Name: ________________________ Class: ___________________ Date: __________ID: A Problem Set Chapter5 Multiple Choice Identify the letter of the choice that best completes the statement or answers the question. ____ 1. Which of the following questions is more likely to be studied by a microeconomist than a macroeconomist? a. Why do prices in general rise by more in some countries than in others? b. Why do wages differ across industries? c. Why do production and income increase in some periods and not in others? d. How rapidly is GDP currently increasing? 2. Which of the following statements about GDP is correct? a. GDP measures two things at once: the total income of everyone in the economy and the unemployment rate. b. Money continuously flows from households to government and then back to households, and GDP measures this flow of money. c. GDP is to a nation抯 economy as household income is to a household. d. All of the above are correct. 3. For an economy, expenditure is equal to income because a. by law firms must pay out all their revenue as income to someone. b. for every sale there is a buyer and a seller. c. prices of individual goods and services change, but the average price level stays the same. d. None of the above is correct; expenditure is not always equal to income for an economy. 4. 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. 5. 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. 6. Which of the following transactions adds to U.S. GDP for 2006? a. In 2006, Ashley sells a car that she bought in 2002 to William for $5,000. b. An American management consultant works in Mexico during the summer of 2006 and earns the equivalent of $30,000 during that time. c. When John and Jennifer were both single, they lived in separate apartments and each paid $750 in rent. John and Jennifer got married in 2006 and they bought a house that, according to reliable estimates, could be rented for $1,600 per month. d. None of the above transactions adds to GDP for 2006. ____ ____ ____ ____ ____ 1 The DVDs will be counted as a change in inventory in the second quarter and so will be included in second-quarter GDP. d.Name: ________________________ ____ ID: A ____ ____ ____ ____ ____ 7. c. d. d. What happens to GDP as a result of this conversion? a. counted as an intermediate good only if they are consumed. The value of the goods and services produced by the restaurant is included in Romanian GDP. 10. 12. GDP is unaffected because previously the rent payments were included in GDP.000 unsold DVDs be treated in the GDP statistics? a. One-half of the value of the goods and services produced by the restaurant is included in Romanian GDP. For example. d. b. necessarily raises GDP. 11. His move a. caused GDP to fall. but not in U. but not in Romanian GDP. people have come to rely more on market-produced goods and less on goods that they produce for themselves. and the other one-half of the value is included in U. c. this change has a. It sells 300. doesn't change GDP because gambling is never included in GDP. GDP. Grapes are a. counted as an intermediate good. and continues to be. Suppose further that a current estimate of the value of the condominium owners' housing services is the same as the rent they previously paid. c. and holds the others in its warehouse. hire people to clean their houses. b. caused GDP to rise. GDP necessarily decreases. d.S. 9. An American company operates a fast food restaurant in Romania. b. and when sold in the third quarter will raise third-quarter GDP. A movie company makes 500. and now the rent payments are replaced in GDP by the estimate of the value of housing services. Suppose an apartment complex converts to a condominium.000 of them before the end of the second quarter. GDP. 8. GDP necessarily increases. b. necessarily decreases GDP. always counted as an intermediate good. counted as an intermediate good only if they are used to produce another good such as wine. GDP. rather than cleaning their own houses. busy people with high incomes. b. doesn't change GDP because in either case his income is included. Since the DVDs eventually will be bought by consumers. Over time. GDP. they are included as consumption in the second quarter. d. so that the former renters are now owners of their housing units. Since the DVDs were not purchased this quarter. How will the 200. they will be counted as an increase in third-quarter GDP. but in an uncertain direction. not caused any change in GDP. By itself. c. The DVDs will be counted as a change in inventory in the second quarter. The value of the goods and services produced by the restaurant is included in U. Which of the following statements is accurate? a.S. 2 . the direction of the change depends on the difference in the quality of the cleaning that has resulted. The value of the goods and services produced by the restaurant is included in both Romanian GDP and U. from gambling. Most of his income was. c. b. c. whether they are used to produce another good or consumed.000 DVDs of one of its latest releases. GDP is unaffected because neither the rent nor the estimate of the value of housing services is included in GDP. probably changed GDP.S. A professional gambler moves from a state where gambling is illegal to a state where gambling is legal.S. while item (2) is included in the consumption component. paid for them. GDP is unaffected. ____ 20.S. the difference in the price of the sale of an existing home and its original purchase price c. GDP decreases. depreciation. ____ 18.S. Item (1) is included in the consumption component. a. profits of corporations. b. c. and structures. known illegal activities d. inventories.S. U. and structures. net exports decrease and U. employ a statistical procedure called seasonal adjustment. bonds.S. Which of the following items is included in U. and (2) purchases of newly-constructed homes. capital equipment. quarterly GDP is always higher in the second quarter than in other quarters. citizen buys a television made in Korea by a Korean firm. b. ____ 17. not included in GDP since the government will have to raise taxes to pay for them. net exports decrease and U. included in GDP only to the extent that the federal government. b. rather than state or local governments. excluding household purchases of new housing. In order to account systematically for this predictable second-quarter jump in GDP. spending on durable goods. since the goods are being saved until they are sold in another period.S. not included in GDP since they do not represent production. and other financial assets. including new housing. After the terrorist attacks on September 11. stocks. Consider two items that might be included in GDP: (1) The estimated rental value of owner-occupied housing. since GDP aims to measure the value of the economy's production. Only item (2) is included in GDP and it is included in the investment component. Paolaland's government statisticians will a.S. net exports are unaffected and U. How are these two items accounted for when GDP is calculated? a. 2001. b.S. new capital equipment. U. The value of goods added to a firm's inventory in a certain year is treated as a. c. Item (1) is included in the investment component. c. d. U. indirect business taxes. c. None of the above is included in GDP. ____ 14. retained earnings of corporations. d.Name: ________________________ ID: A ____ 13. U. included in GDP since government expenditures are included in GDP. report GNP rather than GDP. GDP decreases. For the purpose of calculating GDP. investment. c. while item (2) is included in the investment component. since the goods could not be inventoried unless they were durable. real estate and financial assets. d. d. ____ 15. GDP is unaffected. Both item (1) and item (2) are included in the consumption component of GDP. b.S. If a U. In the nation of Paolaland. ____ 19. d. report a four-quarter moving average of GDP rather than the one-quarter figure. goods produced by foreign citizens working in the United States b. National income differs from net national product in that it includes business subsidies and excludes a. report personal income rather than GDP.S. ____ 16. c.S. since the goods will be sold to consumers in another period. inventories. d. b. d. net exports are unaffected and U. These purchases of goods and services are a. 3 . c. consumption. b. investment is spending on a. GDP? a. saving. governments within the United States raised expenditures to increase security at airports. The state of Iowa pays $1. and telephones by U. d. firms? purchases of capital equipment d. 4 . households? purchases of newly constructed homes b. c. excluded from GDP because they are not private pensions. d.000 to a tree-trimming firm to trim trees along city boulevards. $900. consumption amounted to $3. not part of GDP because it is a transfer payment. purchases of newly constructed homes by U. ____ 28. net additions to firms? inventories c. the benefit that a person receives from an expenditure by government minus the taxes that were collected by government to fund that expenditure. ____ 24.S. It follows that government purchases amounted to a. part of GDP because it represents income.000. b. ____ 26. included in GDP because they represent potential consumption. Which of the following is included in the consumption component of U. All of the above are correct. households c.S households d. $1. d. paper clips. the government could provide subsidies. c. would be included in GDP because they are part of government expenditures.Name: ________________________ ID: A ____ 21. ____ 25. would be included in GDP because they are part of investment expenditures. d. b. d.100. Unemployment compensation is a. All of the above are correct.250. The federal government pays $2. ____ 22. To encourage formation of small businesses. excluded from GDP because they do not represent current government purchases of goods and services. would not be included in GDP because the government raises taxes to pay for them. b. ____ 23. In a certain economy in 2005. purchases of staplers. included in GDP because they represent payments for work performed in the past.000. government purchases were equal to investment. and the value of imports exceeded the value of exports by $200. c. d. Social Security payments are a. $1. $1. not part of GDP because the payments reduce business profits. c. a form of government spending that is not made in exchange for a currently produced good or service.000 in Social Security benefits to a retired person. these subsidies a.000 to help a low-income family pay its medical bills. Iowa pays $10. All of the above are correct. b. b.S. Which of the following is included in the investment component of GDP? a. part of GDP because the recipients must have worked in the past to qualify. GDP? a.S. The city of Des Moines. b. Which of the following items is counted as part of government purchases? a. business firms b. ____ 27. A transfer payment is a. a payment that is automatically transferred from your bank account to pay a bill or some other obligation.325. purchases of natural gas by U. GDP amounted to $5. a payment for moving expenses a worker receives when he or she is transferred by an employer to a new location. c. c. would not be included in GDP because they are transfer payments. b. c. and real GDP was higher in 2005 than in 2006. Year 2004 2005 2006 Nominal GDP $4000 $4100 $4200 GDP Deflator 100 105 110 ____ 32. is a measure of the value of goods only.500. and real GDP was higher in 2005 than in 2004. $9. or the prices at which goods and services are sold must be higher. The information in the table pertains to the country of Ophir. $4. ____ 30. b. ____ 33. and real GDP was higher in 2005 than in 2004. since prices change from year to year. Household spending in Ophir increased throughout the period. real GDP was higher in 2006 than in 2005. Refer to Table 23-2. either the economy must be producing a larger output of goods and services. then a. evaluates current production at the prices that prevailed in some specific year in the past. It follows that GDP amounted to a. ____ 31. Which of the following statements do we know to be correct? a.Name: ________________________ ID: A ____ 29. the economy must be producing a larger output of goods and services. and the economy抯 imports exceeded its exports by $500.000.500. or both.500. c. $7. All of the above are correct. d. employment or productivity must be rising. d. real GDP was higher in 2004 than in 2005.000. $10. 5 . prices at which goods and services are sold must be higher. In a certain economy in 2005. and real GDP was higher in 2005 than in 2006. c. is not a valid measure of the economy's performance. real GDP was higher in 2005 than in 2004. If total spending rises from one year to the next. d. Real GDP a. From this information we can conclude that a. Refer to Table 23-2. b. government purchases exceeded investment by $2. c. real GDP was higher in 2004 than in 2006. d. investment amounted to 1/6 of GDP. Table 23-2. The production of goods and services increased in Ophir throughout the period. b. d. consumption amounted to 1/2 of GDP. evaluates current production at current prices. b. it excludes the value of services. Total spending in Ophir increased throughout the period. c. b. Nominal GDP measures current production using base-year prices. whereas real GDP measures current production using base-year prices. and the GDP deflator is 125. c. For 2005. and this indicates that the price level has increased by 25 percent since the base year. $1. 80. When economists talk about growth in the economy. the GDP deflator is a.250. 6 . b. current year prices.50 $3. b. Nominal GDP for 2007 is a. 125. b. and this indicates that the price level has increased by 125 percent since the base year. d. Which statement represents most correctly the relationship between nominal GDP and real GDP? a. nominal GDP is $400.100. ____ 35. Nominal GDP measures current production using current prices. absolute change in real GDP. Using 2006 as the base year. real GDP is $950 and the GDP deflator is 116. ____ 40. c.00 $6. c. real GDP is $950 and the GDP deflator is 95. real GDP is $500. c. and this indicates that the price level has decreased by 20 percent since the base year.50 Quantity of Magazines 180 200 200 ____ 34. the base year.00 $5. c. a. real GDP is $400. d. Suppose that the country of Samiam produces only eggs and ham. Real GDP is the production of final goods and services valued at a. whereas real GDP measures base-year production using base-year prices. If nominal GDP is $10 trillion and real GDP is $8 trillion. $900. whereas real GDP measures current production using current prices. and the GDP deflator is 80. real GDP is $880 and the GDP deflator is 125. d. and the GDP deflator is 125. and this indicates that the price level has increased by 80 percent since the base year. b. percentage change in nominal GDP. ____ 38. d. ____ 36. real GDP is $880 and the GDP deflator is 80. nominal GDP is $500. whereas real GDP measures current production using current prices.350. ____ 39. expected future prices. percentage change in real GDP. 80. constant prices. the ratio of current year prices to constant year prices. c. b. $1. a. In 2004. b.Name: ________________________ ID: A Table 23-3 Prices and Quantities Quantity of Sandwiches 100 120 150 Year 2006 2007 2008 Price of Sandwiches $4. ____ 37. real GDP is $400. $1. Refer to Table 23-3. Nominal GDP measures base-year production using base-year prices.50 per dozen and ham sold for $5 per pound. nominal GDP is $400. c. d. d. eggs sold for $1. nominal GDP is $500. absolute change in nominal GDP. 125. for 2007. they measure that growth with the a.00 Price of Magazines $2. Refer to Table 23-3.00 $2. Nominal GDP measures current production using current prices. In 2005 it produced 100 dozen eggs at $3 per dozen and 50 pounds of ham at $4 per pound. and the GDP deflator is 100. d. real GDP is $400. If the GDP deflator is 200 and nominal GDP is $10. falling profits c. $5. then real GDP is a. It decreased. c.000 billion. c. but it less than doubled. b. A country reported nominal GDP of $100 billion in 2006 and $75 billion in 2005. it reported a GDP deflator of 100 in 2005 and 105 in 2004. a GDP deflator of 400. ____ 48. the GDP deflator declines for about four consecutive quarters. ____ 46. d. A recession is always associated with a. a. real output fell and the price level rose. c. Recessions are associated with which of the following? a. A country reported a nominal GDP of $85 billion in 2005 and $100 billion in 2004. GDP incorporates a large number of non-market goods and services that are of little value to society. We can conclude that a. the farmer is equally well off in 2004 as in 2003.000. GDP fails to account for the quality of the environment.000 billion. ____ 43. nominal GDP declines for about two consecutive quarters. real GDP declines for about two consecutive quarters. d. It increased. and a population of 100. falling output d.000. real output and the price level both fell. a. b. c. and population of 150. increased bankruptcies b. c. d. It more than doubled. 7 . c. the end of a war. we cannot tell whether the farmer is better off in 2004 or in 2003 without additional information. d. ____ 42. A farmer produces the same output in 2004 as in 2003. it reported a GDP deflator of 125 in 2006 and 120 in 2005. ____ 45. d. real output fell and the price level rose. slow but positive growth of real GDP. None of the above is correct.000 billion. What happened to the real GDP per person? a. b.Name: ________________________ ID: A ____ 41. GDP is not a perfect measure of well-being. ____ 44. declining real GDP. b. a. the farmer was better off in 2004. It was unchanged. ____ 49. GDP places too much emphasis on the value of leisure. Between 2005 and 2006. Suppose that twenty-five years ago a country had nominal GDP of $1. real output rose and the price level fell. d. a GDP deflator of 200. b. b. A recession is a period during which a. $50 billion. $2. ____ 47. b. d. b. All of the above are correct. c. the farmer is better off in 2004. d. real output and the price level both fell. but so does his product price. real output and the price level both rose. for example. c. Today it has nominal GDP of $3. real output and the price level both rose. All of the above are correct. His input prices increase by 50 percent. nominal GDP declines for about four consecutive quarters. rising inflation. Between 2004 and 2005. real output rose and the price level fell. ____ 52. suggest that poor nations actually might enjoy a higher standard of living than do rich nations. c. GDP does not reflect a. are inconclusive about the relationship between GDP and the economic well-being of citizens. Thailand.Name: ________________________ ID: A ____ 50. in spite of the large differences in GDP between nations. Countries in which the underground or 搒 hadow? economy has been estimated to account for more than 50 percent of GDP include a. Peru. Georgia. leave no doubt that a nation's GDP is closely associated with its citizens' standard of living. c. b. and Argentina. c. the value of goods and services produced at home. Bolivia. indicate that there are few real differences in living standards around the world. 8 . Mexico. and Zimbabwe. b. d. International data on GDP and socioeconomic variables a. b. d. d. and the United States. the value of leisure. Japan. All of the above are correct. Mexico. the quality of the environment. Bolivia. and Argentina. ____ 51. ANS: MSC: 2. ANS: MSC: 23. ANS: MSC: 6. ANS: TOP: 16. ANS: MSC: 22. ANS: MSC: 3. ANS: MSC: 19. ANS: MSC: 8. ANS: MSC: 5. ANS: TOP: 12. ANS: MSC: 4. ANS: MSC: 18. Expenditures TOP: Gross domestic product TOP: Gross domestic product TOP: Gross domestic product TOP: Gross domestic product TOP: Gross domestic product TOP: Gross domestic product TOP: Intermediate goods MSC: Applicative TOP: Gross domestic product TOP: Gross domestic product MSC: Definitional MSC: Interpretive TOP: Investment TOP: Investment TOP: Consumption. ANS: MSC: 9. ANS: MSC: 13. Investment MSC: Applicative MSC: Applicative TOP: Transfer payments TOP: Transfer payments TOP: Transfer payments . ANS: MSC: 14. ANS: TOP: 21. Gross domestic product C DIF: 1 REF: 23-3 Definitional C DIF: 2 REF: 23-3 Interpretive B DIF: 2 REF: 23-3 Definitional D DIF: 2 REF: 23-3 Net exports. ANS: MSC: B DIF: 1 REF: 23-0 Interpretive C DIF: 2 REF: 23-1 Interpretive B DIF: 2 REF: 23-1 Interpretive C DIF: 2 REF: 23-2 Definitional B DIF: 1 REF: 23-2 Interpretive C DIF: 3 REF: 23-2 Applicative D DIF: 2 REF: 23-2 Applicative C DIF: 2 REF: 23-2 Applicative A DIF: 2 REF: 23-2 Applicative B DIF: 2 REF: 23-2 Interpretive C DIF: 2 REF: 23-2 Investment. ANS: MSC: 10. Net national product A DIF: 2 REF: 23-2 Seasonal adjustment. ANS: TOP: 20.ID: A Problem Set Chapter5 Answer Section MULTIPLE CHOICE 1. ANS: MSC: 11. Gross domestic product C DIF: 1 REF: 23-3 Definitional C DIF: 1 REF: 23-3 Interpretive D DIF: 1 REF: 23-3 Interpretive 1 TOP: Economists TOP: Gross domestic product TOP: Income. Gross domestic product C DIF: 2 REF: 23-2 Applicative A DIF: 2 REF: 23-2 Interpretive B DIF: 2 REF: 23-2 National income. ANS: MSC: 17. Gross domestic product C DIF: 2 REF: 23-3 Government spending. ANS: MSC: 7. ANS: TOP: 15. ANS: MSC: C DIF: 1 REF: Interpretive B DIF: 2 REF: Consumption. GDP deflator TOP: Transfer payments . ANS: MSC: 33. ANS: MSC: 25. ANS: TOP: 42. ANS: MSC: 29. ANS: MSC: 38. ANS: MSC: 44. ANS: MSC: 27. ANS: MSC: 49. Real GDP TOP: Economic growth. ANS: MSC: 47. ANS: MSC: 34. ANS: MSC: 35. ANS: MSC: 43. ANS: MSC: 39. Price level TOP: Real GDP. ANS: MSC: 32. ANS: MSC: 48. ANS: MSC: 28. ANS: MSC: 36. Real GDP. ANS: TOP: 37. ANS: TOP: 26. Real GDP TOP: GDP deflator. Inflation rate MSC: Interpretive TOP: Investment TOP: Government purchases TOP: Gross domestic product TOP: Gross domestic product TOP: Nominal GDP TOP: Real GDP TOP: Real GDP TOP: Nominal GDP TOP: Nominal GDP TOP: Real GDP. ANS: MSC: 46. Gross domestic product D DIF: 1 REF: Definitional B DIF: 2 REF: Definitional B DIF: 2 REF: Applicative C DIF: 3 REF: Analytical C DIF: 2 REF: Interpretive B DIF: 1 REF: Definitional C DIF: 3 REF: Applicative A DIF: 2 REF: Interpretive B DIF: 1 REF: Applicative B DIF: 2 REF: Applicative B DIF: 2 REF: Nominal GDP. Economic welfare MSC: Applicative TOP: Real GDP TOP: Nominal GDP. ANS: MSC: 45. GDP deflator A DIF: 2 REF: Applicative D DIF: 2 REF: Applicative D DIF: 2 REF: Interpretive D DIF: 1 REF: Interpretive C DIF: 2 REF: Definitional A DIF: 1 REF: Interpretive C DIF: 2 REF: Applicative C DIF: 1 REF: Interpretive 2 23-3 23-3 23-3 23-3 23-3 23-3 23-4 23-4 23-4 23-4 23-4 23-4 23-4 23-4 23-4 23-4 23-4 23-4 23-4 23-4 23-4 23-4 23-4 23-4 23-5 23-5 MSC: Interpretive TOP: Real GDP. GDP deflator B DIF: 1 REF: Definitional C DIF: 2 REF: Interpretive D DIF: 2 REF: Interpretive C DIF: 2 REF: Interpretive A DIF: 2 REF: Nominal GDP. Price level TOP: Prices TOP: Recessions TOP: Recessions TOP: Recessions TOP: Real GDP TOP: Real GDP. ANS: MSC: 31. ANS: MSC: 41. ANS: MSC: 40.ID: A 24. ANS: MSC: 30. Real GDP. ANS: MSC: D DIF: 1 REF: 23-5 Interpretive C DIF: 1 REF: 23-5 Gross domestic product. Standard of living A DIF: 2 REF: 23-5 Definitional TOP: Gross domestic product MSC: Interpretive TOP: Underground economy 3 .ID: A 50. ANS: TOP: 52. ANS: MSC: 51.