Chapter 07

If the GDP in one year is greater than it was in the previous year, then economic growth must
have occurred.
a. TRUE
b. FALSE
Suppose the total market value of all final goods and services produced this year in economy X
is $4 million. Of the $4 million worth of goods, $3 million is sold and $1 million is held in
inventory. For this year, the GDP for economy X is
a. $4 million.
b. $3 million.
c. $1 million.
d. $7 million.
e. none of the above
Which of the following is counted in GDP?
a. the trading of 100 shares of Microsoft stock
b. the services of a real estate broker
c. government transfer payments
d. the sale of a used car
e. none of the above
Business firms make which of the following two types of investment?
a. foreign investment and domestic investment
b. fixed investment and capital investment
c. investment in stocks and investment in bonds
d. investment in new capital goods and investment in used capital goods to replace "wornout" capital goods
e. fixed investment and inventory investment
Net domestic product (NDP) is the total value of new goods available in the economy after worn
out capital goods have been replaced.
a. TRUE
b. FALSE
If in the process of calculating GDP, the market value of all intermediate goods is added to the
market value of all final goods, this would
a. overstate the actual value of GDP.
b. produce the correct value of GDP.
c. understate the actual value of GDP.
d. avoid the possible error of double counting.
When computing national income, which of the following is included in compensation of
employees?
a. wages and salaries paid to employees

b. employers contributions to Social Security and employee benefit plans

c. the monetary value of fringe benefits, tips, and paid vacations
d. all of the above
Net exports equals
a. exports divided by imports.
b. the sum of exports and imports.
c. exports minus imports.
d. exports during the year.
e. none of the above
Gross Domestic Product is computed by using
a. base-year prices.
b. wholesale prices.
c. previous-year prices.
d. current-year prices.
Leisure is
a. a good that is not counted in GDP.
b. a good that is counted in GDP.
c. neither a good nor a bad, and it is not counted in GDP.
d. a bad as far as economists are concerned, because it is not tangible.
Compensation of employees is the largest spending component of GDP.
a. TRUE
b. FALSE
A recession is always part of a
a. contraction.
b. recovery.
c. detraction.
d. remission.
Corporate profits can be broken into three categories: dividends, undistributed profits, and
corporate profits taxes.
a. TRUE
b. FALSE
In the definition of GDP, the words "total market value" refer to total
a. dollar value at base prices.
b. dollar value at current prices.
c. subjective value.
d. objective value.
e. a and d
Increases in import spending

a.
b.
c.
d.

raise GDP.
lower GDP.
are always balanced off in GDP by changes in exports.
may raise or lower GDP.

Real GDP is the value of all __________ goods and services produced in a given year in
__________ prices.
a. intermediate; that year's
b. intermediate; base-year
c. final; that year's
d. final; base-year
Look at the following data: personal income = $4,900 billion; personal taxes = $900 billion;
transfer payments = $980 billion. What is disposable income?
a. $3,200 billion
b. $4,000 billion
c. $4,980 billion
d. $1,880 billion
e. There is not enough information to answer the question.
Refer to Exhibit 7-2. GDP in 2012 is
a. 49
b. 51
c. 86
d. 92
e. not possible to calculate without the CPI.
The expenditure approach to measuring GDP sums
a. consumption, investment, government purchases, and net exports.
b. sales, revenues, income, and wages.
c. profits, compensation of employees, consumption, and investment.
d. net exports, consumption, wages, and salaries.
e. consumption, interest, net exports, and federal government purchases
GDP can rise as a result of a rise in __________________, and Real GDP can rise as a result of a
rise in _______________________.
a. prices or output; prices only.
b. prices only; prices or output.
c. prices or output; output only.
d. prices or output; prices or output.
Disposable income is
a. equal to GDP minus the capital consumption allowance.
b. that portion of personal income that can be used for consumption and saving.
c. the sum of all payments to suppliers of the factors of production.
d. the amount of income that individuals actually receive.

e. another term for personal income.

Real GDP is GDP
a. in current-year prices.
b. in base-year prices.
c. in GDP-prices.
d. in that year's prices.
Which of the following statements is true?
a. Government purchases is the largest component of GDP.
b. Net exports are equal to exports plus imports.
c. U.S. imports refer to the physical quantity of foreign-produced goods that are purchased
by residents of the United States.
d. Government purchases includes the spending on goods and services by all levels of
government (federal, state, and local).
e. c and d
Net domestic product is the total value of
a. all final goods and services produced within a country's borders in a year.
b. only intermediate goods produced within a country's borders in a year.
c. all final goods and services produced within a country's borders in a year minus gross
private domestic investment.
d. only intermediate goods produced within a country's borders in a year plus gross private
domestic investment.
e. all final goods and services produced within a country's borders in a year minus capital
consumption allowance.
Refer to Exhibit 7-2. Assuming that 1990 is the base year, Real GDP in 2012 is
a. 49
b. 51
c. 86
d. 92
e. not possible to calculate without the CPI.
Investment equals inventory investment added to
a. business purchases of new capital goods.
b. purchases of new residential housing.
c. fixed investment.
d. business purchases of new capital goods and purchases of new residential housing.
e. either c or d
Sophia just bought shares of stock in IBM for $20,000 and paid a $300 commission to her
broker. How did this impact GDP?
a. It had no impact on GDP.
b. GDP increased by $300.
c. GDP increased by $20,000.

d. GDP increased by $19,700.

e. GDP increased by $20,300.
Which of the following is always a characteristic of the contraction phase of the business cycle?
a. lower unemployment rates
b. a decline in Real GDP
c. higher inflation rates
d. a decline in GDP
e. all of the above
A transfer payment is a payment to a person that is made in return for goods and services
supplied.
a. TRUE
b. FALSE
Refer to Exhibit 7-3. GDP is equal to
a. 13050
b. 11550
c. 8600
d. 11450
e. 14000