Econ 202 Fall 2009 Ch.

10: National Income

Multiple Choice Identify the choice that best completes the statement or answers the question. ____ 1. If an economys GDP rises, then it must be the case that the economys a. income rises and saving falls. b. income and saving both rise. c. income rises and expenditure falls. d. income and expenditure both rise. 2. In a simple circular-flow diagram, firms use the money they get from a sale to a. pay wages to workers. b. pay rent to landlords. c. pay profit to the firms owners. d. All of the above are correct. 3. GDP adds together many different kinds of products into a single measure of the value of economic activity by using prices determined by a. banks. b. economists. c. the government. d. markets. 4. A professional gambler moves from a state where gambling is illegal to a state where gambling is legal. Most of his income was, and continues to be, from gambling. His move a. necessarily raises GDP. b. necessarily decreases GDP. c. doesn't change GDP because gambling is never included in GDP. d. doesn't change GDP because in either case his income is included. 5. Suppose there are only two firms in an economy: Rolling Rawhide produces rawhide and sells it to Chewy Chomp, Inc., which uses the rawhide to produce and sell dog chews. With each $2 of rawhide that it buys from Rolling Rawhide, Chewy Chomp, Inc. produces a dog chew and sells it for $5. Neither firm had any inventory at the beginning of 2007. During that year, Rolling Rawhide produced enough rawhide for 1000 dog chews. Chewy Chomp, Inc. bought 75% of that rawhide for $1500 and promised to buy the remaining 25% for $500 in 2008. Chewy Chomp, Inc. produced 750 dog chews during 2007 and sold each one during that year for $5. What was the economy's GDP for 2007? a. $3750 b. $4250 c. $5250 d. $5750 6. Which of the following transactions adds to U.S. GDP for 2006? a. In 2006, Marvin Windows manufactures 20 windows that will eventually be installed in an office building in Minneapolis. The windows remain in Marvins inventory at the end of 2006. b. An Irish marketing consultant works in Boston during the summer of 2006 and earns $30,000 during that time. c. When Tim and Tina were both single, they lived in separate apartments and each paid $750 in rent. Tim and Tina got married in 2006 and they bought a house that, according to

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reliable estimates, could be rented for $1,550 per month. d. All of the above transactions add to U.S. GDP for 2006. ____ 7. The government of Wrexington, a country which has adopted American GDP accounting conventions, has calculated that the seasonally-adjusted market value of all final goods and services produced within Wrexington in quarter 1 was $5 billion. The government will report that GDP in quarter 1 was a. $1.25 billion at an annual rate. b. $4 billion at an annual rate. c. $5 billion at an annual rate. d. $20 billion at an annual rate. 8. U.S. GDP and U.S. GNP are related as follows: a. GNP = GDP + Value of exported goods - Value of imported goods. b. GNP = GDP - Value of exported goods + Value of imported goods. c. GNP = GDP + Income earned by foreigners in the U.S. - Income earned by U.S. citizens abroad. d. GNP = GDP - Income earned by foreigners in the U.S. + Income earned by U.S. citizens abroad. 9. Which of the following is an example of depreciation? a. falling stock prices b. the retirement of several employees c. computers becoming obsolete d. All of the above are examples of depreciation.

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____ 10. Unlike national income, personal income a. includes retained earnings, corporate income taxes and social insurance contributions, and excludes interest and transfer payments received by households from government. b. excludes retained earnings, corporate income taxes, social insurance contributions, and interest and transfer payments received by households from government. c. excludes retained earnings, corporate income taxes and social insurance contributions, and includes interest and transfer payments received by households from government. d. includes retained earnings, corporate income taxes, social insurance contributions, and interest and transfer payments received by households from government. Table 23-1 The table below contains data for the country of Wrexington for the year 2006. GDP Income earned by citizens abroad Income foreigners earn here Losses from depreciation Indirect business taxes Business subsidies Statistical discrepancy Retained earnings Corporate income taxes Social insurance contributions Interest paid to households by government Transfer payments to households from government Personal taxes $110 $5 $15 $4 $6 $2 $0 $5 $6 $10 $5 $15 $30

Nontax payments to government

$5

____ 11. Refer to Table 23-1. Gross national product for Wrexington in 2006 is a. $100. b. $110. c. $115. d. $130. ____ 12. Refer to Table 23-1. Disposable personal income for Wrexington in 2006 is a. $56. b. $66. c. $116. d. $126. ____ 13. GDP is equal to a. the market value of all final goods and services produced within a country in a given period of time. b. Y. c. C + I + G + NX. d. All of the above are correct. ____ 14. 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. ____ 15. If you buy a burger and fries at your favorite fast food restaurant, a. then neither GDP nor consumption will be affected because you would have eaten at home had you not bought the meal at the restaurant. b. then GDP will be higher, but consumption spending will be unchanged. c. then GDP will be unchanged, but consumption spending will be higher. d. then both GDP and consumption spending will be higher. ____ 16. Consider two items that might be included in GDP: (1) the estimated rental value of owner-occupied housing and (2) purchases of newly-constructed homes. How are these two items accounted for when GDP is calculated? a. Both item (1) and item (2) are included in the consumption component of GDP. b. Item (1) is included in the consumption component of GDP, while item (2) is included in the investment component of GDP. c. Item (1) is included in the investment component of GDP, while item (2) is included in the consumption component of GDP. d. Only item (2) is included in GDP, and it is included in the investment component. ____ 17. Goods that go into inventory and are not sold during the current period are a. counted as intermediate goods and so are not included in current period GDP. b. counted in current period GDP only if the firm that produced them sells them to another firm. c. included in current period GDP as inventory investment. d. included in current period GDP as consumption. ____ 18. Transfer payments are a. included in GDP because they represent income to individuals.

b. included in GDP because they eventually will be spent on consumption. c. not included in GDP because they are not payments for currently produced goods or services. d. not included in GDP because taxes will have to be raised to pay for them. ____ 19. Consider the following three items of spending by the government: (1) the federal government pays a $500 unemployment benefit to an unemployed person; (2) the federal government makes a $2,000 salary payment to a Navy lieutenant; (3) the city of Bozeman, Montana makes a $10,000 payment to ABC Lighting Company for street lights in Bozeman. Which of these payments contributes directly to government purchases in the national income accounts? a. only item (1) b. only item (2) c. only items (1) and (2) d. only items (2) and (3) ____ 20. In the economy of Wrexington in 2008, consumption was $5300, GDP was $8800, government purchases were $1800, imports were $500, and investment was $2000. What were Wrexingtons exports in 2008? a. -$800 b. -$300 c. $200 d. $300 Table 23-2 The table below contains data for the country of Wrexington for the year 2008. Household purchases of durable goods Household purchases of nondurable goods Household purchases of services Household purchases of new housing Purchases of capital equipment Inventory changes Purchases of new structures Depreciation Salaries of government workers Government expenditures on public works Transfer payments Foreign purchases of domestically produced goods Domestic purchases of foreign goods $1293 $1717 $301 $704 $310 $374 $611 $117 $1422 $553 $777 $88 $120

____ 21. Refer to Table 23-2. What was Wrexingtons consumption in 2008? a. $2018 b. $3010 c. $3311 d. $4015 ____ 22. In 2007, U.S. net exports were a. positive and about 2 percent the size of GDP. b. positive and about 5 percent the size of GDP. c. negative and about 2 percent the size of GDP. d. negative and about 5 percent the size of GDP.

____ 23. If total spending rises from one year to the next, then a. the economy must be producing a larger output of goods and services. b. goods and services must be selling at higher prices. c. either the economy must be producing a larger output of goods and services, or goods and services must be selling at higher prices, or both. d. employment or productivity must be rising. ____ 24. The inflation rate in year 2 equals a. . b. . c. . d. . ____ 25. In the economy of Wrexington in 2008, real GDP was $5 trillion and the GDP deflator was 200. What was Wrexingtons nominal GDP in 2008? a. $2.5 trillion b. $10 trillion c. $40 trillion d. $100 trillion Table 23-4 The table below contains data for the country of Dachsland, which produces only pretzels and books. The base year is 2005. Year 2005 2006 2007 2008 Price of Pretzels $4.00 $4.00 $5.00 $6.00 Quantity of Pretzels 90 100 120 150 Price of Books $1.50 $2.00 $2.50 $3.50 Quantity of Books 150 180 200 200

____ 26. Refer to Table 23-4. In 2006, Dachslands a. nominal GDP was $585, real GDP was $660, and the GDP deflator was 88.6. b. nominal GDP was $585, real GDP was $670, and the GDP deflator was 87.3. c. nominal GDP was $760, real GDP was $660, and the GDP deflator was 115.2. d. nominal GDP was $760, real GDP was $670, and the GDP deflator was 113.4. ____ 27. Refer to Table 23-4. Dachslands output grew a. 29.9% from 2005 to 2006. b. 33.3% from 2006 to 2007. c. 24.3% from 2006 to 2007. d. 15.4% from 2007 to 2008.

Table 23-5 The table below contains data for the country of Batterland, which produces only waffles and pancakes. The base year is 2006. Year 2005 2006 2007 2008 Price of Waffles $2 $2 $3 $4 Quantity of Waffles 100 120 150 180 Price of Pancakes $1 $2 $3 $3 Quantity of Pancakes 100 150 200 220

____ 28. Refer to Table 23-5. In 2008, Batterlands real GDP was a. $540. b. $800. c. $930. d. $1380. ____ 29. GDP is not a perfect measure of well-being; for example, a. GDP incorporates a large number of non-market goods and services that are of little value to society. b. GDP places too much emphasis on the value of leisure. c. GDP fails to account for the quality of the environment. d. All of the above are correct. ____ 30. Suppose that twenty-five years ago a country had nominal GDP of $1,000, a GDP deflator of 200, and a population of 100. Today it has nominal GDP of $3,000, a GDP deflator of 400, and population of 150. What happened to the real GDP per person? a. It more than doubled. b. It increased, but it less than doubled. c. It was unchanged. d. It decreased.

Econ 202 Fall 2009 Ch. 10: National Income Answer Section
MULTIPLE CHOICE 1. ANS: NAT: TOP: 2. ANS: NAT: TOP: 3. ANS: NAT: TOP: 4. ANS: NAT: TOP: 5. ANS: NAT: TOP: 6. ANS: NAT: TOP: 7. ANS: NAT: TOP: 8. ANS: NAT: TOP: 9. ANS: NAT: TOP: 10. ANS: NAT: TOP: 11. ANS: NAT: TOP: 12. ANS: NAT: TOP: 13. ANS: NAT: TOP: 14. ANS: NAT: TOP: 15. ANS: D PTS: 1 DIF: 2 REF: 23-1 Analytic LOC: The study of economics and definitions in economics Income | Expenditure MSC: Interpretive D PTS: 1 DIF: 1 REF: 23-1 Analytic LOC: Understanding and applying economic models Circular-flow diagram MSC: Definitional D PTS: 1 DIF: 2 REF: 23-2 Analytic LOC: The study of economics and definitions in economics GDP MSC: Interpretive A PTS: 1 DIF: 2 REF: 23-2 Analytic LOC: The study of economics and definitions in economics GDP MSC: Applicative B PTS: 1 DIF: 3 REF: 23-2 Analytic LOC: The study of economics and definitions in economics GDP | Intermediate goods MSC: Analytical D PTS: 1 DIF: 2 REF: 23-2 Analytic LOC: The study of economics and definitions in economics GDP MSC: Applicative D PTS: 1 DIF: 2 REF: 23-2 Analytic LOC: The study of economics and definitions in economics GDP MSC: Applicative D PTS: 1 DIF: 2 REF: 23-2 Analytic LOC: The study of economics and definitions in economics GDP | GNP MSC: Interpretive C PTS: 1 DIF: 2 REF: 23-2 Analytic LOC: The study of economics and definitions in economics Depreciation MSC: Applicative C PTS: 1 DIF: 2 REF: 23-2 Analytic LOC: The study of economics and definitions in economics Personal income MSC: Interpretive A PTS: 1 DIF: 2 REF: 23-2 Analytic LOC: The study of economics and definitions in economics GNP MSC: Applicative A PTS: 1 DIF: 2 REF: 23-2 Analytic LOC: The study of economics and definitions in economics Disposable personal income MSC: Applicative D PTS: 1 DIF: 2 REF: 23-3 Analytic LOC: The study of economics and definitions in economics GDP MSC: Interpretive C PTS: 1 DIF: 1 REF: 23-3 Analytic LOC: The study of economics and definitions in economics Identity MSC: Definitional D PTS: 1 DIF: 2 REF: 23-3

16. 17. 18. 19. 20. 21. 22. 23. 24. 25. 26. 27. 28. 29. 30.

NAT: TOP: ANS: NAT: TOP: ANS: NAT: TOP: ANS: NAT: TOP: ANS: NAT: TOP: ANS: NAT: TOP: ANS: NAT: TOP: ANS: NAT: TOP: ANS: NAT: TOP: ANS: NAT: MSC: ANS: NAT: TOP: ANS: NAT: TOP: ANS: NAT: TOP: ANS: NAT: TOP: ANS: NAT: TOP: ANS: NAT: TOP:

Analytic LOC: The study of economics and definitions in economics Consumption | GDP MSC: Applicative B PTS: 1 DIF: 2 REF: 23-3 Analytic LOC: The study of economics and definitions in economics Consumption | Investment MSC: Applicative C PTS: 1 DIF: 2 REF: 23-3 Analytic LOC: The study of economics and definitions in economics Inventory MSC: Interpretive C PTS: 1 DIF: 2 REF: 23-3 Analytic LOC: The study of economics and definitions in economics Transfer payments MSC: Interpretive D PTS: 1 DIF: 2 REF: 23-3 Analytic LOC: The study of economics and definitions in economics Government purchases MSC: Applicative C PTS: 1 DIF: 2 REF: 23-3 Analytic LOC: The study of economics and definitions in economics Exports MSC: Applicative C PTS: 1 DIF: 3 REF: 23-3 Analytic LOC: The study of economics and definitions in economics Consumption MSC: Analytical D PTS: 1 DIF: 1 REF: 23-3 Analytic LOC: The study of economics and definitions in economics Net exports MSC: Definitional C PTS: 1 DIF: 1 REF: 23-4 Analytic LOC: The study of economics and definitions in economics Nominal GDP MSC: Definitional A PTS: 1 DIF: 1 REF: 23-4 Analytic LOC: Unemployment and inflation TOP: Inflation Definitional B PTS: 1 DIF: 2 REF: 23-4 Analytic LOC: The study of economics and definitions in economics Nominal GDP MSC: Applicative D PTS: 1 DIF: 2 REF: 23-4 Analytic LOC: The study of economics and definitions in economics Nominal GDP | Real GDP | GDP deflator MSC: Applicative D PTS: 1 DIF: 3 REF: 23-4 Analytic LOC: The study of economics and definitions in economics Real GDP MSC: Analytical B PTS: 1 DIF: 2 REF: 23-4 Analytic LOC: The study of economics and definitions in economics Real GDP MSC: Applicative C PTS: 1 DIF: 2 REF: 23-5 Analytic LOC: The study of economics and definitions in economics Economic welfare MSC: Interpretive C PTS: 1 DIF: 2 REF: 23-5 Analytic LOC: The study of economics and definitions in economics Real GDP per person MSC: Applicative