensationofEmployees
Skill: Recognition
89) Lookingatthecomponentsoftheincomeapproachweseethat
A) compensationofemployeesisthelargestcategory.
B) consumptionisthelargestcategory.
C) profitsarethelargestcategory.
D) rentalincomeisthelargestcategory.
Answer: A
Skill: Recognition
90) Compensationpaidtoemployeesrepresented________ofGDPfortheUnitedStatesin2010.
A) about5percent
B) approximately15percent
C) 35percent
D) morethan50percent
Answer: D
Skill: Recognition
91) Whichofthefollowingisincludedincompensationofemployeespartoftheincomeapproach
tomeasuringGDP?
I. Wagesandsalaries.
II. Pensionfundcontributions.
III. Socialsecuritycontributions.
A) Ionly
B) IandII
C) IandIII
D) I,IIandIII
Answer: D
Skill: Recognition
92) WhencalculatingthecompensationofemployeespartofGDP,
A) socialsecuritycontributionsmustbeincluded.
B) fringebenefitsarenotincluded.
C) taxeswithheldonearningsarenotincluded.
D) thevalueofvacationtimemustbeincluded.
Answer: A
Skill: Recognition
93) Inthenationalincomeaccounts,netinterestisthetotalinterestpaymentsreceivedby
householdsonloansmadebythemminus
A) interestreceivedfromhouseholdsownershipofgovernmentbonds.
B) interestpaymentsmadebyhouseholdsontheirownborrowing.
C) interestpaymentsmadebyhouseholdstoforeignlenders.
D) taxespaidbyhouseholdsontheirinterestincome.
Answer: B
Topic: IncomeApproach,NetInterest
Skill: Recognition
94) Rentalincomeincludes
A) thepaymentfortheuseofland.
B) thepaymentfortheuseofallrentedinputs.
C) noincomefromrentalhousingbecausemosthousesareoccupiedbytheirowners.
D) BothanswersAandBarecorrect.
Answer: D
Topic: IncomeApproach,RentalIncome
Skill: Recognition
95) WhichofthefollowingisincludedinthecategoryofcorporateprofitswhenmeasuringGDP?
I. Profitspaidasdividends.
II. Undistributedprofits.
III. Incomereceivedbyownersandoperatorsofbusinesses.
A) Ionly
B) IandII
C) IandIII
D) I,IIandIII
Answer: B
Topic: IncomeApproach,CorporateProfits
Skill: Recognition
96) Anindirecttaxisataxpaidbyconsumers
A) toastateorlocalgovernment.
B) whentheypurchasegoodsandservices.
C) onunearnedincome(asopposedtowagesandsalaries).
D) thatisapercentageofthevalueoftheirrealproperty.
Answer: B
Topic: IndirectTax
Skill: Recognition
97) Anindirecttaxisexemplifiedby
A) anincometax.
B) asalestax.
C) asubsidy.
Answer: B
Topic: IndirectTax
Skill: Conceptual
98) Whichofthefollowingbestrepresentsanindirecttax?
A) federalincometax
B) stateincometax
C) localpropertytax
D) salestaxespaidongoodsandservices
Answer: D
Topic: IndirectTax
Skill: Conceptual
99) Thepresenceof________createsadifferenceinthevaluebetweenthemarketpriceandthe
factorcostofaproduct.
A) indirecttaxesandconsumption
B) subsidiesanddirecttaxes
C) corporateprofitsandsubsidies
D) indirecttaxesandsubsidies
Answer: D
Topic: IndirectTax
Skill: Conceptual
100) Thesumofcompensationtoemployees,rentalincome,corporateprofits,netinterest,and
proprietorsincomeis
A) grossdomesticproduct.
B) grossdomesticincome.
C) netdomesticincomeatfactorcost.
D) netdomesticproduct.
Answer: C
Topic: NetDomesticIncomeatFactorCost
Skill: Recognition
101) Tworeasonswhyvaluinggoodsattheirmarketpricesisdifferentthanvaluingthemattheir
factorcostsinclude
A) depreciationandinvestment.
B) exportsandimports.
C) personaltaxesandcorporatetaxes.
D) indirecttaxesandsubsidies.
Answer: D
Topic: NetDomesticIncomeatFactorCost
Skill: Conceptual
Corporateprofits
Netinterest
Indirecttaxeslesssubsidies
Depreciation
Proprietorsincome
Rentalincome
Personalconsumptionexpenditures
Governmentexpenditureongoods
andservices
Netexportsofgoodsandservices
$200
150
230
250
1,350
150
70
1,400
500
40
102) Usingthedatainthetableabove,grossdomesticproductequals
A) $1,920.
B) $1,940.
C) $2,150.
D) $2,400.
Answer: D
Skill: Analytical
103) Usingthedataintheabovetable,grossprivatedomesticinvestmentequals
A) $250.
B) $260.
C) $460.
D) someamountthatcannotbedeterminedwithoutmoreinformation.
Answer: C
Skill: Analytical
104) Usingthedataintheabovetable,netprivatedomesticinvestmentequals
A) $210.
B) $260.
C) $510.
D) someamountthatcannotbedeterminedwithoutmoreinformation.
Answer: A
Skill: Analytical
Item
Personalincome
Netdomesticincomeat
factorcost
ongoodsandservices
Depreciation
investment
Indirecttaxes
Subsidies
Billionsof
dollars
1,200
2,100
400
200
100
600
100
105) Theabovetableshowssomenationalincomeaccountingdataforanation.Inthisnation,gross
domesticproductisequalto________billion.
A) $2,000
B) $2,300
C) $2,500
D) $2,800
Answer: D
Skill: Analytical
Item
Netinterest
ongoodsandservices
Compensationof
employees
Rentalincome
Proprietorsincome
Indirecttaxesminus
subsidies
Corporateprofits
Exportsofgoodsand
services
Importsofgoodsand
services
Depreciation
Dollars
239
136
1,735
37
128
259
194
249
289
333
106) Usingthedataintheabovetable,grossdomesticproductascalculatedbytheincomeapproach
equals________.
A) $2,333
B) $2,592
C) $2,925
D) $2,205
Answer: C
Skill: Analytical
Component
Grossinvestment
Personalconsumption
expenditure
Depreciation
goodsandservices
U.S.imports
U.S.exports
Amount
(billionsof
dollars)
1300
1475
25
1315
260
249
65
107) Theabovetablegivesdataforahypotheticalnation.Grossdomesticproductis
A) $4,049billion.
B) $4,079billion.
C) $4,054billion.
D) $4,339billion.
Answer: B
Skill: Analytical
108) NominalGDPis
A) realGDPadjustedforpricechanges.
B) GDPvaluedatpricesofthatyear.
C) GDPvaluedatconstantprices.
D) realGDPvaluedatbaseyearprices.
Answer: B
Topic: NominalGDP
Skill: Recognition
109) NominalGDPisthevalueoffinalgoodsandservices
A) atthepricesofthatyear.
B) atthepricesoftheimmediatelypreviousyear.
C) atthepricesofabaseyear.
D) producedinforeigncountriesbutconsumedinthedomesticcountry.
Answer: A
Topic: NominalGDP
Skill: Recognition
110) NormallyintheUnitedStatestherelationshipbetweennominalandrealGDPforagivenyear
is
A) realGDPisgreaterthannominalGDPbecauseofpriceincreases.
B) nominalGDPisgreaterthanrealGDPbecauseofpriceincreases.
C) nominalGDPequalsrealGDP.
D) nominalGDPisgreaterthanrealGDPbecauseofpricedecreases.
Answer: B
Topic: NominalGDP
Skill: Recognition
111) Ofthefollowing,whichiscorrect?
A) NominalGDPdoesnotchangewhentheproductionofgoodsandservicesincreases.
B) NominalGDPisnotaffectedbychangesinpricesofgoodsandservices.
C) NominalGDPincreaseswhenthepricesofgoodsandservicesincrease.
D) RealGDPchangesonlywhenthepricesofgoodsandservicesreallychange.
Answer: C
Topic: RealandNominalGDP
Skill: Recognition
112) RealGDPis
A) anincreaseintheaveragelevelofprices.
B) thevalueoftotalproductionwhentheunemploymentrateis6percent.
C) thevalueoftotalproductionofallthenationsfarms,factories,shopsandofficesmeasured
inthepricesofasingleyear.
D) thevalueoftotalproductionofallthenationsfarms,factories,shopsandofficesmeasured
atthepricesoftheyearitwasproduced.
Answer: C
Topic: RealGDP
Skill: Recognition
113) RealGDPmeasuresthe
A) totalprofitsearnedbyallbusinessesvaluedusingpricesfromasingleyear.
B) changesinthepricesofoutputmeasuredindollars.
C) generalupwarddriftinprices.
D) valueoftotalproductionlinkedtopricesofasingleyear.
Answer: D
Topic: RealGDP
Skill: Recognition
114) ________grossdomesticproductisthevalueof________linkedbacktothepricesofasingle
year.
A) Real;totalproduction
B) Real;productionpossibilities
C) Productivity;theconsumerpriceindex
D) Nominal;totalproduction
Answer: A
Topic: RealGDP
Skill: Recognition
115) RealGrossDomesticProductis
A) theamountofpeopleunemployeddividedbythetotallaborforce.
B) theproductivityoflabor.
C) themostthatcanbeproducedwhentheeconomysresourcesarefullyemployed.
D) thevalueoftotalproductionlinkedbacktothepricesofasingleyear.
Answer: D
Topic: RealGDP
Skill: Recognition
116) WhichofthefollowingisTRUEregardingrealGDP?
I.
RealGDPisthevalueofthetotalproductionofthecountrysfarms,factories,shops,and
offices.
II. RealGDPriseswheneverinflationoccurs.
III. RealGDPdoesnotmeasureallthatisproduced.
A) IandII
B) IandIII
C) IIandIII
D) I,IIandIII
Answer: B
Topic: RealGDP
Skill: Conceptual
117) Inyearswithinflation,nominalGDPincreases________realGDP.
A) fasterthan
B) slowerthan
C) atthesamerateas
D) sometimesfaster,sometimesslower,andsometimesatthesamerateas
Answer: A
Skill: Conceptual
118) Supposeaneconomyhassomeinflation.Then,afterabaseyear,thevalueofrealGDPwill
A) belessthannominalGDP.
B) notbedifferentfromnominalGDP.
C) begreaterthannominalGDP.
D) willbeapproximatelyhalfthevalueofnominalGDP.
Answer: C
Skill: Conceptual
119) GrossprivatedomesticinvestmentisacomponentofwhichapproachtomeasuringGDP?
A) incomesapproach
B) expenditureapproach
C) linkingapproach
D) outputapproach
Answer: B
Topic: StudyGuideQuestion,ExpenditureApproach,Investment
Skill: Conceptual
120) WhichofthefollowingisNOTacomponentoftheincomesapproachtoGDP?
A) netexports
B) wagesandsalaries
C) corporateprofits
D) proprietorsincome
Answer: A
Topic: StudyGuideQuestion,IncomesApproach
Skill: Conceptual
3TheUsesandLimitationsofRealGDP
1) Themaximumamountofproductionthatcanbeproducedwhileavoidingshortagesoflabor,
capital,land,andentrepreneurshipthatwouldbringrisinginflationiscalled
A) realGDP.
B) nominalGDP.
C) actualGDP.
D) potentialGDP.
Answer: D
Topic: PotentialGDP
Skill: Recognition
2) PotentialGDPis
A) anothernameforrealGDP.
B) alwaysdifferentfromrealGDP.
C) thelevelofGDPnotadjustedforpricechanges.
D) themaximumamountofGDPthatcanbeproducedwhileavoidingshortagesoflabor,
capital,land,andentrepreneurshipthatwouldbringrisinginflation.
Answer: D
Topic: PotentialGDP
Skill: Recognition
3) PotentialGDPis
A) themaximumGDPthataneconomyactuallyachievesthroughoutitsentirehistory.
B) thelevelofGDPachievedduringperiodswhen100percentofthelaborforceisemployed.
C) agoalthatcanneverbeachievedbytheeconomy.
D) themaximumamountofGDPthatcanbeproducedwhileavoidingshortagesoflabor,
capital,land,andentrepreneurshipthatwouldbringrisinginflation.
Answer: D
Topic: PotentialGDP
Skill: Recognition
4) PotentialGDPisthe
A) themaximumamountofproductionthatcanbeproducedwhileavoidingshortagesof
labor,capital,land,andentrepreneurshipthatwouldbringrisinginflation.
B) currentvalueofproductionintheeconomy.
C) valueofproductionwhentheeconomyisinarecession.
D) valueofproductionwhentheeconomyisatapeak.
Answer: A
Topic: PotentialGDP
Skill: Recognition
5) PotentialGDP
A) measurestheactualproductionfromyeartoyear.
B) measuresthemaximumamountofproductionthatcanbeproducedwhileavoiding
shortagesoflabor,capital,land,andentrepreneurshipthatwouldbringrisinginflation.
C) iscyclical.
D) BothanswersAandCarecorrect
Answer: B
Topic: PotentialGDP
Skill: Conceptual
6) Inanyyear,realGDP
A) mustalwaysbelessthanpotentialGDP.
B) mightbegreaterorlessthanpotentialGDP.
C) willalwaysbegreaterthanpotentialGDPbecauseofthetendencyofnationstoincur
inflation.
D) alwaysequalspotentialGDP.
Answer: B
Topic: PotentialGDP
Skill: Conceptual
7) TherelationshipbetweenrealGDPandpotentialGDPisthat
A) realGDPalwaysequalspotentialGDP.
B) realGDPneverequalspotentialGDP.
C) realGDPfluctuatesaboutpotentialGDP.
D) realGDPisalwaysbelowpotentialGDP.
Answer: C
Topic: PotentialGDP
Skill: Conceptual
8) Inanyyear,realGDP
A) mustalwaysbelessthanpotentialGDP.
B) mightbegreaterorlessthanpotentialGDP.
C) willbegreaterthanpotentialGDPiftheinflationrateispositive.
D) alwaysequalspotentialGDP.
Answer: B
Topic: PotentialGDP
Skill: Conceptual
9) ________referstoaperiodwhenthe________decreases.
A) Recession;growthrateofnominalGDP
B) Recession;growthrateofoutputperperson
C) Productivitygrowthslowdown;growthrateofrealGDP
D) Productivitygrowthslowdown;growthrateofoutputperperson
Answer: D
Topic: ProductivityGrowthSlowdown
Skill: Recognition
10) Theseriesofupsanddownstheeconomytendstomoveiniscalled
A) thebusinesscycle.
B) arecession.
C) adepression.
D) economicgrowth.
Answer: A
Topic: BusinessCycle
Skill: Recognition
11) Thebusinesscyclerefersto
A) fluctuationsinthelevelofrealGDParoundpotentialGDP.
B) changesinthelevelofnominalGDP.
C) changesinthelevelofthestockmarket.
D) changesinthelevelofemployment.
Answer: A
Skill: Recognition
12) Abusinesscycleis
A) thepatternofshort-runupwardanddownwardmovementsintotaloutput.
B) theincreaseinconsumerspendingthataccompaniesanincreaseindisposableincome.
C) thecyclicalchangeinthenationsbalanceoftrade.
D) thecyclicalmovementintheinterestrates.
Answer: A
Skill: Recognition
13) Thebusinesscycleisthe
A) regulargrowthrateoftherealGDP.
B) regularfluctuationsofrealGDPbelowpotentialGDP.
C) irregularfluctuationsofpricesaroundrealGDP.
D) irregularfluctuationsofrealGDParoundpotentialGDP.
Answer: D
Skill: Recognition
14) Businesscyclesare
A) irregular,withsomehavingtworecessionsandnoexpansion.
B) predictable,witharecessionfollowingatrough.
C) unpredictable,butalwayshavetwophasesandtwoturningpoints.
D) unpredictable,anddontalwayshavetwophasesandtwoturningpoints.
Answer: C
Skill: Recognition
15) Businesscycles
A) aremorevolatileduringaRepublicanadministration.
B) areunpredictableduetopoliticalupheavalsandglobalmarkets.
C) followapatternoftrough,expansion,peakandrecession.
D) areallidenticalindurationoverthelastcentury.
Answer: C
Skill: Conceptual
16) Whichofthefollowingstatementsistrue?
A) RealGDPfluctuatesaroundpotentialGDP.
B) PotentialGDPfluctuatesaroundrealGDP.
C) PotentialGDPisthesameasrealGDP.
D) Whenalloftheeconomysresourcesarefullyemployed,thevalueofproductioniscalled
realGDP.
Answer: A
Skill: Recognition
17) RealGDP
A) fluctuatesfromyeartoyearbutisalwaysbelowpotentialGDP.
B) fluctuatesaroundpotentialGDP.
C) growsataconstant3to4percentperyear.
D) canbecalledpotentialGDPwhenitisadjustedforpricechanges.
Answer: B
Skill: Recognition
18) Thetermbusinesscyclemostcloselyreferstothe
A) fluctuatingprofitsoffirms.
B) fiscalyear.
C) accountingperiodusedbyfirms.
D) alternatingperiodsofexpansionsandrecessions.
Answer: D
Skill: Recognition
19) Whichofthefollowingisnotaphaseorturningpointofthebusinesscycle?
A) recession
B) expansion
C) shutdown
D) trough
Answer: C
Skill: Recognition
20) Thefourpartsofthebusinesscycleoccurinthefollowingorder:
A) recession,trough,peak,expansion.
B) expansion,trough,peak,recession.
C) recession,trough,expansion,peak.
D) expansion,trough,recession,peak.
Answer: C
Skill: Recognition
21) Whichofthefollowingarepartsofthebusinesscycles?
A) peakandpotentialGDP
B) realGDPandpotentialGDP
C) recessionandexpansion
D) inflationandrecession
Answer: C
Skill: Recognition
22) WhichofthefollowingisTRUEregardingbusinesscycles?
I.
Cyclesarepredictable.
II. Ineachcycle,apeakfollowsanexpansion.
III. PotentialGDPfluctuatesaroundrealGDP.
A) IandII
B) IandIII
C) IIandIII
D) IIonly
Answer: D
Skill: Conceptual
23) Acommondefinitionofarecessionisatimewith
A) adeclineinthepricelevel.
B) adeclineininterestrates.
C) adecreaseinrealGDPfortwoormoresuccessivequarters.
D) adecreaseinrealGDPfortwoormoresuccessiveyears.
Answer: C
Skill: Recognition
24) Arecessioniscommonlydefinedasaperiodwith
A) negativegrowthrateinrealGDPthatlastsatleastonequarter.
B) positivegrowthrateinrealGDPthatlastsatleastonequarter.
C) positivegrowthrateinrealGDPthatlastsatleasttwoquarters.
D) negativegrowthrateinrealGDPthatlastsatleasttwoquarters.
Answer: D
Skill: Recognition
25) Acommondefinitionofarecessionisaperiodoftime
A) ofatleast6monthsduringwhichrealGDPdecreases.
B) withanincreaseinrealeconomicoutputfromthepreviousperiod.
C) withnochangeinrealGDP.
D) withnochangeinthedollar(money)valueofeconomicoutput.
Answer: A
Skill: Recognition
26) Arecessioniscommonlydefinedasoccurringwhen
A) realGDPdecreasesforaperiodof12ormoremonths.
B) realGDPdecreasesforaperiodof6ormoremonths.
C) theunemploymentraterisesabove7.5percentfor6ormoremonths.
D) theunemploymentraterisesabove5.0percentfor12ormoremonths.
Answer: B
Skill: Recognition
27) Bycommondefinition,arecessionoccurswhen
A) theinternationaldeficitworsensforatleasttwosuccessivequarters.
B) thegovernmentbudgetdeficitexceedsthenationaldebt.
C) theinflationrateexceeds3.5percent.
D) realGDPdecreasesforatleasttwosuccessivequarters.
Answer: D
Skill: Recognition
28) Recessionsarecommonlydefinedtooccur
A) wheneverunemploymentincreases.
B) whengrowthinrealGDPdecreasesfortwoconsecutivequarters.
C) whengrowthinrealGDPisnegativefortwoconsecutivequarters.
D) whentheunemploymentrateexceeds6percent.
Answer: C
Skill: Recognition
29) RealGDPdecreasesduring
A) themovementfromtroughtopeak.
B) themovementfrombelowpotentialGDPbacktopotentialGDP.
C) themovementfrompeaktotrough.
D) adecreaseinunemployment.
Answer: C
Skill: Recognition
30) Whenarecessionends,theturningpointthatimmediatelyfollowsiscalleda
A) trough.
B) peak.
C) depression.
Answer: A
Skill: Recognition
31) Thelowpointofeconomicactivityduringabusinesscycleiscalledthe
A) trough.
B) recession.
C) peak.
D) failure.
Answer: A
Skill: Recognition
32) Whattermisusedtodescribethelowestpointofabusinesscycle?
A) peak
B) trough
C) expansion
D) recession
Answer: B
Skill: Recognition
33) Atroughisthe
A) lowerturningpointofabusinesscyclewhenanexpansionbegins.
B) lowerturningpointofabusinesscyclewhenarecessionbegins.
C) upperturningpointofabusinesscyclewhenanexpansionbegins.
D) upperturningpointofabusinesscyclewhenarecessionbegins.
Answer: A
Skill: Recognition
34) AnexpansionoccurswhenthelevelofrealGDPis
A) increasing.
B) decreasing.
C) atacyclicalpeak.
D) atacyclicaltrough.
Answer: A
Skill: Recognition
35) Anexpansion
A) followsapeak.
B) isdefinedasaperiodofnegativerealGDPgrowth.
C) comesjustbeforeatrough.
D) isdefinedasaperiodofrealGDPincreases.
Answer: D
Skill: Recognition
36) Anexpansionendswhentheeconomy
A) hitsatroughandthenentersarecession.
B) hitsapeakandthenentersarecession.
C) beginstogrowfollowingapeak.
D) hasgrownfortwoquartersinarow.
Answer: B
Skill: Recognition
37) ThetimesduringwhichrealGDPincreasesarereferredtoas
A) contractions.
B) expansions.
C) anti-cycles.
D) corrections.
Answer: B
Skill: Recognition
38) SupposethecountryofDingoexperiencedaneconomictroughinJanuary2011.Wecan
concludethat
A) realGDPinDingowasincreasinginJanuary2011.
B) anexpansionoccurredafterJanuary2011.
C) Dingodidnotexperiencearecessionin2010.
D) DingospotentialGDPfellin2011.
Answer: B
Skill: Conceptual
39) Aneconomyrecoveringfromarecession
A) movesupfromitstroughtoaperiodofexpansion.
B) movesupfromitspeaktoaperiodofexpansion.
C) movesdownfromitstroughtoaperiodofdepression.
D) movesdownfromitspeaktoaperiodofexpansion.
Answer: A
Skill: Conceptual
40) Aneconomicexpansionratherthanarecessionoccurs
A) whenthefederalbudgetisbalanced.
B) whentheunemploymentratefallsbelow5percent.
C) whengrowthinrealGDPispositive.
D) whentheunemploymentrateisnotchanging.
Answer: C
Skill: Recognition
41) Apeakisthe
A) lowerturningpointofabusinesscyclewhenanexpansionends.
B) lowerturningpointofabusinesscyclewhenarecessionends.
C) upperturningpointofabusinesscyclewhenanexpansionends.
D) upperturningpointofabusinesscyclewhenarecessionends.
Answer: C
Skill: Recognition
42) Intheabovefigure,thedistancebetweenpointsS andT represents

A) anexpansion.
B) atrough.
C) apeak.
D) arecession.
Answer: D
Skill: Analytical
43) Intheabovefigure,thedistancebetweenpointsT andU represents

A) anexpansion.
B) atrough.
C) apeak.
D) arecession.
Answer: A
Skill: Analytical
44) Intheabovefigure,arecessionbeginsatpoint________andanexpansionbeginsatpoint
________.
A) a;b
B) b;c
C) b;a
D) d;c
Answer: A
Skill: Analytical
45) Intheabovefigure,atroughisatpoint________andapeakisatpoint________.
A) a;b
B) b;c
C) b;a
D) d;c
Answer: C
Skill: Analytical
46) Intheabovefigure,whichpointrepresentstheunderuseofresources?
A) pointF
B) pointG
C) pointH
D) pointK
Answer: B
Skill: Conceptual
47) Intheabovefigure,whichpointrepresentsasituationwithsignificantshortagesoflabor,
capital,andotherresources?
A) pointF
B) pointG
C) pointI
D) pointK
Answer: A
Skill: Conceptual
48) Intheabovefigure,whichpointrepresentsaneconomywhichisatthepeakpartofabusiness
cycle?
A) pointF
B) pointG
C) pointI
D) pointK
Answer: A
Skill: Recognition
49) Intheabovefigure,thelettersA,B,andC representwhichpositionsinthebusinesscycle?

A) peak,expansion,andrecession,respectively
B) recession,expansion,andpeak,respectively
C) expansion,peak,andrecession,respectively
D) peak,recession,andexpansion,respectively
Answer: D
Skill: Analytical
50) RealGDPisnotaperfectindicatorofeconomicwelfarebecause________.
A) itincludestheundergroundeconomy
B) itincludesadirectmeasureofhealthandlifeexpectancy
C) itunderestimatesinflation
D) economicwelfaredependsonmanyfactorsnotmeasuredornotmeasuredaccuratelyby
realGDP
Answer: D
Topic: GDPandEconomicWelfareComparisons
Skill: Recognition
51) RealGDPdoesnotshowthestateofeconomicwelfareinacountryinpartbecauseGDPomits
I. householdproduction.
II. leisuretimeavailable.
III. thequalityoftheenvironment.
A) Ionly
B) IandIII
C) IIandIII
D) I,IIandIII
Answer: D
Skill: Conceptual
52) RealGDPcanbecriticizedasameasureofeconomicwelfarebecauseit
A) doesnotincludethevalueofproductsproducedinthehousehold.
B) doesnottakeaccountofthedegradationofenvironmentalquality.
C) doesnotincludeleisuretimeavailabletoasociety.
Answer: D
Topic: EconomicWelfareComparisons
Skill: Conceptual
53) AcountrythathasalargerealGDPperpersonmightnotnecessarilyhaveahighlevelof
economicwelfarebecauseitmayhave
A) verylittlepoliticalfreedom.
B) environmentalproblems.
C) littleleisuretime.
Answer: D
Skill: Conceptual
54) Which,ifany,ofthefollowingcausesreportedGDPtobelessthantotaleconomicproduction?
A) theexclusionofhouseholdproduction
B) theexclusionofgovernmenttransfers
C) theinclusionofgovernmentexpenditures
D) NoneoftheabovecausereportedGDPtobelessthantotalproduction.
Answer: A
Topic: HouseholdProduction
Skill: Recognition
55) IncalculatingGDP,householdproductionis
A) includedaspartofconsumption.
B) ignoredbecauseitisnotalargeamount.
C) notincludedbecausethereisnomarkettransaction.
D) includedunderemployeecompensation.
Answer: C
Skill: Conceptual
56) WhichofthefollowingisNOTincludedinrealGDP?
A) productionofservices,suchastheservicesofdoctors
B) productionofgoodsthatlastmorethanoneyear,suchastelevisionsets
C) productionofgoodsthatdonotlastmorethanoneyear,suchasgasoline
D) productioninthehome
Answer: D
Skill: Recognition
57) Ifalargerfractionoftheadultpopulationisworkinginthemarketplace,householdproduction
A) countedinrealGDPincreases.
B) notcountedinrealGDPincreases.
C) countedinrealGDPdecreases.
D) notcountedinrealGDPdecreases.
Answer: D
Skill: Analytical
58) ReportedGDPincreaseswhen,infact,totalproductionisunchangedwhen
i. thereisashiftfromhouseholdproductiontomarketproduction.
ii. apreviouslyillegalactivityislegalized.
A) ionly
B) iionly
C) Neitherinorii
D) Bothiandii.
Answer: D
Topic: HouseholdProduction,UndergroundEconomicActivity
Skill: Conceptual
59) WhencalculatingGDP,undergroundeconomicactivityis
A) theproductionofgoodsandservicesinthehome.
B) thatportionofthetimewhenweareenjoyingleisureactivitiesandnotproducing
marketablegoods.
C) thepartoftheeconomypurposelyhidden.
D) anaspectofthequalityoflife,suchashealthandlifeexpectancy.
Answer: C
Topic: UndergroundEconomicActivity
Skill: Recognition
60) Inpart,theundergroundeconomyexistsbecauseofthe
A) irrationalityofpeoplewhochoosetoevadetaxes.
B) hightaxrates.
C) easeofentryintotheoccupationsthatcomposeit.
D) greaterefficiencyofbartertransactionscomparedtomonetaryones.
Answer: B
Skill: Conceptual
61) WhichofthefollowingisNOT includedinrealGDP?

A) productionofservices,suchastheservicesofhairdressers
B) productionofgoodsthatlastlessthanayear,suchasproductionofhotdogs
C) productionthattakesplaceintheundergroundeconomy
D) productionofgoodsthatlastmorethanayear,suchasapairofrollerblades
Answer: C
Skill: Recognition
62) TheundergroundeconomyexistsforallofthefollowingreasonsEXCEPTthe
A) productionofillegalgoods.
B) avoidanceoftaxes.
C) desiretomaintainaccuraterecordsofeconomictransactions.
D) avoidanceofgovernmentregulation.
Answer: C
Skill: Conceptual
63) Becausepollutionreduceseconomicwelfare,onthiscountrealGDPasmeasured
A) decreasesaspollutionincreases.
B) increasestotakeintoaccounttheexpendituresthatwillbemadeinthefuturetocleanup
thepollution.
C) overstateseconomicwelfare.
D) understateseconomicwelfare.
Answer: C
Topic: EnvironmentalQuality
Skill: Conceptual
64) InthepostWorldWarIIperiod,considerablegrowthintotalproductiontookplaceinthe
UnitedStates.Butatthesametime,businessesweredumpingtheirwasteintotheGreatLakes
withminimalcosttothemselves,significantlypollutingthebodiesofwaterasaresult.This
occurrenceisanexamplewhere
A) realGDPgivesanoverlypositiveviewofeconomicwelfare.
B) realGDPgivesanoverlynegativeviewofeconomicwelfare.
C) investmentwouldhavebeenabettermeasureoftotalproduction.
D) thepollutioncountsasafinalgood.
Answer: A
Skill: Conceptual
65) WhichofthefollowingwouldleadGDPtooverstate economicwelfare?

A) theexistenceofhome-cookedmeals
B) restaurantworkersthatunder-reporttipincome
C) aself-employedCPAwhotakesalongerthannormalvacation
D) electricutilitiesthatswitchtoburningcoalbecauseofhighernaturalgaspricesand
therebycreatemoreacidrainpollution
Answer: D
Skill: Conceptual
66) PurchasingpowerparitypricesareusedtoconstructGDPdatathat
A) donotomittheundergroundeconomy.
B) canbeusedtomakemorevalidcomparisonsbetweenonecountryandanother.
C) isapropermeasureofeconomicwelfare.
D) adjustfordifferencesinpopulation.
Answer: B
Topic: PurchasingPowerParityPrices
Skill: Conceptual
67) IfwecomparetheU.S.GDPandtheChineseGDP,
A) realGDPperpersonisaboutthesameinthetwocountries.
B) U.S.realGDPperpersonislessthanChinasrealGDPperpersononceweadjustfor
currencydifferences.
C) ChinasrealGDPperpersonislessthanrealGDPperpersonintheUnitedStates.
D) realU.S.GDPperpersonwasmuchlargerthanChinasrealGDPperpersonwhen
purchasingpowerparitypricesareusedbutislessthanChinasrealGDPperperson
whenexchangeratepricesareused.
Answer: C
Skill: Recognition
68) Theuseofpurchasingpowerparityprices
A) decreasestherealGDPperpersonstatisticspublishedbytheInternationalMonetary
Fund.
B) weakensthevalidityofcrosscountrycomparisonsofeconomicwelfare.
C) increasestheamountbywhichU.S.GDPislargerthanthatofanyothernation.
D) accountsfordifferencesinthepricesofthesamegoodsindifferentcountrieswhen
measuringrealGDP.
Answer: D
Skill: Conceptual
69) Pollutionisaby-productofsomeproductionprocesses,soonthiscountrealGDPasmeasured
A) isadjusteddownwardtotakeintoaccountthepollution.
B) isadjustedupwardtotakeintoaccounttheexpendituresthatwillbemadeinthefutureto
cleanupthepollution.
C) tendstooverstateeconomicwelfare.
D) tendstounderstateeconomicwelfare.
Answer: C
Topic: StudyGuideQuestion,EnvironmentalQuality
Skill: Conceptual
70) WhichofthefollowingisNOTareasonthatrealGDPisapoormeasureofanationseconomic
welfare?
A) RealGDPomitsmeasuresofpoliticalfreedom.
B) RealGDPdoesnottakeintoaccountthevalueofpeoplesleisuretime.
C) RealGDPdoesnotincludetheundergroundeconomy.
D) RealGDPovervalueshouseholdproduction.
Answer: D
Topic: StudyGuideQuestion,HouseholdProduction
Skill: Conceptual
71) WhichofthefollowingstatementsaboutthecomparisonbetweenGDPinChinaandinthe
UnitedStatesiscorrect?
A) UsingtheexchangeratetovalueChinasGDPindollarsshowsthatChinasGDPper
personexceedstheGDPperpersonintheUnitedStates.
B) UsingpurchasingpowerparitypricestovalueChinasGDPindollarsshowsthatChinas
GDPperpersonexceedstheGDPperpersonintheUnitedStates.
C) ChinasGDPperpersonishigherusingpurchasingpowerparitypricesratherthanthe
exchangeratewhenvaluingChinasGDPindollars.
D) Noneoftheaboveanswersarecorrectbecausetheyareallfalsestatements.
Answer: C
Topic: StudyGuideQuestion,InternationalComparisons
Skill: Recognition
72) Whatweproduceduringourworkingtimeis________aspartofGDPandtheenjoymentwe
gainfromourleisuretimeis________aspartofGDP.
A) included;notincluded
B) included;included
C) notincluded;included
D) notincluded;notincluded
Answer: A
Skill: Recognition
4NewsBasedQuestions
Asthecreditcrisisunfoldedoverthepastyear,oneofthefewcertaintiesintheglobaleconomyseemedto
beChinasabilitytoploughonregardlessofdouble-digitgrowthrates...The...crisishasalsofocused...on
theneedtoupdateagrowthmodelthat...isstilldependentonassemblinggoodsforexportwithoutadding
muchvalueandonheavyindustriesthatcreatepollution.Chinesecompanieshavecontinuedtofindnew
foreignmarketsfortheirproducts...severalotherfactorspointtoaslowingpropertymarket...productionof
steel,cementandairconditionerswasdown...Retailsaleshaverisenby23percentineachofthelasttwo
months.
BeijingsBurden,www.FT.com,byGeoffDyer,Sept.23,2008
1) Accordingtothearticle,________areexpectedtocontribute________toChinasrealGDPin
2008.
A) exportsandconsumption;positively
B) consumptionandgovernmentspending;negatively
C) exportsandinvestment;negatively
D) rentalincomeandinvestment;negatively
Answer: A
Topic: GDP
Skill: Conceptual
AACSB: Communication
2) Accordingtothearticle,________canbeexpectedto________thisyear.
A) exports;increase
B) consumption;decrease
C) imports;decrease
D) netinterestincome;decrease
Answer: A
Topic: GDP
Skill: Conceptual
3) Accordingtothearticle,________isexpectedtoincreaseandaddtoChinas________
componentofGDP.
A) retailsales;consumption
B) retailsales;investment
C) rentalincome;investment
D) rentalincome;exports
Answer: A
Topic: GDP
Skill: Conceptual
Canadaseconomyexpandedby...0.1percentinthesecondquarter...furtherevidencethattheeconomyhas
stalled...followingafirstquarterslipingrossdomesticproduct.Thesecondquarterfiguresfellwellbelow
forecastsofa0.7percentgrowthinrealGDP.Exports....fellforthefourthconsecutivequarter.The
accumulatinggloomisincreasinglydiscouragingbusinessinvestment.Consumerspendingremainsstrong
andcorporateprofitswereattheirhighestsince2004.Thesourcesofstrengthinthesecondquarterare
clearlyunsustainable,saidSalGautieri,senioreconomistatBMOcapitalmarkets.
CanadaAvoidsFallintoRecession,www.FT.com,byChristopherMason,August30,2008
4) Accordingtothearticle,thebestdescriptionofCanadaspositioninthebusinesscycleis
A) atapeak
B) atatrough
C) inanexpansion
D) inarecession
Answer: A
Skill: Conceptual
5) Accordingtothearticle,________in________havecontributedtoCanadas________changein
realGDP.
A) increases;consumptionandexports;expected
B) decreases;exportsandinvestment;unexpected
C) increases;consumptionandinvestment;unexpected
D) decreases;exportsandgovernmentspending;expected
Answer: B
Topic: GDP
Skill: Conceptual
6) Itisestimatedthatin2007,Mexicohadapopulationof110millionandBrazilhadapopulation
of190million.Atthesametime,MexicosGDPwas$1trillionwhileBrazilswas$1.31trillion.
Thesedatashowthat
A) BrazilhadahealthiereconomythandidMexico.
B) MexicosGDPperpersonwaslowerthanwasBrazilsGDPperpersonin2007.
C) MexicosGDPperpersonwas$9090in2007.
D) BrazilsGDPperpersonwas$5300in2007.
Answer: C
Topic: GDPGrowthRate
Skill: Analytical
7) Itisestimatedthatin2007,Mexicohadapopulationof110millionandGDPof$1trillion.In
2006,Mexicospopulationwas104millionandGDPwas$839billion.PerGDPperson________
by________between2006and2007inMexico.
A) increased;$1038
B) increased;5percent
C) decreased;$2013
D) decreased;5percent
Answer: A
Topic: GDPGrowthRate
Skill: Analytical
8) ThefollowingdatadescribeMexicoseconomyin2007.
Governmentspending
$210billion
Investment
$210billion
Exports
$272billion
Imports
$283billion
GDP
1trillion
Population
110million
Fromthedata,wecanconcludethat________inMexicoin2007.
A) Consumptiontotaled$591billion
B) Netexportstotaled-$11billion.
C) GDPperpersonequalled$2000
D) ImportswerethelargestcomponentofGDP
Answer: A
Topic: GDP
Skill: Analytical
9) ThefollowingdatadescribeFranceseconomyin2008.
Consumption
234billioneuros
93billioneuros
Investment
88billioneuros
Exports
128billioneuros
Imports
137billioneuros
Fromthedata,wecanconcludethatinFrance
A) netexportstotaled-11billioneuros.
B) GDPequaled424billioneuros.
C) GDPequaled680billioneuros.
D) Netexportstotaled265billioneuros.
Answer: A
Topic: GDP
Skill: Analytical
10) ThefollowingdataareestimatesdescribingIrelandseconomyin2006and2007(inmillionsof
euros,inconstantprices):
2006
2007
Consumption
84,000
89,000
24,000
26,000
Investment
48,000
48,000
Exports
142,000
151,000
Imports
123,000
128,000
Subsidies
1,800
1,900
Taxes
500
500
IrelandsrealGDPin2007was________millioneuros.
A) 442,000
B) 186,000
C) 188,400
D) 163,000
Answer: B
Topic: GDP
Skill: Analytical
2006
2007
Consumption
84,000
89,000
24,000
26,000
Investment
48,000
48,000
Exports
142,000
151,000
Imports
123,000
128,000
Subsidies
1,800
1,900
Taxes
500
500
In2007,Irelandsnetexportswas________millioneuros.
A) 23,000
B) -23,000
C) 279,000
D) 149,100
Answer: A
Topic: GDP
Skill: Analytical
Consumption
Investment
Exports
Imports
Subsidies
Taxes
2006
84,000
24,000
48,000
142,000
123,000
1,800
500
2007
89,000
26,000
48,000
151,000
128,000
1,900
500
WhichofthefollowingistrueregardingIrelandseconomy?
A) ThechangeinGDPfrom2006to2007representedapeakinthebusinesscycle.
B) GDPdecreasedfrom2006to2007.
C) Netexportsdecreasedfrom2006to2007.
D) Consumptionwas48percentofIrelandsGDPin2007.
Answer: D
Topic: GDP
Skill: Conceptual
LifeexpectancyisexceptionallyhighinJapan.Scoresforpoliticalfreedomandcivillibertiesapproachthose
ofpeercountriesinEurope...equalityofopportunityisextremelyweak.Thecountryalsopossessesoneof
thelongerworkingweeks.JapansGDPwasestimatedtobe$4.2trillion(purchasingpowerparity)andthe
populationwas127.4million.
Drivenbyitsattractiveclimate,BrazilperformssubstantiallybetteronLifeSatisfactionthanMaterial
Wealth.HighinternationaldemandforBrazilscommoditiesandrawmaterialshasproducedasustained
economicexpansionsince2004,whichinturnhasledtojobcreation,wagegrowthandrelativelylow
inflation.Braziliansreportthattheycontroltheirownlivestoasubstantialdegree.BrazilsGDPwas
estimatedtobe$1.7trillion(purchasingpowerparity)and190millionin2006.
www.prosperity.com
13) Accordingtothearticle,wecanconcludethatthestandardofliving
A) ishigherinBrazilbecauseitscitizensfeelmorecontrolovertheirlivesandhave
experiencedjobandwagegrowth.
B) ishigherinJapanbecausetheirlifeexpectancyislonger.
C) ishigherinJapanbecauseitsGDPishigher.
D) mightbehigherinJapanbecauseithasahigherpercapitarealGDPbutotherfactorssuch
asBrazilianssatisfactionwiththeirlivesandeconomicgrowthshouldbeconsidered
whendeterminingeconomicwellbeing.
Answer: D
Skill: Conceptual
14) Accordingtotheinformation,JapansrealGDPperperson
A) ishigherthanBrazilsandthereforewecandefinitelyconcludethateconomicwell-being
ishigherinJapan.
B) is$33,000.
C) islowerthanBrazils,butitsrealGDPishigherwhichmakesstandardoflivinghigherin
Japan.
D) cannotbeexpectedtochangemuchgiventheotherfactorsaffectingGDPgrowth
includingpoliticalfreedomandlifeexpectancy.
Answer: B
Skill: Analytical
15) TheUnitedNationsHumanDevelopmentReport(2006)rankedNorwayfirstinitsHuman
DevelopmentIndexwithGDPperpersonequalto$38,454.TheUnitedStates,withGDPper
personof$39,676,isrankedeighth.Whichofthefollowingcouldexplainthisranking?
A) Otherfactors,likelifeexpectancyandeducationarehigherinNorway.
B) NorwayhasalowerGDPthantheUnitedState.
C) TheUnitedStateshasalowerunemploymentratethandoesNorway.
D) TheUnitedStateshasahigherpopulationgrowthrate.
Answer: A
Skill: Conceptual
16) Germaneconomicgrowthslowed...Economicgrowthslowedto0.3percentfrom0.5percent.
Expansionwasdrivenbyexports...(and)householdconsumptionadded...togrowth.As
unemploymentdeclinesanddisposableincomesincrease,householdspendingmayalsogain
momentum.
www.bloomberg.com,August23,2007
WecanconcludethattheGermaneconomy
A) isatthepeakofthebusinesscycle.
B) hasenteredtheexpansionphaseofthebusinesscycle.
C) hasslowedduetoadeclineininvestmentorgovernmentspending.
D) isintherecessionphaseofthebusinesscycle.
Answer: C
Topic: GDP
Skill: Conceptual
17) ThedatashowArgentinasGDP(usingpurchasingpowerparity)inbillionsofdollars.
Year
19901991199219931994199519961997199819992000200120022003200420052006
GDP($)182209235255277274294324340333338330300333373420470
Thedatashowthat
A) Argentinaseconomywasinarecessionfrom2004through2006.
B) Argentinaseconomywasinarecessionin2001and2002.
C) GDPperpersonmorethandoubledbetween1990and2006.
D) Argentinaseconomyreachedapeakin1996.
Answer: B
Skill: Analytical
18) ThedatashowArgentinasGDP(usingpurchasingpowerparity)inbillionsofdollars.
Year
19901991199219931994199519961997199819992000200120022003200420052006
GDP($)182209235255277274294324340333338330300333373420470
Thedatashowthat
A) Argentinaseconomyreachedapeakin1998.
B) GDPperpersonincreasedbetween1990and2006.
C) ArgentinaspotentialGDPdoubledbetween1990and2006.
D) Argentinaseconomyenteredarecessionin2000.
Answer: A
Skill: Analytical
19) ThefollowingdatashowUruguaysGDPusingpurchasingpowerparityinbillionsofdollars.
Year200020012002200320042005200620072008
GDP($)26.125.823.324.327.930.133.937.240.2
Usingthedata,wecanconcludethat
A) Uruguayseconomyreachedapeakin2000.
B) GDPperpersoninUruguayalmostdoubledbetween2000and2008.
C) potentialGDPinUruguaydoubledbetween2000and2008.
D) Uruguayseconomywasenteredarecessionin2008.
Answer: A
Skill: Analytical
Year200020012002200320042005200620072008
GDP($)26.125.823.324.327.930.133.937.240.2
A) thestandardoflivingdidnotchangeinUruguaybetween2000and2008.
B) Uruguayenteredarecessionin2001.
C) potentialGDPdecreasedin2001.
D) Uruguayseconomyreachedapeakin2005.
Answer: B
Skill: Analytical
Year200020012002200320042005200620072008
GDP($)26.125.823.324.327.930.133.937.240.2
A) Uruguayseconomyenteredarecessionin2005.
B) Uruguaysstandardoflivingincreasedsteadilybetween2000and2008.
C) potentialGDPmorethandoubledbetween2000and2008.
D) Uruguayseconomyreachedatroughin2002.
Answer: D
Skill: Analytical
5EssayQuestions
1) DefineanddiscussGDP.
Answer: GDPisthemarketvalueofallfinalgoodsandservicesproducedwithinacountryina
giventimeperiod.Onlyfinalgoodsandservicesareincluded.Goodsproducedas
intermediategoodsareexcluded.Thegoodsandservicesmustbeproducedwithinthe
timeperiodunderconsiderationandsosalesofusedgoodsareexcluded.Thegoodsand
servicesalsoarethoseproducedwithinthecountry,soproductionbythecountrysfirms
thattakesplaceinaforeignnationisnotincluded.
Topic: GrossDomesticProduct
Skill: Recognition
2) HowdoestheproductionofaU.S.firmlocatedinFranceaffectU.S.GDP?Howdoesthe
productionofaFrenchfirmlocatedinOhioaffectU.S.GDP?
Answer: U.S.GDPincludesallproductionintheUnitedStates,regardlessofwhoownsthefactors
ofproductionused.Therefore,theproductionbytheU.S.firminFrancewontbecounted
inU.S.GDPbecausetheproductiondoesnottakeplaceintheUnitedStates.However,
theproductionbytheFrenchfirmintheUnitedStateswillbecountedaspartofU.S.
GDPbecausetheproductionhastakenplaceintheUnitedStates.
Skill: Conceptual
3) WhyareonlyfinalgoodsandservicesincludedinmeasuringGDP?Giveexamplestocomplete
youranswer.
Answer: WepurposelyleaveintermediategoodsorservicesoutofourcalculationofGDPsowe
dontdoublecount.ExamplesofthisarenotcountingthetiresproducedbyFirestonethat
arethensoldtoFordtobeplacedontheirnewcars.Ifwecountedthetireswhenthey
wereproducedbyFirestoneandthenalsocountedthemwhentheywerepartoftheFord,
wewouldbedoublecountingthem.
Topic: FinalGood
Skill: Conceptual
4) IseveryproductproducedintheUnitedStatesincludedinU.S.grossdomesticproduct?
Answer: No,noteveryproductproducedisincludedinU.S.GDP.Forinstance,goodsproduced
asintermediategoodsareexcluded.Onlyfinalgoodsandservicesareincluded.In
addition,GDPcountsonlygoodstradedinmarkets,sogoodsandservicesthatpeople
producefortheirownuseareexcluded.
Topic: FinalGood
Skill: Conceptual
5) Defineanddistinguishbetweenfinalgoodsandintermediategoods.
Answer: Finalgoodsarethosegoodsthatarepurchasedbytheirfinaluser.Essentially,these
goods(andservices)havebeencompletedanddonotneedtogothroughfurther
processesofcompletion.Examplesoffinalgoodsincluderestaurantmeals,lamps,
railroadengines,andbooks.Intermediategoodsandservicesaregoodsorservices
producedbyonefirm,boughtbyanother,andthenusedasacomponentinthe
manufactureofanothergoodorservice.Basically,intermediategoodsandservicesare
usedasapartofanothergoodorservice.Lumberusedbyacarpentertobuildatableor
paperusedbyapublishertopublishabookareexamplesofintermediategoods.
Skill: Conceptual
6) NeitherintermediategoodsnorusedgoodsareincludedinGDP.Explainwhythese
expendituresarenotincludedinGDP.
Answer: IntermediategoodsandusedgoodsarenotincludedinthemeasurementofGDPbecause
theydonotrepresentfinalexpendituresongoodsandservicesproducedwithinthe
relevanttimeperiod.Intermediategoodsareinputsusedintheproductionoffinalgoods
andservices.TocountthemtwicewouldbedoublecountingandinflatethelevelofGDP.
UsedgoodsalreadyhavebeencountedinGDPduringtheyearinwhichtheywere
produced.Theywerenotproducedinthecurrenttimeperiodandthereforearenot
includedinGDP.
Topic: IntermediateGoodsandUsedGoods
Skill: Conceptual
7) Whatarethecategoriesoftotalexpenditure?
Answer: Therearefourcategories:Consumptionexpenditure,spendingbyhouseholds;
investment,spendingbyfirmstobuynewcapitalequipmentoraddtoinventories;
governmentexpendituresongoodsandservices,spendingbyalllevelsofthe
governmenttobuygoodsandservices;andnetexportsofgoodsandservices,which
equalstheexportsofgoodsandservicesminustheimportsofgoodsandservices.
Topic: TotalExpenditure
Skill: Recognition
8) Howdofirmsandhouseholdsinteractwithinthecontextofthecircularflowmodel?
Answer: Householdsaretheownersofthefactorsofproduction.Firmspurchasethesefactorsin
thefactormarket.Theyusethesefactorstoproducegoodsandserviceswhicharesoldto
householdsinthegoodsmarket.Householdsarepaidfortheservicesofthefactorsof
productionandusethisincometopayforthegoodsandservices.
Topic: CircularFlow
Skill: Conceptual
9) Whatistherelationshipshownbythecircularflowamongincome,totalexpenditure,andGDP?
Answer: Theyareallequal.Thevalueofproduction,whichisGDP,equalsincomebecausefirms
payfactors(asincome)alltherevenuetheyreceivefromsellingthegoodsandservices
theyproduce(GDP).Next,therevenuethatfirmsreceivefromsellingthegoodsand
servicestheyproduce(GDP)isequaltowhatisspentasexpendituresonthegoodsand
services.(totalexpenditure).
Topic: CircularFlow
Skill: Conceptual
10) Usetheideaofthecircularflowdiagramtoexplainwhythevalueofproductionequalstotal
incomeequalstotalexpenditure.
Answer: Thebasicpointisthatnothingescapesthesystem.Firmsreceivethevalueoftheir
productionintheformofrevenue.Withthisrevenue,theypayforthefactorsof
productiontheyhireandwhatisleftoverafterpayingtheircostsisprofit,whichispaid
tothehouseholdsthatownthefirms.Thusthevalueofproductionequalstotalincome.
Theseincomesflowfromfirmstohouseholds.Householdsthenallocatetheirincometo
taxes,saving,andconsumption.Taxesarecollectedandspentbythegovernment.Saving
byhouseholdsisspentasinvestmentbyfirmsafterbeingcycledthroughthebanking
system.Thustotalexpenditureequalsthevalueoftotalincome,whichequalsthevalueof
productionbyfirms.
Topic: CircularFlow
Skill: Conceptual
11) Whatisthedistinctionbetweengrossinvestmentandnetinvestment?
Answer: Grossinvestmentisthetotalspendingoncapitalgoods.Netinvestmentequalsgross
investmentminusdepreciation.Fromoneyeartothenext,thecapitalstockincreasesby
theamountofnetinvestment.
Topic: CapitalandInvestment
Skill: Recognition
12) Explainhowgrossinvestment,depreciation,netinvestment,andthecapitalstockarerelated.
Answer: Thechangeinthecapitalstockequalsnetinvestmentandnetinvestmentequalsgross
investmentminusdepreciation.
Skill: Conceptual
13) Whatistherelationshipbetweengrossinvestment,netinvestment,anddepreciation?Which
measuresthechangeinthecapitalstock?
Answer: Grossinvestmentminusdepreciationequalsnetinvestment.Grossinvestmentisallthe
investmentmadeduringtheyear.Depreciationisthewearandtearoncapitalfromits
useandobsolescence.Thedepreciationpartofgrossinvestmentgoestoreplaceold,
wornoutcapitalandsonetinvestmentisthechangeinthecapitalstock.
Skill: Conceptual
14) Explaintherelationshipamongthecapitalstock,grossinvestment,netinvestment,and
depreciation.
Answer: Thecapitalstockisthetotalquantityofplant,equipment,buildingsandinventories.
Someofthiscapitalstockisalwaysdepreciatingorwearingout.Duringayearafirmwill
purchasenewcapital.Theamountofcapitalpurchasedisgrossinvestment.Theamount
ofgrossinvestmentminustheamountofdepreciationduringayearisnetinvestment.So
netinvestmentisthechangeinthecapitalstockfromoneperiodtothenext.
Topic: CapitalStockandInvestment
Skill: Conceptual
15) Explainthedifferencebetweenthecapitalstock,grossinvestment,depreciation,andnet
investment.
Answer: Thecapitalstockisthetotalquantityofplant,equipment,buildings,andinventories.
Grossinvestmentisthepurchaseofnewcapital.Depreciationisthewearingoutand
scrappingofcapital.Netinvestmentequalsgrossinvestmentminusdepreciation.The
changeinthecapitalstockfromoneperiodtothenextequalsnetinvestment.
Skill: Conceptual
16) Definegrossinvestmentandnetinvestment.Discusstherelationshipbetweengrossinvestment
andnetinvestment.
Answer: Grossinvestmentisthetotalamountspentonnewcapitalgoodstoincreasethequantity
ofcapitalandreplacethedepreciatedcapital.Netinvestmentistheamountspentonnew
capitalthatexceedsthevalueofthedepreciatedcapitalor,inotherwords,netinvestment
equalsgrossinvestmentminusdepreciation.Netinvestmentisequaltothechangeinthe
capitalstock.
Topic: Investment
Skill: Recognition
17) Whenacompanysdepreciationislargerthanitsgrossinvestment,netinvestmentbecomes
negativeandthefirmscapitalstockdecreases.Isthepreviousstatementcorrectorincorrect?
Explainyouranswer.
Answer: Thestatementiscorrect.Netinvestmentequalsgrossinvestmentminusdepreciation.If
depreciationislargerthangrossinvestment,netinvestmentwillbenegative.Net
investmentisthechangeinthecapitalstock,andsothecompanyscapitalstock
decreases.Essentially,becausedepreciationislargerthanthecompanysgross
investment,thecompanyisnotbuyingenoughcapitaltoreplacethecapitalthat
depreciated.Asaresult,thetotalamountofthecompanyscapitaldecreases.
Topic: Investment
Skill: Conceptual
18) Investment,asincludedinGDP,consistsofwhat?
Answer: Investmentisthepurchaseofnewcapitalgoodssuchastools,instruments,machines,
buildings,andadditionstoinventories.Investmentdoes notincludethepurchaseorsale
ofstocksandbonds.
Topic: Investment
Skill: Recognition
19) HowarechangesininventorytreatedinGDP?
Answer: ChangesininventoryarepartoftheinvestmentcomponentofGDP.So,ifDellproduces
100,000computersthisyearandsells95,000,the5,000unsoldcomputersthatareadded
toDellsinventoryarepartoftheinvestmentcomponentofGDPforthisyear.
Skill: Conceptual
20) TocalculateGDP,economistsbeginwithtotalincomeearnedandthensubtracttotal
expenditurebythefoursectorsoftheeconomy.Istheprevioussentencetrueorfalse?Explain
youranswer.
Answer: Thesentenceisfalse.TocalculateGDP,economistscanbeginwithtotalincomeandthen
makeafewadjustmentsbuttheydonotsubtracttotalexpenditure.Alternatively,
economistscansumtotalexpenditurebytheeconomysfoursectors,butthissummation
isGDP.
Topic: MeasuringGDP
Skill: Conceptual
21) ListthecomponentsoftheexpenditureapproachtomeasuringGDP.
Answer: TheexpenditureapproachmeasuresGDPbyaddingfinalexpenditures,sothe
componentsarepersonalconsumptionexpenditure,grossprivateinvestment,
governmentexpendituresongoodsandservices,andnetexports.
Skill: Recognition
22) ListandcomparethefourcomponentsoftheexpenditureapproachtocalculatingGDP.
Answer: The4partscanbesummarizedaccordingtotheformulaGDP= C + I +G+(X-M).The
firstpart,C,isconsumptionexpenditure,whichmeasureshouseholdspendingandisthe
largestcomponentaccountingforaround70percentofGDP.Thenextcategory, I,is
investmentandreferstothepurchaseofnewcapital,thepurchaseofnewhomesand
changesininventories.Thisfluctuatesagreatdealbutgenerallyaccountsfor15to20
percentofGDP.NextisG,whichgovernmentexpenditureongoodsandservices.This
componentincludespurchasesbyalllevelsofgovernmentonnewgoodsandservices
andisabout20percentofGDP.Thefinalcategory,(X-M),isnetexports.Init,exports
areaddedandimportsaresubtracted.ThiscomponentistypicallynegativeintheUnited
Statesbecausewetypicallyrunatradedeficit.Itisgenerallyaround-1to-5percentorso
ofGDP.
Topic: ExpenditureApproachtoGDP
Skill: Conceptual
23) ExplainhowGDPismeasuredaccordingtotheexpenditureandincomeapproaches.
Answer: GDPismeasuredusingtheexpenditureapproachandtheincomeapproach.The
expenditureapproachusesthestreamsofspendingandaddstogetherthetotal
expenditure,orspending,onfinalgoodsandservices.Thustheexpenditureapproach
calculatesthesumofconsumptionexpenditure,investment,governmentexpenditureon
goodsandservices,andnetexports.Theincomeapproachusesanotherofthecircular
flowstocalculateGDP.Theincomeapproachaddstogetherallsourcesofincomeand
thenincorporatesafewadditionaladjustments.Thustheincomeapproachcalculatesthe
sumofcompensationofemployees,netinterest,rentalincomeofpersons,corporate
profits,andproprietorsincome.Thesumisnetdomesticproductatfactorcost.To
changethissumtoGDP,whichiscalculatedatmarketpricesratherthanfactorcosts,and
whichisthegrossproductratherthannetproduct,indirecttaxesareaddedandsubsidies
subtractedandthendepreciationisadded.Anystatisticaldiscrepancyisaddedto(or
subtractedfrom)GDPcalculatedusingtheincomeapproach.
Topic: ExpenditureApproachandIncomeApproach
Skill: Conceptual
24) HowdoestheincomeapproachmeasureGDP?
Answer: Theincomesapproachaddsthecompensationofemployees,netinterest,rentalincome,
corporateprofitsandproprietorsincometogivenetdomesticincomeatfactorcost.Then
indirecttaxesanddepreciationareadded.Finally,subsidiesaresubtractedtoobtain
GDP.
Skill: Recognition
25) Whatmustbedonetonetdomesticproductatfactorcostinordertotransformittogross
domesticproduct?Explainwhytheseadjustmentsarenecessary.
Answer: Severaladjustmentsmustbemadetonetdomesticproductatfactorcostinordertosetit
equaltoGDP.First,indirecttaxesmustbeaddedandsubsidiesmustbesubtracted.These
changesarenecessarybecauseGDPismeasuredusingmarketpriceswhereasnet
domesticproductatfactorcostmeasureswhatthegoodsandservicescosttoproduce.
Thepricecanbedifferentthanthecostwhentherearetaxesandsubsidiespresent.Thus
taxesmustbeaddedtothecostandsubsidiessubtractedinordertodeterminetheprice
thatwasactuallypaid.(Forinstance,aDVDmightcost$20buta$1salestaxmakesthe
price$21.)Then,thesecondadjustmentisthatdepreciationalsoneedstobeadded.
Depreciationisthewearandtearoncapitalwhenitisusedandwhenitbecomes
obsolete.GDPincludesexpenditureoninvestmentandsomeinvestmentisusedto
replacethecapitalstockthathasdepreciated.So,whencalculatingGDPusingtheincome
approach,depreciationmustbeincluded.Butdepreciationis notincludedinnetdomestic
productatfactorcostbecausethatamountincludesonlypaymentsmade(asincome)to
theinputsthathelpedproducetheproductsandnopaymentismadeforthedepreciation
ofcapital.Sotheadditionofdepreciation(aswellastheadjustmentsfortaxesand
subsidies)isnecessaryinordertoconvertnetdomesticproductatfactorcostintoGDP.
Topic: IncomeApproach,Adjustments
Skill: Recognition
26) Severaladjustmentsmustbemadetonetdomesticproductatfactorcostinordertocalculate
GDP.Oneoftheseadjustmentsisaddingdepreciation.Whatisdepreciationandwhymustitbe
added?
Answer: Depreciationisthewearandtearofcapitalwhenitisusedandwhenitbecomesobsolete.
GDPincludesexpenditureoninvestmentandsomeinvestmentisusedtoreplacethe
capitalstockthathasdepreciated.So,whencalculatingGDPusingtheincomeapproach,
depreciationmustbeincluded.Butdepreciationisnotincludedinnetdomesticproduct
atfactorcostbecausethatincludesonlypaymentsmade(asincome)totheinputsthat
helpedproducetheproductsandnopaymentismadeforthedepreciationofcapital.
Hencedepreciationmustbeaddedtonetdomesticproductatfactorcostinorderto
calculateGDP.
Topic: IncomeApproach,Depreciation
Skill: Recognition
27) WhatisthedifferencebetweenrealandnominalGDPandwhydoeconomistsmakethis
distinction?
Answer: RealGDPisameasureofthefinalgoodsandservicesproducedinayearvaluedat
constantprices.NominalGDPisthefinalgoodsandservicesproducedinayearvalued
atthepricesthatexistedduringtheyear.Economistsmakethedistinctionbetweenreal
GDPandnominalGDPbecausenominalGDPchangesfortworeasons:Whenthe
productionofgoodsandserviceschangesandwhenthepricesofthegoodsandservices
change.Economistswanttobeabletodistinguishbetweenchangesbroughtaboutby
productionchangesandchangesbroughtaboutbypricechanges.RealGDPallows
economiststomakethisdistinction.Inparticular,byusingpricesthatareconstant,a
changeinrealGDPrepresentsachangeintheproductionofgoodsandservicesand
factorsoutthechangeinprices.ThusrealGDPremovestheeffectfromchangesinprices
andtherebyrevealsthechangeintheunderlyingproductionofgoodsandservices.
Skill: Conceptual
28) IsitpossiblefornominalGDPtoincreasewhilerealGDPdoesnotchange?
Answer: Yes,itispossiblefornominalGDPtoincreasewhilerealGDPdoesnotchange.Nominal
GDPchangesifeitherpricesorproductionchange,whilerealGDPchangesonlyif
productionchanges.Ifproductiondoesnotchangewhilethepricesofthegoodsand
servicesincrease,realGDPdoesnotchangewhilenominalGDPincreases.
Skill: Conceptual
29) CannominalGDPeverbelessthanrealGDP?
Answer: Yes,nominalGDPcanbelessthanrealGDP.Ifpricesgenerallyfallfromoneperiodto
thenext,thennominalGDPislessthanrealGDP.However,intheU.S.economy,because
pricesgenerallyrise,nominalGDPtypicallyisgreaterthanrealGDP(exceptinthebase
period.)But,thereisnoeconomiclawthatstatesthatpricesmustgenerallyriseandso
thereisnonecessityfornominalGDPtobelargerthanrealGDP.
Skill: Conceptual
30) WhatistherelationshipbetweenactualandpotentialrealGDP?
Answer: RealGDPequalspotentialGDPwhenallresourcesarefullyemployedandthereareno
shortagesthatleadtoinflation.RealGDPcanbegreaterthanpotentialGDPandcanbe
lessthanpotentialGDP.Duringabusinesscycle,realGDPcyclesaroundpotentialGDP.
Duringanexpansion,realGDPrisesabovepotentialGDPandduringarecessionreal
GDPfallsbelowpotentialGDP.
Topic: ActualandPotentialGDP
Skill: Recognition
31) ExplaintherelationshipbetweenrealGDPandpotentialGDPduringthetwophasesofthe
businesscycle.
Answer: DuringanexpansionthelevelofrealGDPeventuallysurpassespotentialGDP,reachesa
peakandsubsequentlyfallsbelowpotentialGDPduringarecessioneventuallyreaching
atrough.
Skill: Conceptual
32) ExplaintherelationshipbetweenpotentialGDPandrealGDPintheUnitedStatessincethe
early1960s.Youdonotneedtotellwhathappenedduringanyspecificyear;justdescribethe
generalrelationship.
Answer: PotentialGDPhasgrownovertheperiod,albeitataslowerrateoverthepast3decades,
whilethelevelofrealGDPhasfluctuatedaroundpotentialGDPthroughout.
Skill: Conceptual
33) Whatisabusinesscycle?
Answer: Thebusinesscycleistherecurrentbutirregularupwardanddownwardmovementsin
productionandjobs.Adownwardmovementiscalledarecessionandanupward
movementiscalledanexpansion.Atthetopofthecycle,whenanexpansiongivesway
toarecession,isapeak.Atthebottomofthecycle,whenarecessiongiveswaytoan
expansion,isatrough.
Skill: Recognition
34) Listandexplainthetwophasesandtwoturningpointsofthebusinesscycle.
Answer: TheeconomyisdefinedasbeinganexpansionwhenrealGDPisincreasingandina
recessionwhenrealGDPdecreasesforatleasttwoconsecutivequarters.Between
expansionandrecessiontheeconomyreachesapeakdefinedasalocalmaximuminthe
levelofrealGDP.AtroughistheoppositeofapeakwhererealGDPhitsalocal
minimumastheeconomygoesfrombeinginarecessiontobeinginanexpansion.
Skill: Conceptual
35) Whatisarecession?
Answer: ArecessionisaperiodoftimeduringwhichrealGDPdecreases,sothatthegrowthrate
ofrealGDPisnegative,foratleasttwosuccessivequarters.Arecessionoccursstartsafter
apeakinthebusinesscycleandendsbeforeatroughinthebusinesscycle.Duringa
recession,realGDPfallsbelowpotentialGDP.
Skill: Recognition
36) Explainthebusinesscyclebydescribingthephasesandturningpoints.
Answer: Thebusinesscyclehastwophases,theexpansionwhereGDPisincreasingandthe
recessionwhereGDPisdecliningforatleasttwoconsecutivequarters.Therearetwo
turningpoints,thepeak,whereanexpansionendsandarecessionbegins,andthe
trough,wherearecessionendsandanexpansionbegins.
Skill: Recognition
37) WhydoesrealGDPhavelimitationsindeterminingeconomicwelfare?
Answer: Firsteconomicwelfareisabroadconceptofeconomicwell-beingthatentailsallgoods
andservicesnotjustthosemeasuredbyGDP.Theseincludeproductioninthehomeand
withintheundergroundeconomy.Secondly,itemssuchasgoodhealth,longlife
expectancyandleisuretimeareallaspectsthatarehighlydesirableandcountfor
economicwelfareyetarenotmeasuredbyGDP.Lastly,environmentalqualityishighly
desiredyetrealGDPgrowthcouldactuallyreducethequalityoftheenvironment.Sofor
allthesereasons,economicgrowthisnottotallydeterminedbyrealGDP.
Skill: Conceptual
38) ExplainhowoureconomicwelfaredependsuponourlevelofrealGDPperpersonbutthere
mightnotbeaone-to-onerelationshipbetweeneconomicwelfareandrealGDPperperson.
Giveexamplesofthingsthatcaneffectonebutnottheother.
Answer: AlthoughGDPhasasignificantimpactonoureconomicwelfare,itisnotaperfect
measureofeconomicwelfare.GDPomitssomefactorsthataffectoureconomicwelfare.
GDPdoesnotincludehouseholdproduction,allthetasksperformedaroundthehouse.It
omitsundergroundproduction,thepartoftheeconomyhiddenfromthegovernment.
RealGDPdoesnotincludethevalueofpeoplesleisuretime.And,GDPdoesnotmake
allowancesforenvironmentalquality,healthandlifeexpectancy,orpoliticalfreedomand
socialjustice.Allofthesefactorsinfluencethequalityofourlifeandhenceoureconomic
welfare.Indeed,occasionallyachangewillaffectGDPandeconomicwelfareindifferent
directions.Forinstance,ifpeopledecidetheywantmoreleisureandhenceretireearly,
GDPwilldecreasebecausefewerpeopleareworking,buteconomicwelfarewillincrease.
Or,ifthereisanincreaseinproductionthatcreatesmassiveamountsofpollution,GDP
increaseseventhougheconomicwelfarelikelydecreases.
Skill: Conceptual
39) IfcountryAhasahigherlevelofrealGDPperpersonthancountryB,thenpeopleinCountry
AmustenjoyahigherstandardofeconomicwelfarethanpeopleinCountryB.Isthisstatement
trueorfalseandexplainyouranswer.
Answer: Thestatementisfalse.FactorsotherthanrealGDPperpersonaffecteconomicwelfare.
Forinstance,factorssuchashouseholdproduction,undergroundproduction,leisure
time,andenvironmentalqualityallaffecteconomicwelfareandallareomittedfromreal
GDPperperson.Inaddition,economicwelfareisinfluencedbyhealthandlife
expectancyaswellasbythenationspoliticalfreedomandsocialjustice,noneofwhichis
measuredbyrealGDPperperson.AlthoughrealGDPperpersonisanimportantfactor
indeterminingacountryseconomicwelfare,itisnottheonlyfactor.
Skill: Conceptual
40) ListanddiscussvarioustypesofgoodsandservicesomittedfrommeasuredGDP.
Answer: Householdproduction,suchaspreparingmealsandtakingcareofchildren,are
productiveactivitiesbutdonotinvolvemarkettransactions.Therefore,household
productionisomittedaspartofGDP.Undergroundproduction,suchasworkingforcash
toavoidtaxesorengaginginillegalactivities,arenotreportedtothegovernmentand
hencearenotcountedaspartofGDP.Leisuretimeandpreservingandimprovingthe
naturalenvironmentarenotproductionpersebutareclearlyeconomicgoods.Theyare
notcountedaspartofGDPbecauseitishardtoquantifyandputamonetaryvalueon
them.
Topic: OmissionsfromGDP
Skill: Conceptual
41) WhatwouldhappentomeasuredGDPifmorepeoplestartedhiringworkerstodohousechores
suchascookingandcleaning?
Answer: GDPisthevalueofthefinalgoodsandservicesthatareproducedinaneconomyovera
specifiedtimeperiod.However,GDP,asmeasured,doesnotincludethevalueof
householdproductionpeopledoforthemselvesaroundtheirhomes.Thereforeifyou
washyourcaratyourhomeorapartment,thevalueofthecarwashingisnotincludedin
GDP.Howeverifyouhiredsomeonetowashyourcaratyourhomeorapartment,the
valueofthecarwashingwouldbeincludedinGDP.Thusifmorepeoplestartedhiring
workerstodohouseholdchores,measuredGDPwouldincrease.
Skill: Conceptual
42) Whatisundergroundproduction?IsitincludedinGDP?
Answer: Undergroundproductionistheproductionofgoodsandservicesthatremainhidden
fromthegovernment.Undergroundproductionincludestheproductionofillegalgoods
andservicesandtheproductionoflegalgoodsandservicesbutinawaythatavoids
taxesorregulations.UndergroundproductionisnotincludedinGDP.
Topic: GDPandUndergroundEconomicActivity
Skill: Recognition
43) ExplainhowundergroundeconomicactivityaffectsmeasurementofGDP.
Answer: Theundergroundeconomyaretransactionshiddenfromthegovernment,eitherbecause
theyareillegalortoavoidtaxes.Becausetheundergroundeconomyishiddenfromthe
government,itisnotincludedinGDPandsoGDPissmallerthanitotherwisewouldbe.
Skill: Conceptual
44) Whilestudyingwithyourfriend,yourfriendstates,OurleisuretimeincreasesGDPbutlowers
oureconomicwelfarebecauseitreducestheamountofgoodsandserviceswecanconsume.Is
yourfriendsstatementcorrect?
Answer: Yourfriendsassertionisincorrectontwocounts.First,leisuretimedoesnotincrease
GDP.Indeed,bytakingtimeawayfromproduction,leisuretimedecreasesGDP.Second,
leisuretimeincreasesoureconomicwelfare.Peopleenjoytheirleisuretimeandtherefore
havingmoreleisuretimeraisestheireconomicwelfare.
Topic: GDPandLeisureTime
Skill: Conceptual
45) Ifyoubuyanewwaterskisandothernewequipmentfor$2,500andtakeaweekoffofyour
job,whereyouearn$1,000aweek,togowaterskiing.Theequipmentyoupurchasedwasall
producedintheUnitedStates.Youthinkthattheweekwasworth$4,000.Asaresultofyour
vacation,GDPchangesbyhowmuch?
Answer: GDPchangesbyonlythe$2,500youspentonthewaterskisandotherequipment.
Skill: Conceptual
6NumericandGraphingQuestions
1) Assumeasmallnationhasthefollowingstatistics:itsconsumptionexpenditureis$15million,
investmentis$2million,governmentpurchasesofgoodsandservicesis$1million,exportsof
goodsandservicestoforeignersis$1million,andimportsofgoodsandservicesfromforeigners
is$1.5million.CalculatethisnationsGDP.
Answer: ThenationsGDPequalsthesumofconsumptionexpenditure,investment,government
purchasesofgoodsandservices,andnetexportsofgoodsandservices,wherenet
exportsofgoodsandservicesequalsofgoodsandservicesexportsminusimportsof
goodsandservices.So,GDP=$15million+$2million+$1million+$1million-$1.5
million=$17.5million.
Skill: Analytical
Item
Consumptionexpenditure
Investment
goodsandservices
Billionsof
dollars
6,258
1,623
1,630
998
1,252
2) ThetableabovegivesthevaluesofdifferentexpendituresintheUnitedStatesduring1999.
AnswerthefollowingquestionsabouttheUnitedStates.
a) Whatwasthevalueofnetexportsofgoodsandservicesin1999?
b) Whatwas(nominal)GDPequaltoin1999?
c) Whatwasthe(nominal)valueoftotalproductionequaltoin1999?
Answer: a) Netexportsofgoodsandservicesequalsthevalueofexportsofgoodsandservices,
$998billion,minusthevalueofimportsofgoodsandservices,$1,252billion,or -$254
billion.
b) GDPequalsthesumofconsumptionexpenditure,$6,258,plusinvestment,$1,623,
plusgovernmentexpenditureongoodsandservices,$1,630,plusnetexports,-$254,or
$9,257billion.
c) ThevalueoftotalproductionequalsthevalueofGDP,sototalproductionwas$9,257
billionin1999.
Skill: Analytical
3) OnJanuary1,2010,UnitedDeliveryhadtrucksvaluedat$1.3million.During2010,United
Deliverypurchasednewtrucksvaluedat$500,000.IfthevalueofthetrucksonDecember31,
2010was$1.5million,whatistheamountofitsnetinvestmentanditsdepreciationduring
2010?
Answer: Netinvestmentisthechangeinthecapitalstockfromoneperiodtothenext.ForUnited
Delivery,netinvestmentequals$1.5million-$1.3million=$200,000.Netinvestment
alsoequalsgrossinvestmentminusdepreciation,sodepreciationequalsgrossinvestment
minusnetinvestment.Grossinvestment,thetotalamountspentonnewcapital
equipment,was$500,000.Netinvestmentwascalculatedtobe$200,000.Therefore
depreciationequals$500,000-$200,000=$300,000.
Topic: CapitalStockandInvestment
Skill: Analytical
4) Usingagraph,drawandlabelthephasesandturningpointsofthebusinesscycle.
Answer:
Thefigureshowsabusinesscycle.
Skill: Recognition
7TrueorFalse
1) WhenIBM,anAmericanfirm,producescomputerchipsinanothercountry,thisproductionis
notincludedinU.S.GDPbecausetheproductiondidnottakeplaceintheUnitedStates.
Answer: TRUE
Skill: Conceptual
2) Thecircularflowdiagramshowsthattheflowofpaymentstothefactorsusedtoproducegoods
andservicesexceedstheflowofpaymentsforfinalgoodsandservices.
Answer: FALSE
Topic: CircularFlow
Skill: Conceptual
3) ThecircularflowdiagramshowsonlytheaggregateexpendituresmeasureofGDP.
Answer: FALSE
Skill: Conceptual
4) Thecircularflowshowsthataggregatespendingislargerthanaggregateincomebecause
peoplesave.
Answer: FALSE
Skill: Conceptual
5) Whengrossinvestmentisgreaterthandepreciation,thenthenationscapitalstockincreased.
Answer: TRUE
Skill: Analytical
6) Netinvestmentequalsgrossinvestmentminusdepreciation.
Answer: TRUE
Topic: NetInvestment
Skill: Recognition
7) Ifdepreciationexceedsgrossinvestment,netinvestmentisnegative.
Answer: TRUE
Topic: NetInvestment
Skill: Conceptual
8) TheexpenditureapproachtomeasuringGDPincludesfirmsspendingonwages.
Answer: FALSE
Skill: Recognition
9) Intermediategoodsandservicesareoneofthelargestcomponentsoftheexpenditureapproach
tomeasuringGDP.
Answer: FALSE
Skill: Recognition
10) TocalculateGDPusingtheexpenditureapproach,inpartitisnecessarytoaddexportsand
subtractimports.
Answer: TRUE
Skill: Recognition
11) TocalculateGDPwhenusingtheincomeapproach,youmustaddindirectbusinesstaxesand
depreciation.
Answer: TRUE
Skill: Conceptual
12) Thelargestcomponentofincomeisproprietorsincome.
Answer: FALSE
Skill: Recognition
13) Aproductivitygrowthslowdowncanbeshownasyear-to-yearfluctuationsofrealGDP
aroundpotentialGDP.
Answer: FALSE
Topic: ProductivityGrowthSlowdown
Skill: Conceptual
14) RealGDPfluctuatesfromyeartoyearbutisalwaysbelowpotentialGDP.
Answer: FALSE
Topic: RealandPotentialGDP
Skill: Recognition
15) Abusinesscycleisthepatternofshort-runupwardanddownwardmovementsinproduction
andjobs.
Answer: TRUE
Skill: Recognition
16) Phasesandturningpointsofthebusinesscycleareexpansion,peak,recessionandtrough.
Answer: TRUE
Skill: Recognition
17) Thebusinesscycleprogressesfromanexpansiontoapeaktoarecessionandthentoatrough.
Answer: TRUE
Skill: Recognition
18) ArecessionoccurswhenrealGDPdecreasesforatleast6months.
Answer: TRUE
Skill: Recognition
19) Anexpansionendswhentheeconomyhitsatroughandthenentersarecession.
Answer: FALSE
Skill: Recognition
20) Tomeasureeconomicwelfare,oneneedsonlytomeasurerealGDP.
Answer: FALSE
Topic: EconomicWelfare
Skill: Conceptual
21) Theomissionofhouseholdproductioncausesactualeconomicproductiontobe
underestimated.
Answer: TRUE
Topic: GDPandHouseholdProduction
Skill: Conceptual
22) HouseholdproductionisnotmeasuredintheGDP.
Answer: TRUE
Skill: Recognition
23) Alleconomicactivityintheundergroundeconomyrepresentstheproductionofillegalgoods
andservices.
Answer: FALSE
Skill: Recognition
24) TheundergroundeconomymeansthatGDPwilloverstatetheactuallevelofeconomicwelfare.
Answer: FALSE
Skill: Conceptual
25) IfameasureofrealGDPcouldincludethevalueofleisuretime,measuredrealGDPwould
increase.
Answer: TRUE
Skill: Conceptual
26) ThefactthatpricesforsimilargoodsdifferacrossnationscomplicatescomparisonsofrealGDP
acrosscountries.
Answer: TRUE
Topic: GDPandPurchasingPowerParityPrices
Skill: Conceptual
8ExtendedProblems
Item
Wagespaid
Consumptionexpenditure
Taxes
Transferpayments
Profits
Investment
Exports
Imports
Amount
(millionsofdollars)
100
120
40
15
35
30
50
30
40
1) ThetableaboveshowsthetransactioninPinklandlastyear:
a) CalculatePinklandsGDP.
b) Whatapproachdidyouusetomakethiscalculation?
Answer: a) GDP=C+I + G + (X - M)= $120+ $30+ $50+ ($30- $40)=$190million.
b) Theexpenditureapproachisused,whichmeasuresGDPasC+I+G+(X-M).
Skill: Analytical
Year
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
RealGDP
(trillionsofyen)
478
483
484
489
499
516
525
519
520
534
536
2) ThetableaboveshowsJapansrealGDPbetween1991to2001.
a) DrawafigurewithJapansrealGDPfrom1991to2001.
b) Intheprevious30years,thegrowthrateofJapanspotentialGDPwas6percentayear.On
yourgraph,showthepaththatpotentialGDPwouldhavefollowedifitsGDPin1991wasequal
topotentialGDPandthegrowthrateofpotentialGDPhadbeenmaintainedin1991 -2001.
c) ShowtheLucaswedgeonyourfigure.
Answer:
a) Seethefigureabove.
b) PotentialGDPisillustratedinthefigureabove.PotentialGDPin1991isassumedto
equalrealGDPin1991.Then,projectedGDPlevelsforsubsequentyearsarecalculated
bymultiplyingpotentialGDPinthepreviousyearby1.06.Forexample,in1992,
potentialGDPequals478trillionyen1.06=507trillionyen;potentialGDPin1993
equals507trillionyen1.06=537trillionyen;andsoon.
c) ThefigureaboveshowstheLucaswedgeasthedarkenedarea.TheLucaswedge
showsthatthelossofoutputaccumulatedinJapanin1991 -2001thatresultedfroma
slowdowninthegrowthrateofrealGDPwas1,575trillionyen.
Topic: LucasWedge
Skill: Analytical
9Appendix:GraphsinMacroeconomics
1) Toseehowvariablesevolveovertimeweuse
A) ascattergraph.
B) anevolutionplot.
C) across-sectionplot.
D) atime-seriesgraph.
Answer: D
Topic: Time-SeriesGraphs
Skill: Recognition
2) Thefigureaboveshowsa
A) two-variabletime-seriesgraph.
B) time-seriesgraph.
C) scatterdiagram.
D) regression.
Answer: B
Skill: Recognition
3) Onatime-seriesgraph,timeistypicallyshown
A) asanarea.
B) alongthex-axis.
C) alongthey-axis.
D) asanimplicitvariableheldconstant.
Answer: B
Skill: Recognition
4) Thehorizontalaxisonatime-seriesgraph
A) measuresthevariablebeinggraphed.
B) measuresunitsoftimesuchasyears.
C) runsparalleltothey-axis.
D) measureshowthevariablebeinggraphedchanges.
Answer: B
Skill: Conceptual
5) Thefigureaboveshowsatime-seriesgraph.Thehorizontalaxismeasures________andthe
verticalaxismeasures________.
A) time;x-values
B) time;thevariableofinterest
C) thevariableofinterest;time
D) y-values;thevariableofinterest
Answer: B
Skill: Recognition
6) Atrendis
A) ameasureofclosenessonascatterdiagram.
B) ageneraltendencyforavariabletoriseorfall.
C) themaximumvalueofavariable.
D) theminimumvalueofavariable.
Answer: B
Skill: Recognition
7) Atrendshows
A) thedegreeofcorrelationbetweentwovariables.
B) thegeneraltendencyforavariabletoriseorfall.
C) thescaleusedtomeasuretovariables.
D) theincreasesinonevariable.
Answer: B
Skill: Recognition
8) Trendrefersto
A) thescaleusedonthex- andy-coordinates.
B) increasesbutnotdecreasesofavariable.
C) decreasesbutnotincreasesofavariable.
D) ageneraltendencyforavariabletoriseorfall.
Answer: D
Skill: Recognition
9) WhichofthefollowingisTRUEregardingatrend?
I. Acrosssectiongraphshowstrends.
II. Atime-seriesgraphshowstrends.
III. Ascatterplotshowstrendsovertime.
A) I
B) II
C) IandII
D) IIandIII
Answer: B
Skill: Conceptual
10) Whichtypeofgraphisusedtoidentifytrends?
A) time-series
B) scatterdiagram
C) cross-section
Answer: A
Skill: Recognition
11) Whichofthefollowingiscorrectaboutatime-seriesgraph?
I. Thex-axismeasurestime.
II. Atime-seriesgraphcanrevealifthereisatrendinthevariable.
A) onlyI
B) onlyII
C) bothIandII
D) neitherInorII
Answer: C
Skill: Recognition
12) Atime-seriesgraphrevealswhetherthereisa________whichrepresents________.
A) trendinavariable;ageneraltendencyforthevariabletoriseorfall
B) relationshipbetweentwovariables;across-sectiongraph
C) trendinavariable;unrelatedvariables
D) relationshipbetweentwovariables;atrendinavariable
Answer: A
Skill: Recognition
13) Atime-seriesgraphshowingtotalproductioninJapanfrom1960to2010showsapositive
trend.Itisthecasethattotalproduction
A) felleveryyearbetween1960and2010.
B) roseeveryyearbetween1960and2010.
C) waslowerin2010thanin1960.
D) washigherin2010thanin1960.
Answer: D
Skill: Conceptual
14) Usingtheabovefigure,duringwhichmonthwasthepriceforcrudeoilthehighest?
A) July
B) December
C) May
D) October
Answer: B
Skill: Analytical
15) Usingtheabovefigure,duringwhichofthefollowingperiodsdoesthepriceofcrudeoilhavea
downwardtrend?
A) MaytoJuly
B) MaytoNovember
C) JulytoOctober
D) OctobertoDecember
Answer: C
Skill: Analytical
16) Usingtheabovefigure,duringwhichofthefollowingperiodsdoesthepriceofcrudeoilshows
anupwardtrend?
A) MaytoNovember
B) MaytoJulyandOctobertoDecember
C) JulytoOctober
D) ApriltoNovember
Answer: B
Skill: Analytical
17) Accordingtothegraphinthefigureabove,whichyearexperiencedthemostrapidchangein
employment?
A) Year2
B) Year3
C) Year4
D) Year5
Answer: B
Skill: Analytical
18) Intheabovefigure,thediagramshows
A) adownwardtrendinx.
B) anupwardtrendinx.
C) ascatterdiagram.
D) atwo-variablescatterdiagram.
Answer: A
Skill: Conceptual
19) Inflationclimbedsteadilyfrom1952to1972.Atime-seriesgraphwithinflationonthevertical
axisandtime(inyears)onthehorizontalaxiswouldshow
A) therateofinflationasahorizontalline.
B) thatinflationwasfollowingadecreasingtrendline.
C) thatinflationhadapositivetrend.
D) thatinflationhadanegativetrend.
Answer: C
Skill: Analytical
20) Atime-seriesgraphdisplaysthepriceofcopper.Theslopeofthelineisnegativeforperiods
whenthe
A) priceofcopperisfalling.
B) priceofcopperisrising.
C) quantityofcopperisfalling.
D) priceofcopperislowandnotchanging.
Answer: A
Skill: Analytical
21) Agraphshowsthewagesoffactoryworkers.Theslopeofthelineispositiveforperiodswhen
thewagerateis
A) falling.
B) rising.
C) highbutnotrisinganyhigher.
D) low.
Answer: B
Skill: Analytical
22) Onatime-seriesgraphwitharatioscale,
A) theslopeofthelineisnegativewhenthelevelofthevariableisrising.
B) thesamedistancealongtheverticalaxismeasuresdifferentamountsofthevariable.
C) timeisplottedontheverticalaxisratherthanthehorizontalaxis.
D) itisimpossibletodetermineatrend.
Answer: B
Topic: RatioScale
Skill: Analytical
23) YoubelievethatthetotalamountofgoodsproducedintheUnitedStateshasgenerally
increasedovertheyears.Inatime-seriesgraphillustratingthetotalamountproduced,you
expecttofind
A) anupwardtrend.
B) norelationshipbetweentimeandtheamountofgoodsproduced.
C) aninverserelationshipbetweentimeandtheamountofgoodsproduced.
D) alinearrelationship.
Answer: A
Topic: StudyGuideQuestion,Time-SeriesGraphs
Skill: Recognition
10Appendix:EssayQuestions
1) Whatkindofinformationisconveyedinatime-seriesgraph?
Answer: Atimeseriesgraphrevealsfourtypesofinformation.First,itshowstheactualvalueof
thevariable(s)ateachpointintime.Second,itshowswhetherthevariable(s)isrisingor
fallingastimepasses.Third,itshowsthespeedwithwhichthevariable(s)ischanging.
Finally,itshowsthepresenceorabsenceofatrend.
Topic: TimeSeries
Skill: Recognition
11Appendix:NumericandGraphingQuestions
1) ThefigureaboveshowsthepriceofaDVDplayerfrom2003to2007.
a) Whattypeofgraphisillustratedabove?
b) WhatisthetrendinthepriceofaDVDplayer?
Answer: a) Thegraphisatime-seriesgraphbecauseitplotstimealongthehorizontalaxisand
thepriceofaDVDplayeralongtheverticalaxis.
b) ThetrendinthepriceofaDVDplayerisnegative,thatis,thepriceofaDVDplayer
hasgenerallydecreasedfromoneyeartothenext.
Topic: TimeSeries
Skill: Recognition
12Appendix:TrueorFalse
1) Atimeseriesgraphcanshowboththelevelofavariableandthespeedwithwhichthevariable
changesovertime.
Answer: TRUE
Topic: GraphingData
Skill: Conceptual
2) Atrendisageneraltendencyforavariabletoincreaseordecreaseovertime.
Answer: TRUE
Topic: GraphingData
Skill: Recognition
13MathematicalNote:Chained-DollarRealGDP
1) Valuingthequantitiesofgoodsproducedinconsecutiveyearsusingpricesinbothyearsand
thenaveragingthepercentagechangesinthevalueofoutputispartofthe________methodof
calculatingrealGDP.
A) base-year
B) moving-base-year
C) chain-weightedoutputindex
D) fixedquantities/variableprices
Answer: C
Topic: RealGDP
Skill: Recognition
2) Thechain-weightedoutputindexmethod________.
A) isusedtocalculatethevalueofnominalGDP
B) valuesthequantitiesproducedinayearatthepricesofthebaseyear
C) showsthatrealGDPincreaseseveryyear
D) usesthepricesoftwoadjacentyearstocalculatetherealGDPgrowthrate
Answer: D
Topic: Chain-WeightedGrowthRate
Skill: Recognition
3) WhichofthefollowingisTRUEregardingthechain -weightedoutputindexmethod?
I. ItisthemethodusedtomeasurethegrowthrateofnominalGDP.
II. Itusesdatafromthecurrentyearandfromthepreviousyear.
III. ItisamethodofmeasuringthegrowthrateofrealGDP.
A) IandII
B) IIandIII
C) IandIII
D) I,IIandIII
Answer: B
Skill: Conceptual
4) Thechain-weightedoutputindex
A) usesonlythecurrentyearspricestocalculategrowthinrealGDP.
B) usespricesforthecurrentyearandthepreviousyeartocalculategrowthinrealGDP.
C) mustbecalculatedonlyeveryotheryear.
D) isaninaccuratewaytomeasuregrowthinrealGDPandsohasbeenreplacedbythe
nominal-to-realindex.
Answer: B
Skill: Conceptual
5) Thechain-weightedoutputindexmethodofcalculatingrealGDPcompares
A) comparesthequantitiesofgoodsproducedinconsecutiveyearsusingpricesinbothyears
andaveragingthepercentagechangesinthevalueofoutput.
B) quantitiesproducedindifferentyearsusingpricesfromayearchosenasareference
period.
C) quantitiesproducedindifferentyearswiththepricesthatprevailedduringtheyearin
whichtheoutputwasproduced.
D) pricesatdifferentpointsintimeusingasampleofgoodsthatisrepresentativeofgoods
purchasedbyhouseholds.
Answer: A
Skill: Conceptual
6) Thechain-weightedoutputindexmethodofmeasuringrealGDPisbasedon
A) usingcurrentpricesratherthanbaseyearprices
B) averagingthemarketvalueoftheexpendituresoveratwoyearperiodandthen
comparingwithabaseperiod.
C) usingthepricesoftwoadjacentyearstocalculatethegrowthrateofrealGDP.
D) averagingthenominalandrealmeasuresofGDPtocomeupwithamoreaccuratefigure.
Answer: C
Skill: Conceptual
7) At2010prices,thevalueofproductionin2011was6percentagepointshigherthanin2010.At
2011prices,thevalueofproductionin2011was4percentagepointshigherthanin2010.Using
thechain-weightedoutputindex,realGDPis________in2011thanin2010.
A) 10percentgreater
B) 5percentgreater
C) 7.5percentgreater
D) 4percentsmaller
Answer: B
Skill: Analytical
8) RealGDPin2010is$10trillion.Between2010and2011,using2010prices,GDPgrew3percent
andusing2011pricesrealGDPgrew7percent.Usingthechain-weightedoutputindex
method,realGDPin2011is________trillion.
A) $10.5
B) $11
C) $10.1
D) $12.72
Answer: A
Skill: Analytical

Measuring GDP and Economic Growth

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Measuring GDP and Economic Growth

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Chapter4

15) Whichofthefollowingexpendituresassociatedwiththeproductionofanewhigh -performance

67) WhichofthefollowingisNOT afinalgood?

6) Intheequation,GDP=C+ I+ G+ X- M,G refersto

17) LetCrepresentconsumptionexpenditure,S saving,I grossprivatedomesticinvestment,G

41) WhichofthefollowingitemsisNOT partofgovernmentexpenditureongoodsandservicesin

44) WhichofthefollowingisNOT partofGDPcalculatedusingtheexpenditureapproach?

82) WhichofthefollowingitemsisNOT acomponentoftheincomeapproachtomeasuringU.S.

83) WhichofthefollowingisNOT apartoftheincomeapproachtodeterminingGDP?

84) WhichofthefollowingisNOT oneofthecomponentsforcomputingGDPbaseduponthe

85) WhichofthefollowingisNOT includedintheincomeapproachtomeasuringGDP?

42) Intheabovefigure,thedistancebetweenpointsS andT represents

43) Intheabovefigure,thedistancebetweenpointsT andU represents

49) Intheabovefigure,thelettersA,B,andC representwhichpositionsinthebusinesscycle?

61) WhichofthefollowingisNOT includedinrealGDP?

65) WhichofthefollowingwouldleadGDPtooverstate economicwelfare?

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