Chapter 5

Practice Quiz
Gross Domestic Product
1. The dollar value of all final goods and services produced within the borders of a nation
is the
a. GNP deflator.
b. gross national product.
c. net national product.
d. gross domestic product.
ANS:
d. GDP is the most widely reported measure of a nations economic performance. GDP
excludes production abroad by U.S. firms.
2. Based on the circular flow model, money flows from businesses to households in
a. factor markets.
b. product markets.
c. neither factor nor product markets.
d. both factor and product markets.
ANS:
a. Money flows from households to businesses in product markets. The reverse is true for
factor markets.
3. The circular flow model does not include which of the following?
a. The quantity of shoes in inventory on January 1.
b. The total wages paid per month.
c. The percentage of profits paid out as dividends each year.
d. The total profits earned per year in the U.S. economy.
ANS:
a. The quantity of shoes in inventory is a stock at one point in time rather than a flow
over a period of time.

4. The expenditure approach measures GDP by adding all the expenditures for final
goods made by
a. households.
b. businesses.
c. government.
d. foreigners.
e. all of the above.
ANS:
e. One method national income accountants use to calculate GDP is to add all spending
for the four sectors of the economy during a period of time.
5. GDP is a less-than-perfect measure of the nations economic pulse because it
a. excludes nonmarket transactions.
b. does not measure the quality of goods and services.
c. does not report illegal transactions.
d. all of the above are true.
ANS:
d. GDP only measures legal market transactions and adjustments for quality changes are
very difficult or impossible.
6. Subtracting an allowance for depreciation of fixed capital from gross domestic product
yields
a. real GDP.
b. nominal GDP.
c. personal income.
d. national income.
ANS:
d. GDP includes an estimate of depreciation. National income is equal to GDP less
depreciation.
7. Adding all incomes earned by households from the sale of resources yields
a. intermediate goods.
b. indirect business taxes.
c. national income.
d. personal income.
ANS:

c. Intermediate goods and indirect business taxes have nothing to do with adding
household incomes. Personal income is the total income received by households. For
example, PI includes transfer payments and NI does not.
8. Personal income equals disposable income plus
a. personal savings.
b. transfer payments.
c. dividend payments.
d. personal taxes.
ANS:
d. Disposable income is the amount of income that households actually have to spend or
save after payment of personal taxes.
9. Disposal personal income
a. is the income people spend for personal items such as homes and cars.
b. includes transfer payments.
c. excludes transfer payments.
d. includes personal taxes.
ANS:
b. DPI equals PI minus personal taxes. Since PI includes transfer payments, DPI also
includes transfer payments.
10. Which of the following statements is true?
a. National income is total income earned by households, whereas personal income is
total income received by households.
b. Disposable personal income equals personal income minus personal taxes.
c. The expenditures approach and the income approach yield the same GDP figure.
d. All of the above are true.
ANS:
d. Each of the above answers is correct.
11. Gross domestic product data that reflect actual prices as they exist in a given year are
expressed in terms of
a. fixed dollars.
b. current dollars.
c. constant dollars.
d. real dollars.
ANS:

b. Nominal GDP is also referred to as current dollar or money GDP and is not adjusted
for inflation.
12. The GDP chain price index is
a. widely reported in the news.
b. broadly based.
c. adjusted for government spending.
d. a measure of changes in consumer prices.
ANS;
b. The GDP chain price index not only measures price changes of consumer goods, but
also price changes of business investment, government consumption expenditures,
exports and imports.
13. Which of the following statements is true?
a. The inclusion of intermediate goods and services in GDP calculations would
underestimate our nations production level.
b. The expenditures approach sums the compensation of employees, rents, profits, net
interest, and non-income expenses for depreciation and indirect business taxes.
c. Real GDP has been adjusted for change in the general level of prices due to inflation or
deflation.
d. Real GDP equals nominal GDP multiplied by the GDP deflator.
ANS:
c. The word real in front of any term means that the value has been adjusted for inflation.
14. Which of the following is a shortcoming of GDP?
a. GDP measures nonmarket transactions.
b. GDP includes an estimate of illegal transactions.
c. GDP includes an estimate of the value of household services.
d. None of the above is true.
ANS;
d. GDP does not include nonmarket transactions, illegal transactions, or the value of
household services.
15. Which of the following items is included in the calculation of GDP?
a. Purchase of 100 shares of General Motors stock
b. Purchase of a used car
c. The value of a homemakers services
d. Sale of Gulf War military surplus
e. None of the above would be included

ANS:
e. Answers b. and d. are not included in GDP because only newly produced goods and
services are counted. Answer a. is a financial asset not a newly produced good or service.
Answer c. is an unpaid, nonmarket transaction.