Practice for Finals Introduction to Economics for EM Name: ________________________________ Section _____________________________ Multiple Choice.

Identify the choice that best completes the statement or answers the question. ____ 1. Macroeconomists study a. the decisions of households and firms. b. the interaction between households and firms. c. economy-wide phenomena. d. regulations on firms and unions. ____ 2. Which of the following is not a question that macroeconomists address? a. Why is average income high in some countries while it is low in others? b. Why does the price of oil rise when war erupts in the Middle East? c. Why do production and employment expand in some years and contract in others? d. Why do prices rise rapidly in some periods of time while they are more stable in other periods? ____ 3. For an economy as a whole, a. wages must equal profit. b. consumption must equal saving. c. income must equal expenditure. d. the number of buyers must equal the number of sellers. ____ 4. Because every transaction has a buyer and a seller, a. GDP is more closely associated with an economys income than it is with an economys expenditure. b. every transaction contributes equally to an economys income and to its expenditure. c. the number of firms must be equal to the number of households in a simple circular-flow diagram. d. firms profits are necessarily zero in a simple circular-flow diagram. ____ 5. GDP is defined as a. the market value of all goods and services produced within a country in a given period of time.

b. the market value of all goods and services produced by the citizens of a country, regardless of where they are living, in a given period of time. c. the market value of all final goods and services produced within a country in a given period of time. d. the market value of all final goods and services produced by the citizens of a country, regardless of where they are living, in a given period of time. ____ 6. In order to include many different goods and services in an aggregate measure, GDP is computed using, primarily, a. values of goods and services based on surveys of consumers. b. market prices. c. consumer and producer surpluses. d. costs of producing goods and services. ____ 7. Gross domestic product adds together many different kinds of goods and services into a single measure of the value of economic activity. To do this, GDP makes use of a. market prices. b. prices that government economists believe reflect the true value of goods and services to society. c. the assumption that quantities of goods and services produced are unchanged from year to year. d. the assumption that prices of goods and services are unchanged from year to year. ____ 8. Grapes are a. always counted as an intermediate good. b. counted as an intermediate good only if they are used to produce another good, such as wine. c. counted as an intermediate good only if they are consumed. d. counted as an intermediate good, whether they are used to produce another good or consumed. ____ 9. Als Aluminum Company sells $1 million worth of aluminum to Shiny Foil Company, which uses the aluminum to make aluminum foil. Shiny Foil Company sells $4 million worth of aluminum foil to households. The transactions just described contribute how much to GDP? a. $1 million b. $3 million

c. $4 million d. $5 million ____ 10. Which of the following is not included in U.S. GDP? a. unpaid cleaning and maintenance of houses b. services such as those provided by lawyers and hair stylists c. the estimated rental value of owner-occupied housing d. production of foreign citizens living in the United States ____ 11. Which of the following examples of production of goods and services would be included in U.S. GDP? a. Samantha, a Canadian citizen, grows sweet corn in Minnesota and sells it to a grocery store in Canada. b. Ian, an American citizen, grows peaches for his family in the back yard of their Atlanta home. c. Leo, an American citizen, grows marijuana in his Seattle home and sells it to his friends and neighbors. d. None of the above examples of production would be included in U.S. GDP. ____ 12. The government of Wrexington, a country which has adopted American GDP accounting conventions, reported that GDP in quarter 3 was $12 billion at an annual rate. This means that the market value of all final goods and services produced within Wrexington in quarter 3 was a. $3 billion. b. $4 billion. c. $12 billion. d. $48 billion.

____ 13. Darla, a Canadian citizen, works only in the United States. The value of the output she produces is a. included in both U.S. GDP and U.S. GNP. b. included in U.S. GDP, but it is not included in U.S. GNP. c. included in U.S. GNP, but it is not included in U.S. GDP. d. included in neither U.S. GDP nor U.S. GNP.

____ 14. An Italian company operates a pasta restaurant in the U.S. The value of the output produced by this pasta restaurant is included in a. U.S. GNP and Italian GNP. b. U.S. GNP and Italian GDP. c. U.S. GDP and Italian GNP. d. U.S. GDP and Italian GDP. ____ 15. An identity is an equation that a. describes an equilibrium. b. pertains to macroeconomics, not to microeconomics. c. must be true because of how the variables in the equation are defined. d. involves final goods, not intermediate goods. ____ 16. Household spending on education is counted in which component or subcomponent of GDP? a. consumption of durable goods b. consumption of nondurable goods c. consumption of services d. investment ____ 17. What word do economists use to refer to the purchase of goods that will be used in the future to produce more goods and services? a. capital b. consumption c. investment d. costs ____ 18. A good is produced by a firm in 2007, added to the firms inventory in 2007, and sold to a household in 2008. It follows that a. the value of the good is added to the investment category of 2007 GDP and added to the investment category of 2008 GDP. b. the value of the good is added to the investment category of 2007 GDP and subtracted from the investment category of 2008 GDP. c. the value of the good is subtracted from the investment category of 2007 GDP and added to the investment category of 2008 GDP. d. the value of the good is subtracted from the investment category of 2007 GDP and sub-

tracted from the investment category of 2008 GDP. ____ 19. Which of the following subcomponents of GDP can be either positive or negative? a. inventory investment b. exports c. government purchases d. All of the above are correct.

____ 20. If a U.S. citizen buys a dress made in Nepal by a Nepalese firm, then a. U.S. consumption increases, U.S. net exports decrease, and U.S. GDP decreases. b. U.S. consumption increases, U.S. net exports decrease, and U.S. GDP is unaffected. c. U.S. consumption decreases, U.S. net exports increase, and U.S. GDP increases. d. U.S. consumption decreases, U.S. net exports increase, and U.S. GDP is unaffected. ____ 21. In the economy of Wrexington in 2008, consumption was $3000, exports were $400, GDP was $5000, imports were $600, and investment was $1100. What were Wrexingtons government purchases in 2008? a. $300 b. $500 c. $700 d. $1100 ____ 22. In the economy of Wrexington in 2008, consumption was $2000, exports were $800, GDP was $4800, government purchases were $840, and investment was $1400. What were Wrexingtons imports in 2008? a. -$560 b. -$240 c. $240 d. $560 Table 23-3. The table below contains data for the country of Wrexington for the year 2008.
Total income Household purchases of durable goods Household purchases of nondurable goods Household purchases of non-education services Household purchases of education services $5731 $1108 $702 $203 $302

Household purchases of new housing Purchases of capital equipment Inventory changes Purchases of new structures Depreciation Local government spending on goods and services State government spending on goods and services Federal government spending on goods and services Transfer payments Foreign purchases of domestically produced goods Domestic purchases of foreign goods

$816 $333 $75 $267 $401 $236 $419 $1182 $707 $217 $129

____ 23. Refer to Table 23-3. What was Wrexingtons GDP in 2008? a. $4623 b. $5731 c. $6037 d. $6839 ____ 24. Which of the following is correct? a. Nominal GDP never equals real GDP. b. Nominal GDP always equals real GDP. c. Nominal GDP equals real GDP in the base year. d. Nominal GDP equals real GDP in all years but the base year.

____ 25. Changes in the GDP deflator reflect a. only changes in prices. b. only changes in the amounts being produced. c. both changes in prices and changes in the amounts being produced. d. neither changes in prices nor changes in the amounts being produced. ____ 26. The inflation rate in year 2 equals

a. . b. . c. . d. . ____ 27. In the economy of Wrexington in 2008, nominal GDP was $10 trillion and real GDP was $4 trillion. What was Wrexingtons GDP deflator in 2008? a. 25 b. 40 c. 250 d. 400 ____ 28. GDP is used as the basic measure of a society's economic well-being. A better measure of the economic wellbeing of individuals in society is a. saving per person. b. GDP per person. c. government expenditures per person. d. investment per business firm. ____ 29. GDP is not a perfect measure of well-being; for example, a. GDP excludes the value of volunteer work. b. GDP does not address the distribution of income. c. GDP does not address environmental quality. d. All of the above are correct. ____ 30. The consumer price index is used to a. monitor changes in the level of wholesale prices in the economy. b. monitor changes in the cost of living over time. c. monitor changes in the level of real GDP over time.

d. monitor changes in the stock market. ____ 31. In the calculation of the CPI, coffee is given greater weight than tea if a. consumers buy more coffee than tea. b. the price of coffee is higher than the price of tea. c. it costs more to produce coffee than it costs to produce tea. d. coffee is more readily available than tea is to the typical consumer.

____ 32. The price index was 320 in one year and 360 in the next year. What was the inflation rate? a. 9 percent b. 11.1 percent c. 12.5 percent d. 40 percent ____ 33. The price index was 120 in 2006 and 127.2 in 2007. What was the inflation rate? a. 5.7 percent b. 6.0 percent c. 7.2 percent d. 27.2 percent ____ 34. Which of the following changes in the price index produces the greatest rate of inflation: 106 to 112, 112 to 118, or 118 to 124? a. 106 to 112 b. 112 to 118 c. 118 to 124 d. All of these changes produce the same rate of inflation. ____ 35. The price index was 92 in 2000, and the inflation rate was 13 percent between 1999 and 2000. The price index in 1999 was a. 79. b. 81.4. c. 103.96. d. 105.

____ 36. The consumer price index is a. not very useful as a measure of the cost of living. b. a perfect measure of the cost of living. c. a useful measure, but not a perfect measure, of the cost of living. d. not used as a measure of the cost of living. ____ 37. The introduction of a new good a. increases the cost of maintaining the same level of economic well-being. b. decreases the cost of maintaining the same level of economic well-being. c. has no impact on the cost of maintaining the same level of economic well-being. d. may increase or decrease the cost of maintaining the same level of economic well-being, depending on how expensive the new good is. ____ 38. For some racquet sports, there have been increases in the size of the racquets; also, the methods and materials used for making racquets have improved. To which problem in the construction of the CPI is this situation most relevant? a. substitution bias b. introduction of new goods c. unmeasured quality change d. income bias

____ 39. Laura bought word-processing software in 2005 for $50. Laura's twin brother, Laurence, bought an upgrade of the same software in 2006 for $50. To which problem in the construction of the CPI is this situation most relevant? a. substitution bias b. unmeasured quality change c. introduction of new goods d. income bias ____ 40. The CPI and the GDP deflator a. generally move together. b. generally show different patterns of movement.

c. always show identical changes. d. always show different patterns of movement. ____ 41. The CPI differs from the GDP deflator in that a. the CPI is a price index, while the GDP deflator is an inflation index. b. substitution bias is not a problem with the CPI, but it is a problem with the GDP deflator. c. increases in the prices of foreign produced goods that are sold to U.S. consumers show up in the CPI but not in the GDP deflator. d. increases in the prices of domestically produced goods that are sold to the U.S. government show up in the CPI but not in the GDP deflator. ____ 42. Babe Ruth's 1931 salary was $80,000. Government statistics show a consumer price index of 15.2 for 1931 and 207 for 2007. Ruth's 1931 salary was equivalent to a 2007 salary of about a. $5,874. b. $1,089,474. c. $1,216,000. d. $16,560,000. ____ 43. Ethel purchased a bag of groceries in 1970 for $8. She purchased the same bag of groceries in 2006 for $25. If the price index was 38.8 in 1970 and the price index was 180 in 2006, then what is the price of the 1970 bag of groceries in 2006 dollars? a. $5.39 b. $25.00 c. $29.11 d. $37.11 Scenario 24-2. The price tag on a golf ball in 1975 read $0.20, and the price tag on a golf ball in 2005 read $2.00. The CPI in 1975 was 52.3, and the CPI in 2005 was 191.3. ____ 44. Refer to Scenario 24-2. In 1975 dollars, a 1975 golf ball cost $0.20 and a 2005 golf ball cost a. $0.55, so golf balls were cheaper in 1975. b. $0.55, so golf balls were cheaper in 2005. c. $7.32, so golf balls were cheaper in 1975. d. $7.32, so golf balls were cheaper in 2005.

____ 45. Jane earned a salary of $40,000 in 1996 and $65,000 in 2006. The consumer price index was 160 in 1996 and 266 in 2006. Janelles 1996 salary in 2006 dollars is a. $24,060.15. b. $42,400.00. c. $43,655.17. d. $66,500.00. ____ 46. In 1970, Professor Plum earned $12,000; in 1980, he earned $24,000; and in 1990, he earned $36,000. If the CPI was 40 in 1970, 70 in 1980, and 130 in 1990, then in real terms, Professor Plum's salary was highest in a. 1970 and lowest in 1980. b. 1970 and lowest in 1990. c. 1980 and lowest in 1970. d. 1980 and lowest in 1990. ____ 47. In 1972, one could buy model rocket engines for $1.50 each. If those same engines cost $2.50 each today, then which pair of CPIs would make the engine prices in today's dollars the same for both years? a. 60 in 1972 and 95 today b. 60 in 1972 and 120 today c. 90 in 1972 and 140 today d. 96 in 1972 and 160 today ____ 48. Consternation Corporation has an agreement with its workers to index completely the wage of its employees using the CPI. Consternation Corporation currently pays its production line workers $7.50 an hour and is scheduled to index their wages today. If the CPI is currently 130 and was 125 a year ago, the firm should increase the hourly wages of its workers by a. $0.04. b. $0.29. c. $0.30. d. $0.50. ____ 49. Social Security payments are indexed for inflation using the CPI. A recent newspaper editorial claimed that Social Security recipients are harmed by years of low inflation because they do not receive as large an increase in their payments as they do in years of high inflation. Which of the following statements is correct? a. The newspaper editorial is correct under all circumstances.

b. The newspaper editorial is correct if the market basket consumed by Social Security recipients is the same as the market basket used to compute the CPI. c. The newspaper editorial could be correct if the prices of the goods consumed by Social Security recipients change at a different rate than the prices of the goods in the market basket used to compute the CPI d. The newspaper editorial is incorrect under all circumstances. ____ 50. Ralph puts money in the bank and earns a 5 percent nominal interest rate. If the inflation rate is 2 percent, then after one year, a. Ralph will have 3 percent more money, which will purchase 5 percent more goods. b. Ralph will have 3 percent more money, which will purchase 7 percent more goods. c. Ralph will have 5 percent more money, which will purchase 3 percent more goods. d. Ralph will have 5 percent more money, which will purchase 7 percent more goods.

Practice for Finals Answer Section 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23. 24. 25. ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: C B C B C B A B C A A A B C C C C B A B D C B C A 26. 27. 28. 29. 30. 31. 32. 33. 34. 35. 36. 37. 38. 39. 40. 41. 42. 43. 44. 45. 46. 47. 48. 49. 50. ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: A C B D B A C B A B C B C B A C B D A D D D C C C