C h a p t e r

5 MEASURING GDP
AND ECONOMIC
GROWTH*

Topic: Circular Flow

Gross Domestic Product Skill: Conceptual
4) In the circular flow model of an economy with no
Topic: GDP
Skill: Recognition government sector and no international trade,
1) Gross domestic product is the total ____ pro- households
duced within a country in a given time period. A) receive income from buyers of goods and ser-
A) market value of all final and intermediate goods vices.
and services B) receive income from the sale of factors in the
B) market value of all final and intermediate goods goods markets.
and services plus investment and depreciation C) pay firms for the use of their factors.
C) amount of final and intermediate goods and ser- D) receive income from producers for the use of
vices factors in the factor markets.
Answer: D
D) market value of all final goods and services
Answer: D Topic: Circular Flow, Aggregate Expenditure
Skill: Conceptual
Topic: Circular Flow
Skill: Conceptual 5) In the circular flow diagram, aggregate expendi-
2) The circular flow diagram shows ture includes the sum of
A) how nominal GDP is distinct from real GDP. A) saving and investment.
B) how the prices of factors are determined. B) consumption and investment.
C) the effects of inflation in a simple economy. C) consumption, investment, and saving.
D) the flows between different sectors of the econ- D) income and saving.
Answer: B
omy.
Answer: D Topic: Circular Flow, Aggregate Expenditure
Skill: Conceptual
Topic: Circular Flow
Skill: Conceptual 6) In the circular flow of economic activity
3) The circular flow diagram indicates that A) aggregate expenditure measures the dollar value
A) households sell the services of factors of produc- of purchases of factors.
tion to firms. B) aggregate expenditure measures the dollar value
B) firms buy the services of factors of production of purchases of final goods and services.
from the government. C) aggregate income measures the dollar value of
C) households sell goods and services to the gov- labor resources only.
ernment. D) aggregate expenditure is measured as it moves
D) firms buy goods and services from households. through the financial markets.
Answer: A Answer: B

* This is Chapter 21 in Economics.

155
156 CHAPTER 5

Topic: Government Budget Deficit Topic: Rest of the World Sector

Skill: Recognition Skill: Conceptual
7) The government’s budget deficit is the excess of 11) When imports into the United States exceed ex-
government ports from the United States, the United States
A) purchases of goods and services over its interest A) borrows from the rest of the world or sells for-
payments on the government debt. eign assets.
B) purchases of goods and services over its net B) lends to the rest of the world or sells foreign as-
taxes. sets.
C) net taxes over its purchases of goods and ser- C) borrows from the rest of the world or buys for-
vices. eign assets.
D) interest payments on the government debt over D) lends to the rest of the world or buys foreign as-
its net taxes. sets.
Answer: B Answer: A

Topic: Rest of the World Sector Topic: Expenditure Equals Income

Skill: Conceptual Skill: Conceptual
8) If U.S. imports are less than U.S. exports, the 12) Which of the following are equal to one another?
A) rest of the world borrows from the U.S. econ- I. aggregate production
omy. II. aggregate expenditure
B) U.S. economy borrows from the rest of the III. aggregate income
world. A) I equals II, but not III.
C) U.S. government has a budget surplus. B) I equals III, but not II.
D) U.S. government has a budget deficit. C) II equals III, but not I.
Answer: A D) I equals II equals III.
Answer: D
Topic: Rest of the World Sector
Skill: Conceptual Topic: How Investment Is Financed
9) If the rest of the world lends to the U.S. econ- Skill: Recognition
omy, 13) Investment is financed by which of the following?
A) the U.S. government has a budget surplus. I. Government spending
B) the U.S. government has a budget deficit. II. National saving
C) U.S. imports are less than U.S. exports. III. Borrowing from the rest of the world
D) U.S. imports exceed than U.S. exports. A) I, II, and III
Answer: D B) I and II only
C) I and III only
Topic: Rest of the World Sector
D) II and III only
Skill: Conceptual
Answer: D
10) When exports from the United States exceed im-
ports into the United States, the rest of the world Topic: National Saving
A) borrows from the United States or sells U.S. as- Skill: Recognition
sets. 14) National saving is defined as the amount of saving
B) lends to the United States or sells U.S. assets. by
C) borrows from the United States or buys U.S. as- A) businesses.
sets. B) households.
D) lends to the United States or buys U.S. assets. C) businesses and households.
Answer: A D) businesses and households and the government.
Answer: D
MEASURING GDP AND ECONOMIC GROWTH 157

Topic: National Saving Topic: Borrowing from the Rest of the World
Skill: Recognition Skill: Recognition
15) National saving equals 19) Suppose the U.S. spends more on foreign goods
A) household saving + business saving. and services than foreigners spend on our goods
B) household saving + business saving + govern- and services and the U.S. sells no foreign assets.
ment saving. Then
C) household saving + business saving + net taxes – A) the United States must borrow an amount equal
government purchases of goods and services. to national saving.
D) Both answers B and C are correct. B) the United States must borrow an amount equal
Answer: D to imports minus exports.
C) the rest of the world may or may not finance the
Topic: National Saving
U.S. trade deficit.
Skill: Recognition
D) the United States must borrow an amount equal
16) National saving is defined as
to consumption expenditure plus investment.
A) the total amount of household saving. Answer: B
B) personal saving by households and businesses
plus government saving. Topic: Borrowing from the Rest of the World
C) the saving by the federal government. Skill: Conceptual
D) None of the above answers are correct. 20) If foreigners spend more on U.S.-made goods and
Answer: B services than we spend on theirs,
A) foreigners must borrow from the United States
Topic: National Saving
or sell U.S. assets to make up the difference.
Skill: Conceptual
B) all U.S. national saving remains in the United
17) If the government runs a budget deficit, then
States
A) national saving is negative.
C) we must borrow from foreigners because of low
B) household but not business saving must pay for
imports.
the deficit.
D) funds flow in from abroad to help finance U.S.
C) part of household and business saving finances
investment.
the deficit. Answer: A
D) national saving cannot fund investment.
Answer: C Topic: Borrowing from the Rest of the World
Skill: Analytical
Topic: National Saving 21) If our exports are $1.2 billion and our imports are
Skill: Analytical
$1.7 billion,
18) If national saving (S) is $100,000, net taxes (T)
A) the United States is lending to the rest of the
equal $100,000 and government purchases of
world.
goods and services (G) are $25,000, how much
B) U.S. national saving is too high.
are households and businesses saving?
C) the United States is borrowing from the rest of
A) $25,000. the world.
B) $225,000. D) U.S. investment must decrease.
C) –$25,000. Answer: C
D) None of the above.
Answer: A
158 CHAPTER 5

Topic: Flows and Stocks Topic: Flows and Stocks

Skill: Recognition Skill: Conceptual
22) A feature of a stock variable and a flow variable is 27) Which of the following is a flow variable?
that A) Capital.
A) a stock is a quantity per unit of time and a flow B) Gross domestic product.
is a quantity that exists at a point in time. C) Wealth.
B) a stock is a quantity that exists at a point in time D) The money in your pocket.
and a flow is a quantity per unit of time. Answer: B
C) a stock only measures the value of goods and
Topic: Flows and Stocks
services produced in a country during a given
Skill: Conceptual
time period.
28) An example of a flow variable is
D) an example of a stock variable is real GDP and
A) capital.
an example of a flow variable is consumption
B) consumption expenditure by households.
expenditure.
Answer: B C) the machinery owned by a firm.
D) the cash held by households.
Topic: Flows and Stocks Answer: B
Skill: Conceptual
23) Which of the following is a stock variable? Topic: Flows and Stocks
Skill: Conceptual
A) Investment.
29) Which of the following is a stock variable?
B) Income.
A) Capital.
C) Wealth.
B) Consumption expenditure by households.
D) Saving.
Answer: C C) Gross investment.
D) Depreciation.
Topic: Flows and Stocks Answer: A
Skill: Conceptual
24) GDP is Topic: Flows and Stocks
Skill: Conceptual
A) a measure of the amount of government debt.
30) An example of a stock quantity is
B) investment in the nation’s economy.
A) real GDP.
C) stock.
B) consumption expenditure by households.
D) flow.
Answer: D C) gross investment.
D) wealth.
Topic: Flows and Stocks Answer: D
Skill: Conceptual
25) Which of the following is a flow variable? Topic: Wealth and Saving
Skill: Recognition
A) investment.
31) Which of the following is FALSE about saving?
B) capital.
A) Saving adds to wealth.
C) the amount of money in your savings account.
B) Income left after paying taxes can either be con-
D) the number of CD’s you own.
Answer: A sumed or saved.
C) Saving equals wealth minus consumption ex-
Topic: Flows and Stocks penditures.
Skill: Conceptual D) Saving is a flow variable.
26) Which of the following is NOT a flow variable? Answer: C
A) The number of DVD players sold per month.
B) The number of DVDs available at the library.
C) Annual spending on DVD rentals.
D) The number of DVDs produced per year.
Answer: B
MEASURING GDP AND ECONOMIC GROWTH 159

Topic: Wealth and Saving Topic: Capital and Investment

Skill: Analytical Skill: Recognition
32) At the beginning of the year, your wealth is 36) The term capital, as used in macroeconomics,
$10,000. During the year, you have an income of includes all of the following except
$90,000 and you spend $80,000 on consump- A) inventories.
tion. You pay no taxes. Your wealth at the end of B) equipment.
the year is C) buildings.
A) $20,000.00. D) a company’s work force.
B) $0. Answer: D
C) $90,000.00.
Topic: Capital and Investment
D) $100,000.00.
Skill: Recognition
Answer: A
37) Capital
Topic: Wealth and Saving A) includes the plant, equipment, and buildings
Skill: Analytical owned by firms.
33) At the beginning of the year, your wealth is B) increases when depreciation increases.
$10,000. During the year, you have an income of C) does not include semifinished goods used to
$80,000 and you spend $90,000 on consump- produce other goods and services.
tion. You pay no taxes. Your wealth at the end of D) is a flow variable.
the year is Answer: A
A) $20,000.00.
Topic: Capital and Investment
B) $0.
Skill: Recognition
C) $90,000.00.
38) Depreciation
D) $100,000.00.
Answer: B A) does not change the level of capital in the econ-
omy.
Topic: Capital and Investment B) is the decrease in the capital stock because of
Skill: Recognition wear and tear.
34) The term capital, as used in macroeconomics, C) is also known as capital consumption.
refers to D) Both answers B and C are correct.
A) the plant, equipment, buildings, and inventories Answer: D
of raw materials and semi-finished goods.
Topic: Capital and Investment
B) financial wealth.
Skill: Recognition
C) the sum of investment and government pur-
39) Investment, as defined in the text, refers to the
chases of goods.
purchase of
D) investment.
Answer: A A) new capital.
B) stocks and bonds.
Topic: Capital and Investment C) durable goods by consumers.
Skill: Recognition D) All of the above answers are correct.
35) The term capital, as used in macroeconomics, Answer: A
refers to
Topic: Capital and Investment
A) the amount of money that someone can invest
Skill: Recognition
in a new venture.
40) Which of the following is not included in the
B) the amount of money a firm can raise in the
investment component of GDP?
stock market.
A) A household purchases a new washing machine.
C) manufactured inputs, including inventories,
B) Purchase of new equipment by a business.
buildings, machinery, etc.
C) A firm builds a new warehouse.
D) All of the above answers are correct.
Answer: C D) A business fails to sell all of its output and there-
fore experiences an increase in inventories.
Answer: A
160 CHAPTER 5

Topic: Capital and Investment Topic: Capital and Investment

Skill: Recognition Skill: Conceptual
41) Gross investment 46) If the economy’s capital stock increases over time,
A) is the purchase of new capital. A) net investment is positive.
B) includes only replacement investment. B) depreciation is less than zero.
C) does not include additions to inventories. C) depreciation exceeds gross investment.
D) Both answers A and B are correct. D) gross investment equals depreciation.
Answer: A Answer: A

Topic: Capital and Investment Topic: Capital and Investment

Skill: Recognition Skill: Conceptual
42) The total amount spent on adding to the stock of 47) If the economy’s capital stock decreases over time,
capital and on replacing depreciated capital is A) net investment is positive.
A) capital consumption. B) depreciation is less than zero.
B) gross investment. C) depreciation exceeds gross investment.
C) depreciation. D) gross investment equals net investment.
D) the net stock of investment. Answer: C
Answer: B
Topic: Capital and Investment
Topic: Capital and Investment Skill: Analytical
Skill: Recognition 48) The Acme Stereo Company had a capital stock of
43) The total amount spent on adding to the stock of $24 million at the beginning of the year. At the
capital and on replacing depreciated capital is end of the year, the firm had a capital stock of
A) consumption on new capital. $20 million. Thus its
B) depreciation. A) net investment was some amount but we need
C) gross investment. more information to determine the amount.
D) net investment. B) net investment was $4 million for the year.
Answer: C C) gross investment was zero.
D) net investment was –$4 million for the year.
Topic: Capital and Investment Answer: D
Skill: Recognition
44) Economists define depreciation as Topic: Capital and Investment
A) the decrease in the capital stock from wear and Skill: Analytical
tear and obsolescence. 49) At the beginning of the year, Tom’s Tubes had a
B) the loss in stock market of a company’s value. capital stock of 5 tube inflating machines. During
C) the drop in the price of a company’s product. the year, Tom scrapped 2 old machines and pur-
D) All of the above answers are correct. chased 3 new machines. Tom’s net investment for
Answer: A the year totaled
A) 1 machine.
Topic: Capital and Investment B) 2 machines.
Skill: Recognition
C) 3 machines.
45) Depreciation is
D) 6 machines.
A) the sum of gross and net investment. Answer: A
B) a stock variable that affects the economy’s ability
to produce.
C) the difference between gross investment and the
capital stock.
D) one of the flow variables affecting the capital
stock.
Answer: D
MEASURING GDP AND ECONOMIC GROWTH 161

Topic: Capital and Investment Topic: Net Domestic Product

Skill: Analytical Skill: Analytical
50) At the beginning of the year, Tom’s Tubes had a 54) In the nation of Nirvana, depreciation is $22 bil-
capital stock of 5 tube inflating machines. During lion, GDP is $260.4 billion, and national income
the year, Tom scrapped 2 old machines and pur- is $215.2 billion. Net domestic product is
chased 3 new machines. Tom’s gross investment A) smaller than national income.
for the year totaled B) $215.2 billion.
A) 1 machine. C) $238.4 billion.
B) 2 machines. D) $445.2 billion.
C) 3 machines. Answer: C
D) 6 machines.
Answer: C
Measuring U.S. GDP
Topic: Capital and Investment Topic: GDP
Skill: Analytical Skill: Recognition
51) At the beginning of the year, Tom’s Tubes had a 55) Which of the following correctly describes GDP?
capital stock of 5 tube inflating machines. During
I. GDP is a flow variable.
the year, Tom scrapped 2 old machines and pur-
II. GDP is the value of the production of an in-
chased 3 new machines. Tom’s capital stock at the
dividual firm’s goods and services.
end of year equals
III. GDP can be calculated using the expenditure
A) 1 machine. approach or the income approach.
B) 2 machines. A) I only.
C) 3 machines. B) III only.
D) 6 machines. C) I and III.
Answer: D
D) II and III.
Topic: Net Domestic Product Answer: C
Skill: Recognition
Topic: Expenditure Approach
52) Depreciation is subtracted from gross domestic Skill: Recognition
product to determine directly 56) GDP can be computed as the sum of
A) consumption expenditures plus investment ex- A) all sales that have taken place in an economy
penditures plus government purchases plus net over a period of time.
exports. B) the total expenditures of consumers and business
B) disposable income. over a period of time.
C) net domestic product. C) the total expenditures of consumption, invest-
D) national income. ment, and government purchases of goods and
Answer: C
services over a period of time.
Topic: Net Domestic Product D) the total expenditures of consumption, invest-
Skill: Recognition ment, government purchases of goods and ser-
53) GDP equals net domestic product plus vices, and net exports over a period of time.
A) transfer payments and business transfers. Answer: D
B) depreciation.
C) indirect business taxes and personal taxes.
D) retained earnings.
Answer: B
162 CHAPTER 5

Topic: Expenditure Approach Topic: Expenditure Approach

Skill: Recognition Skill: Recognition
57) GDP using the expenditure approach equals the 60) To measure GDP using the expenditure approach
sum of personal consumption expenditures plus you must collect data on
A) gross private investment. A) inflation.
B) gross private investment plus government pur- B) exports.
chases of goods and services. C) wages.
C) gross private investment plus government pur- D) saving.
chases of goods and services minus imports of Answer: B
goods and services.
Topic: Expenditure Approach
D) gross private investment plus government pur-
Skill: Recognition
chases of goods and services plus net exports of
61) Aggregate expenditures include all of the follow-
goods and services.
ing EXCEPT
Answer: D
A) consumption of food.
Topic: Expenditure Approach B) purchases of intermediate goods.
Skill: Recognition C) purchases of a piece of capital equipment.
58) The expenditure approach measures GDP by D) purchases of guns by the government.
adding Answer: B
A) compensation of employees, rental income, cor-
Topic: Expenditure Approach
porate profits, net interest, and proprietors’ in-
Skill: Conceptual
come.
62) In the expenditure approach to GDP, the largest
B) compensation of employees, rental income, cor-
component is
porate profits, net interest, proprietors’ income,
A) government purchases.
subsidies paid by the government, indirect taxes
B) personal consumption expenditures.
paid, and depreciation.
C) gross private domestic investment.
C) compensation of employees, rental income, cor-
D) net exports.
porate profits, net interest, proprietors’ income,
Answer: B
indirect taxes paid, and depreciation and sub-
tracting subsidies paid by the government. Topic: Expenditure Approach
D) consumption expenditure, gross private domes- Skill: Conceptual
tic investment, net exports of goods and services, 63) Let C represent consumption expenditure, S sav-
and government purchases of goods and ser- ing, I gross private domestic investment, G gov-
vices. ernment purchases of goods and services, and NX
Answer: D net exports of goods and services. Then GDP
equals
Topic: Expenditure Approach
Skill: Recognition A) C + S + G + NX.
59) Which of the following is NOT part of the ex- B) C + S + G – NX.
penditure approach to measuring GDP? C) C + I + G + NX.
A) Gross private domestic investment D) C + I + G – NX.
B) Net exports of goods and services Answer: C
C) Net interest
D) Personal consumption expenditures
Answer: C
MEASURING GDP AND ECONOMIC GROWTH 163

Topic: Expenditure Approach, Consumption Topic: Expenditure Approach, Investment

Expenditure Skill: Recognition
Skill: Recognition 68) Gross private domestic investment is all purchases
64) Consumption expenditure is the payment by of newly produced business capital goods and
households for consumption of buildings
A) goods but not services. A) minus the change in business inventories.
B) services but not goods. B) plus the change in business inventories plus resi-
C) goods and services. dential construction.
D) services and for saving. C) plus fixed investment minus inventory invest-
Answer: C ment.
D) plus purchases of capital goods produced in pre-
Topic: Expenditure Approach, Consumption
vious years to replace any depreciated capital
Expenditure
Skill: Recognition goods.
Answer: B
65) The largest component of GDP is
A) gross private domestic investment. Topic: Expenditure Approach, Investment
B) personal consumption expenditures. Skill: Recognition
C) net exports of goods and services. 69) The difference between gross investment and net
D) government purchases of goods and services. investment is
Answer: B A) inflation.
B) depreciation.
Topic: Expenditure Approach, Consumption
Expenditure C) initial capital.
Skill: Recognition D) consumption.
66) Personal consumption expenditures include Answer: B
A) expenditures by households on goods and ser- Topic: Expenditure Approach, Investment
vices produced only in the United States. Skill: Recognition
B) expenditures by households on goods and ser- 70) Goods that are produced this year, stored in in-
vices produced in the United States and the rest ventories, and then sold to consumers next year
of the world. A) count in this year’s GDP.
C) the purchase of new homes. B) count in next year’s GDP.
D) the purchase of used goods and new goods. C) count in both this year’s and next year’s GDP.
Answer: B D) are not counted as a part of GDP.
Answer: A
Topic: Expenditure Approach, Consumption
Expenditure Topic: Expenditure Approach, Investment
Skill: Conceptual Skill: Conceptual
67) All of the following household expenditures are 71) An example of “investment” in computing real
included in consumption expenditure EXCEPT GDP using the expenditure approach is the pur-
A) payment to a dentist for filling a tooth. chase of
B) purchase of corporate stock. A) a new set of tools by an auto mechanic, for use
C) purchase of a new purse. in repairing cars.
D) purchase of hair styling. B) 100 shares of IBM stock.
Answer: B
C) a 100 year old house by a married couple.
D) computer chips by IBM to put in their personal
computers.
Answer: A
164
Topic: Expenditure Approach, Investment
Skill: Conceptual
72) An example of “investment” in the national in-
come accounts is the purchase of
A) a new van by a potter, who packs it with his
wares and travels to art shows.
B) 100 shares of Canadian stock on the New York
Stock Exchange.
C) a 100-year-old house that was just put on the
protected historic sites list in the year in ques-
tion.
D) a U.S. government bond.
Answer: A
Topic: Expenditure Approach, Investment
Skill: Conceptual
73) In the national income accounts, the purchase of
a new house counts as
A) consumption expenditure.
B) investment.
C) a transfer.
D) an addition to inventory.
Answer: B
Topic: Expenditure Approach, Investment
Skill: Conceptual
74) All of the following are included in gross private
domestic investment expenditure EXCEPT a
A) business’s purchase of a fleet of cars.
B) household’s purchase of a new house.
C) business’s purchase of another company’s stock.
D) a retail store’s purchase of shoes to add to its in-
ventory.
Answer: C
Topic: Expenditure Approach, Government
Purchases
Skill: Recognition
75) In the national income accounts, government
purchases of goods and services refer to those pur-
chases made by
A) federal and state governments only.
B) the federal government only.
C) state and local governments only.
D) all levels of government.
Answer: D
CHAPTER 5
Topic: Expenditure Approach, Government
Purchases
Skill: Recognition
76) In the national income accounts, government
purchases of goods and services exclude
A) transfer payments.
B) state and local government purchases.
C) local government purchases but include state
government purchases.
D) spending on national defense.
Answer: A
Topic: The Expenditure Approach, Government
Purchases
Skill: Recognition
77) Which of the following is included in the gov-
ernment purchases component of the expenditure
approach to GDP?
A) State government expenditure on local schools
B) Transfer payments
C) Changes in inventories
D) Taxes
Answer: A
Topic: The Expenditure Approach, Government
Purchases
Skill: Recognition
78) Which one of the following transactions in a par-
ticular year is included in gross domestic product
for that year?
A) Social Security payments to retirees
B) The government pays a computer services com-
pany that assisted in the delivery of Social Secu-
rity payments to retirees
C) A car is produced in the previous year and re-
mains in inventory for the entire year under
consideration
D) A stay-at-home parent performs housework that
the family would otherwise have paid a maid
$20,000 a year to perform.
Answer: B
MEASURING GDP AND ECONOMIC GROWTH 165

Topic: The Expenditure Approach, Government
Purchases
Skill: Recognition
79) In the computation of GDP, social security pay-
ments count as
A) transfer payments and are included in GDP.
B) transfer payments and are not included in GDP.
C) government purchases of goods and services and
are included in GDP.
D) government purchases of goods and services and
are not included in GDP.
Answer: B
Topic: Expenditure Approach, Net Exports
Skill: Recognition
82) Net exports of goods and services equal the
A) exports of goods and services divided by the im-
ports of goods and services.
B) exports of goods and services plus the imports of
goods and services.
C) exports of goods and services minus the imports
of goods and services.
D) imports of goods and services minus the exports
of goods and services.
Answer: C

Topic: The Expenditure Approach, Government Topic: Expenditure Approach, Net Exports
Purchases Skill: Conceptual
Skill: Conceptual 83) In the calculation of GDP by the expenditure
80) Which of the following is NOT part of GDP? approach, exports from the United States must be
A) General Motors’ purchases of new capital A) subtracted because they are included in the con-
equipment sumption of a foreign country.
B) Expenditures by the federal government for na- B) ignored because they are not bought by U.S.
tional defense citizens.
C) Social security payments made to the elderly C) subtracted if they are bought by foreign firms
D) The purchase of new homes by consumers for investment purposes.
Answer: C D) added.
Answer: D
Topic: Expenditure Approach, Government
Purchases
Skill: Conceptual Government purchases of goods and $240
81) Transfer payments are not part of government services
purchases of goods and services because transfer Depreciation 240
payments Gross private domestic investment 400
A) are not predictable given the nature of their ap- Personal income taxes 140
propriation and allocation. Net taxes 120
B) do not represent the purchase of a final good or Net exports of goods and services 80
service. Personal consumption expenditures 640
C) are not always spent on goods produced in the Net interest 100
U.S. Topic: Expenditure Approach
D) The premise of the question is incorrect because Skill: Analytical
transfer payments are part of government pur- 84) From the data in the above table, GDP equals
chases of goods and services. A) $1,120.
Answer: B B) $1,280.
C) $1,290.
D) $1,360.
Answer: D
166 CHAPTER 5

Topic: Net Domestic Product Topic: Income Approach

Skill: Analytical Skill: Analytical
85) Using the data in the above table, net domestic 89) Which of the following is a component of the
product equals incomes approach to GDP?
A) $1,120. A) Consumption expenditure.
B) $1,280. B) Wages and salaries.
C) $1,290. C) Investment.
D) $1,360. D) Government purchases of goods and services.
Answer: A Answer: B

Topic: Income Approach Topic: Income Approach

Skill: Recognition Skill: Recognition
86) The approach to GDP that sums compensation of 90) The largest component of national income is
employees, rental income, corporate profits, net A) compensation of employees.
interest, proprietors’ income, depreciation, and B) rental income.
indirect taxes and subtracts subsidies is the C) corporate profits.
A) opportunity cost approach. D) proprietors’ income.
B) expenditure approach. Answer: A
C) added cost approach.
Topic: Income Approach, Compensation of
D) income approach.
Employees
Answer: D
Skill: Recognition
Topic: Income Approach 91) Which of the following is included in “compensa-
Skill: Conceptual tion of employees” part of the income approach
87) The income approach to measuring GDP sums to measuring GDP?
together I. Wages and salaries.
A) compensation of employees, rental income, cor- II. Pension fund contributions.
porate profits, net interest, proprietors’ income, III. Social security contributions.
subsidies paid by the government, indirect taxes A) I only.
paid, and capital consumption expenditures. B) I and II.
B) compensation of employees, rental income, cor- C) I and III.
porate profits, net interest, proprietors’ income, D) I, II and III.
indirect taxes paid, and capital consumption ex- Answer: D
penditures and subtracts subsidies paid by the
Topic: Income Approach, Compensation of
government.
Employees
C) the sales of each firm in the economy. Skill: Recognition
D) the costs of each firm in the economy and then 92) When calculating the compensation of employees
subtracts indirect business taxes and the capital part of GDP,
consumption allowance. A) social security contributions must be included.
Answer: B
B) fringe benefits are not included.
Topic: Income Approach C) taxes withheld on earnings are not included.
Skill: Recognition D) the value of vacation time must be included.
88) Proprietors’ income is a component of which Answer: A
approach to measuring GDP?
A) Incomes approach.
B) Expenditure approach.
C) Cost approach.
D) Output approach.
Answer: A
MEASURING GDP AND ECONOMIC GROWTH 167

Topic: Income Approach, Net Interest Topic: Indirect Tax

Skill: Recognition Skill: Conceptual
93) In the national income accounts, net interest is 97) All of the following are indirect taxes EXCEPT
the total interest payments received by households A) cigarette sales taxes.
on loans made by them minus B) income taxes.
A) interest received from households’ ownership of C) liquor excise taxes.
government bonds. D) taxes on utility bills.
B) interest payments made by households on their Answer: B
own borrowing.
Topic: Net Domestic Income At Factor Cost
C) interest payments made by households to for-
Skill: Recognition
eign lenders.
98) The sum of compensation to employees, rental
D) taxes paid by households on their interest in-
income, corporate profits, net interest, and pro-
come.
prietors’ income is
Answer: B
A) gross domestic product.
Topic: Income Approach, Rental Income B) gross domestic income.
Skill: Recognition C) net domestic income at factor cost.
94) Rental income includes D) net domestic product.
A) the payment for the use of land. Answer: C
B) the payment for the use of all rented inputs.
Topic: Income Approach
C) no income from rental housing because most
Skill: Conceptual
houses are occupied by their owners.
99) Reasons why valuing goods at their market prices
D) Both answers A and B are correct.
is different than valuing them at their factor costs
Answer: D
include
Topic: Income Approach, Corporate Profits A) depreciation and investment.
Skill: Recognition B) exports and imports.
95) Which of the following are included in the cate- C) personal taxes and corporate taxes.
gory of corporate profits when measuring GDP? D) indirect taxes and subsidies.
I. Profits paid as dividends. Answer: D
II. Undistributed profits.
Topic: Income Approach, Depreciation
III. Income received by owners and operators of
Skill: Recognition
businesses.
100) Gross domestic product minus net domestic
A) I only.
product equals
B) I and II.
A) exports minus imports.
C) I and III.
B) imports minus exports.
D) I, II and III.
Answer: B C) net taxes.
D) depreciation.
Topic: Indirect Tax Answer: D
Skill: Recognition
96) An indirect tax is a tax paid by consumers
A) to a state or local government.
B) when they purchase goods and services.
C) on unearned income (as opposed to wages and
salaries).
D) that is a percentage of the value of their real
property.
Answer: B
168 CHAPTER 5

Corporate profits $200 Component Amount

Net interest 150 (billions of dollars)
Indirect taxes less subsidies 230 Gross investment 1300
Depreciation 250 Personal consumption
Compensation of employees 1,350 expenditure 1475
Proprietor’s income 150 Depreciation 25
Rental income 70 Government purchases 1315
Personal consumption expendi- 1,400 U.S. imports 260
tures U.S. exports 249
Government purchases of goods 500 Compensation of employees 65
and services Topic: Expenditure Approach
Net exports of goods and services 40 Skill: Analytical
Topic: Income Approach 104) The above table gives data for a hypothetical na-
Skill: Analytical tion. Gross domestic product is
101) Using the data in the table above, gross domestic A) $4,049 billion.
product equals B) $4,079 billion.
A) $1,920. C) $4,054 billion.
B) $1,940. D) $4,339 billion.
C) $2,150. Answer: B
D) $2,400.
Answer: D Topic: Net Domestic Product
Skill: Analytical
Topic: Expenditure Approach 105) The above table gives data for a hypothetical na-
Skill: Analytical tion. Net domestic product is
102) Using the data in the above table, gross private A) $4,039 billion.
domestic investment equals B) $4,044 billion.
A) $250. C) $4,054 billion.
B) $260. D) $4,314 billion.
C) $460. Answer: C
D) some amount that cannot be determined with-
out more information.
Answer: C Real GDP and the Price Level
Topic: Real GDP
Topic: Expenditure Approach Skill: Recognition
Skill: Analytical
106) Real GDP measures the
103) Using the data in the above table, net private do-
A) total profits earned by all businesses valued us-
mestic investment equals
ing prices from a single year.
A) $210. B) changes in the prices of output measured in dol-
B) $260. lars.
C) $510. C) general upward drift in prices.
D) some amount that cannot be determined with- D) value of total production linked to prices of a
out more information. single year.
Answer: A
Answer: D
MEASURING GDP AND ECONOMIC GROWTH 169

Topic: Real GDP Topic: Real and Nominal GDP

Skill: Recognition Skill: Conceptual
107) The old, traditional base-year method of calculat- 111) In years with inflation, nominal GDP increases
ing real GDP compared ____ real GDP.
A) the quantities of goods produced in consecutive A) faster than
years using prices in both years and averaging B) slower than
the percentage changes in the value of output. C) at the same rate as
B) quantities produced in different years using D) sometimes faster, sometimes slower, and some-
prices from a year chosen as a reference period. times at the same rate as
C) quantities produced in different years with the Answer: A
prices that prevailed during the year in which
Topic: Real and Nominal GDP
the output was produced.
Skill: Conceptual
D) prices at different points in time using a sample
112) Suppose an economy has some inflation. Then,
of goods that is representative of goods pur-
after a base year, the value of real GDP will
chased by households.
Answer: B A) be less than nominal GDP.
B) not be different from nominal GDP.
Topic: Real and Nominal GDP C) be greater than nominal GDP.
Skill: Recognition D) will be approximately half the value of nominal
108) Which of the following relationships is correct? GDP.
A) Nominal GDP = (GDP Deflator ÷ Real GDP) Answer: C
× 100
Topic: Real and Nominal GDP
B) Real GDP = (Nominal GDP x GDP Deflator) ÷ Skill: Analytical
100 113) If nominal GDP is $5 trillion and the GDP defla-
C) GDP Deflator = (Nominal GDP ÷ Real GDP) x tor is 125, what is real GDP?
100 A) $4 trillion
D) Real GDP = Nominal GDP x 100 B) $.04 trillion
Answer: C C) $625 trillion
Topic: Real and Nominal GDP D) $6.25 trillion
Skill: Conceptual Answer: A
109) To calculate real GDP, the GDP deflator can Topic: Real and Nominal GDP
used to adjust nominal GDP for changes in Skill: Analytical
A) national income. 114) What is the value of real GDP if the value of the
B) the unemployment rate. GDP deflator is 122.5 and nominal GDP is $825
C) the cost of the typical urban worker’s market billion?
basket. A) $6.735 billion
D) the general price level. B) $673.5 billion
Answer: D C) $702.5 billion
Topic: Real and Nominal GDP D) $1,010.6 billion
Skill: Recognition Answer: B
110) Economists distinguish real from nominal GDP
to
A) determine whether the government sector is
growing.
B) measure the change in nominal interest rates.
C) determine whether economic welfare has
changed.
D) determine whether real production has changed.
Answer: D
170 CHAPTER 5

Topic: Chain-Weighted Growth Rate Topic: GDP Deflator

Skill: Conceptual Skill: Recognition
115) The chain-weighted output index 118) The GDP deflator equals 100 times
A) uses only the current year’s prices to calculate A) nominal GDP divided by real GDP.
growth in real GDP. B) real GDP divided by nominal GDP.
B) uses prices for the current year and the previous C) gross domestic product divided by net domestic
year to calculate growth in real GDP. product.
C) must only be calculated every other year. D) net domestic product divided by gross domestic
D) is an inaccurate way to measure growth in real product.
GDP and so has been replaced by the “nominal- Answer: A
to-real” index.
Answer: B Topic: Real and Nominal GDP
Skill: Analytical
Topic: Chain-Weighted Growth Rate 119) Suppose that nominal GDP per person is
Skill: Conceptual $18,000 in 2004, the 1998 GDP deflator is 100,
116) The chain-weighted output index method of cal- and the 2004 GDP deflator is 110. The approxi-
culating real GDP compares mate real per person GDP in 2004 is
A) compares the quantities of goods produced in A) $16,364.
consecutive years using prices in both years and B) $16,634.
averaging the percentage changes in the value of C) $18,000.
output. D) $19,800.
B) quantities produced in different years using Answer: A
prices from a year chosen as a reference period.
Topic: Real and Nominal GDP
C) quantities produced in different years with the
Skill: Analytical
prices that prevailed during the year in which
120) Suppose that nominal GDP per person is
the output was produced.
$17,000 in 2004, the 1998 GDP deflator is 100,
D) prices at different points in time using a sample
and the 2004 GDP deflator is 90. The approxi-
of goods that is representative of goods pur-
mate real GDP per person in 2004 is
chased by households.
Answer: A A) $17,000.
B) $18,889.
Topic: Chain-Weighted Growth Rate C) $32,300.
Skill: Conceptual D) $15,300.
117) The chain-weighted output index method of Answer: B
measuring real GDP is based on
Topic: Real and Nominal GDP
A) using current prices rather than base year prices
Skill: Analytical
B) averaging the market value of the expenditures
121) Suppose that nominal GDP per person is
over a two year period and then comparing with
$21,000 in 2004, the 1998 GDP deflator is 100,
a base period.
and the 2004 deflator is 105. The approximate
C) using the prices of two adjacent years to calcu-
real GDP per person in 2004 is
late the growth rate of real GDP.
A) $20,000.
D) averaging the nominal and real measures of
B) $21,000.
GDP to come up with a more accurate figure.
Answer: C C) $19,048.
D) $22,050.
Answer: A
MEASURING GDP AND ECONOMIC GROWTH
Topic: GDP Deflator
Skill: Recognition
122) The implicit GDP deflator is calculated by
A) comparing the quantities of goods produced in
consecutive years using prices in both years and
averaging the percentage changes in the value of
output.
B) comparing the quantities produced in different
years using prices from a year chosen as a refer-
ence period.
C) comparing the quantities produced in different
years with the prices that prevailed during the
year in which the output was produced.
D) dividing nominal GDP by real GDP.
Answer: D
Measuring Economic Growth
Topic: Over Adjustment for Inflation
Skill: Conceptual
123) If the GDP deflator is biased by quality changes,
the result is that
A) nominal GDP is understated.
B) real GDP is overstated.
C) there is no effect upon the correct level of real
GDP.
D) real GDP is understated.
Answer: D
Topic: Household Production
Skill: Recognition
124) Which of the following is NOT included in real
GDP?
A) Production of services, such as the services of
doctors.
B) Production of goods that last more than one
year, such as television sets.
C) Production of goods that do not last more than
one year, such as gasoline.
D) Production in the home.
Answer: D
Topic: Household Production
Skill: Analytical
125) If a larger fraction of the adult population is
working, household production
A) counted in real GDP increases.
B) not counted in real GDP increases.
C) counted in real GDP decreases.
D) not counted in real GDP decreases.
Answer: D
171
Topic: Underground Economic Activity
Skill: Recognition
126) Which of the following is NOT included in real
GDP?
A) Production of services, such as the services of
hair dressers.
B) Production of goods that last less than a year,
such as production of hot dogs.
C) Production that takes place in the underground
economy.
D) Production of goods that last more than a year,
such as a pair of roller blades.
Answer: C
Topic: Underground Economic Activity
Skill: Conceptual
127) The underground economy exists for all of the
following reasons EXCEPT the
A) production of illegal goods.
B) avoidance of taxes.
C) desire to maintain accurate records of economic
transactions.
D) avoidance of government regulation.
Answer: C
Topic: Environmental Quality
Skill: Conceptual
128) Because pollution reduces economic welfare, real
GDP
A) decreases as pollution increases.
B) increases to take into account the expenditures
that will be made in the future to clean up the
pollution.
C) overstates economic welfare.
D) understates economic welfare.
Answer: C
172 CHAPTER 5

Topic: Environmental Quality Topic: Purchasing Power Parity Prices

Skill: Conceptual
129) In the post World War II period, considerable
growth in total production took place in the U.S.
But at the same time, businesses were able to pro-
duce by dumping their waste into the Great Lakes
with minimal cost, significantly polluting the
bodies of water as a result. This occurrence is an
example where
A) real GDP gives an overly positive view of eco-
nomic welfare.
B) real GDP gives an overly negative view of eco-
nomic welfare.
C) investment would have been a better measure of
total production.
D) the pollution counts as a final good.
Answer: A
Skill: Recognition*
132) If we compare the U.S. GDP and the Chinese
GDP,
A) GDP per person is about the same in the two
countries.
B) U.S. GDP per person is less than China’s GDP
per person once we adjust for currency differ-
ences.
C) China’s GDP per person is less than GDP per
person in the United States.
D) U.S. GDP per person was much larger than
China’s GDP per person when purchasing
power parity prices are used but is less than
China’s GDP per person when exchange rate
prices are used.
Answer: C

Topic: Environmental Quality

Skill: Conceptual Study Guide Questions
130) Which of the following would lead GDP to over-
Topic: Study Guide Question, GDP
state economic welfare? Skill: Conceptual
A) the existence of home-cooked meals. 133) Which of the following is NOT a final good?
B) restaurant workers that under-report tip income. A) a new computer sold to an NYU student
C) a self-employed CPA who takes a longer than B) a new car sold to Avis for use in their fleet of
normal vacation. rental cars
D) electric utilities that switch to burning coal be- C) a purse sold to a foreign visitor
cause of higher natural gas prices and thereby D) a hot dog sold to a spectator at a Chicago Bears
create more acid rain pollution. football game
Answer: D Answer: B
Topic: Purchasing Power Parity Prices Topic: Study Guide Question, Expenditure Equals
Skill: Conceptual Income
131) Purchasing power parity prices are used to con- Skill: Conceptual
struct GDP data that 134) GDP equals
A) do not omit the underground economy. A) aggregate expenditure.
B) can be used to make more valid comparisons be- B) aggregate income.
tween one country and another. C) the value of the aggregate production in a coun-
C) is a proper measure of economic welfare. try during a given time period.
D) adjust for differences in population. D) all of the above.
Answer: B Answer: D
MEASURING GDP AND ECONOMIC GROWTH 173

Topic: Study Guide Question, Financing Topic: Study Guide Question, Incomes Approach
Investment Skill: Conceptual
Skill: Recognition 140) Which of the following is NOT a component of
135) A nation’s investment must be financed by the incomes approach to GDP?
A) national saving only. A) Net exports
B) the government’s budget deficit. B) Wages and salaries
C) borrowing from the rest of the world only. C) Corporate profits
D) national saving plus borrowing from the rest of D) Proprietors’ income
the world. Answer: A
Answer: D
Topic: Study Guide Question, Real GDP
Topic: Study Guide Question, Flows and Stocks Skill: Recognition
Skill: Conceptual 141) Currently, real GDP is calculated using
136) Which of the following is a flow? A) the quantities only method.
A) GDP B) base year prices method.
B) Wealth C) current year prices method.
C) The amount of money in a savings account D) chain-weighted output index method.
D) Capital Answer: D
Answer: A
Topic: Study Guide Question, Real GDP
Topic: Study Guide Question, Flows and Stocks Skill: Analytical
Skill: Conceptual 142) Real GDP in 2002 is $100. Between 2002 and
137) Which of the following is a stock? 2003, using 2002 prices GDP grew 8 percent and
A) Income using 2003 prices real GDP grew 4 percent. What
B) Depreciation does real GDP in 2003 equal?
C) Investment A) $104
D) Capital B) $106
Answer: D C) $108
D) None of the above answers is correct.
Topic: Study Guide Question, Flows and Stocks
Answer: B
Skill: Conceptual
138) ____ is a flow variable and ____ is a stock vari- Topic: Study Guide Question, Real and Nominal
able. GDP
A) Wealth; income Skill: Analytical
B) Income; capital 143) If the GDP deflator for 2004 is 125, nominal
C) Wealth; capital GDP
D) Depreciation; income A) equals real GDP in 2004.
Answer: B B) is greater than real GDP in 2004.
C) is less than real GDP in 2004.
Topic: Study Guide Question, Expenditure
D) in 2003 will be less than real GDP in 2004.
Approach, Investment
Answer: B
Skill: Conceptual
139) Gross private domestic investment is a compo-
nent of which approach to measuring GDP?
A) Incomes approach
B) Expenditure approach
C) Linking approach
D) Output approach
Answer: B
174 CHAPTER 5

Nominal GDP Real GDP Topic: Study Guide Question, Household

Production
Year (billions of (billions of GDP deflator
Skill: Conceptual
dollars) dollars)
147) Which of the following is NOT a reason that real
2004 2500 ____ 105
GDP is a poor measure of a nation’s economic
2005 ____ 2400 117 welfare?
Topic: Study Guide Question, Real and Nominal A) Real GDP omits measures of political freedom.
GDP
B) Real GDP does not take into account the value
Skill: Analytical
of people’s leisure time.
144) Using the data in the above table, what is real
C) Real GDP does not include the underground
GDP in 2004?
economy.
A) $2137 billion.
D) Real GDP overvalues household production.
B) $2520 billion. Answer: D
C) $2381 billion.
D) $2051 billion. Topic: Study Guide Question, International
Answer: C Comparisons
Skill: Recognition
Topic: Study Guide Question, Real and Nominal 148) Which of the following statements about the
GDP comparison between GDP in China and in the
Skill: Analytical
United States is correct?
145) Using the data in the above table, what is nominal
A) Using the exchange rate to value China’s GDP
GDP in 2005?
in dollars shows that China’s GDP per person
A) $2400 billion.
exceeds the GDP per person in the United
B) $2381 billion.
States.
C) $2808 billion.
B) Using purchasing power parity prices to value
D) $2520 billion.
China’s GDP in dollars shows that China’s
Answer: C
GDP per person exceeds the GDP per person in
Topic: Study Guide Question, Environmental the United States.
Quality C) China’s GDP per person is higher using pur-
Skill: Conceptual chasing power parity prices rather than the ex-
146) Pollution is a by-product of some production change rate when valuing China’s GDP in dol-
processes, so real GDP as measured lars.
A) is adjusted downward to take into account the D) None of the above answers are correct because
pollution. they are all false statements.
B) is adjusted upward to take into account the ex- Answer: C
penditures that will be made in the future to
clean up the pollution.
MyEconLab Questions
C) tends to overstate economic welfare.
D) tends to understate economic welfare. Topic: Flows and Stocks
Answer: C Level 1: Definitions and Concepts
149) An example of a stock is ____ and an example of
a flow is ____.
A) depreciation; capital
B) capital; investment
C) investment; capital
D) investment; depreciation
Answer: C
MEASURING GDP AND ECONOMIC GROWTH
Topic: Capital and Investment
Level 1: Definitions and Concepts
150) Depreciation equals ____.
A) capital minus gross investment
B) capital minus net investment
C) net investment minus gross investment
D) gross investment minus net investment
Answer: D
Topic: Expenditure Approach, Government
Purchases
Level 1: Definitions and Concepts
151) Government purchases include ____.
A) social security and education
B) net exports
C) buying a new bomber
D) Both answers A and C are correct
Answer: C
Topic: Financing Investment
Level 1: Definitions and Concepts
152) A country’s investment can be financed by ____.
A) a government budget surplus
B) national saving and foreign borrowing
C) only saving by households and firms
D) making exports exceed imports
Answer: B
Topic: Expenditure Approach
Level 1: Definitions and Concepts
153) Gross Domestic Product is equal to the sum of
consumption expenditure, investment, net ex-
ports, and ____.
A) government purchases
B) saving
C) profits
D) net taxes
Answer: A
Topic: Intermediate Goods and Services
Level 1: Definitions and Concepts
154) Intermediate goods and services ____.
A) are double counted in GDP
B) are used to produce final goods and services
C) include used goods
D) are included in GDP
Answer: B
175
Topic: Income Approach
Level 1: Definitions and Concepts
155) The income approach measures GDP by adding
together compensation of employees, proprietors’
income, ____.
A) net investment, saving, and farmers’ income
B) net interest, rental income, and corporate profits
C) net investment, rental income, and corporate
profits
D) net saving, investment income, and profits
Answer: B
Topic: Chain-Weighted Growth Rate
Level 1: Definitions and Concepts
156) The chain-weighted output index method ____.
A) is used to calculate the value of nominal GDP
B) values the quantities produced in a year at the
prices of the base year
C) shows that real GDP increases every year
D) uses the prices of two adjacent years to calculate
the real GDP growth rate
Answer: D
Topic: GDP Deflator
Level 1: Definitions and Concepts
157) The measure of the price level, which is an aver-
age of current year prices expressed as a percent-
age of base-year prices is the ____.
A) GDP inflator
B) inflation rate
C) Urban GDP Price Level
D) GDP deflator
Answer: D
Topic: GDP Deflator
Level 1: Definitions and Concepts
158) GDP deflator equals ____.
A) (Nominal GDP ÷ 100) × Real GDP
B) (Nominal GDP ÷ Real GDP) × 100
C) nominal GDP
D) (Real GDP ÷ Nominal GDP) × 100
Answer: B
176 CHAPTER 5

Topic: Flows and Stocks Topic: Income Approach

Level 2: Using Definitions and Concepts Level 2: Using Definitions and Concepts
159) Investment is a ____ that ____ the ____ of capi- 163) Which of the following items is not a component
tal. of the income approach to measuring U.S. GDP?
A) flow; increases; stock A) interest earned on savings deposits
B) stock; decreases; stock B) profits made by businesses
C) stock; increases; flow C) income earned by businesses that export goods
D) flow; adds to; flow D) investment
Answer: A Answer: D

Topic: Flows and Stocks Topic: Items Not in GDP

Level 2: Using Definitions and Concepts
160) When ____ is greater than ____, saving increases
____.
A) income; government purchases; wealth
B) income; consumption expenditure; wealth
C) consumption expenditure; government pur-
chases; wealth
D) government purchases; consumption expendi-
ture; taxes
Answer: B
Topic: Financing Investment
Level 2: Using Definitions and Concepts
161) If the government budget is balanced and invest-
ment is equal to saving, then ____.
A) exports equal imports
B) net exports are positive
C) the country does not trade internationally
D) net exports are negative
Answer: A
Topic: Expenditure Approach
Level 2: Using Definitions and Concepts
162) Which of the following items is not a component
of the expenditure approach to measuring U.S.
GDP?
A) purchases of food made by families
B) social security payments made by the govern-
ment
C) purchases of U.S.-made movies by Europeans
D) purchases of new homes made by families
Answer: B
Level 2: Using Definitions and Concepts
164) Which of the following items are counted in
GDP? A taxi company’s ____.
A) sale of some bonds to finance its purchases
B) purchase of new trip meters for its cabs
C) sale of 5 old cabs
D) purchase of 5 new cabs
Answer: D
Topic: Price Level
Level 2: Using Definitions and Concepts
165) Paying higher prices means that our ____.
A) standing of living has decreased
B) cost of living has increased
C) cost of living has increased and our standard of
living has increased
D) standard of living has increased
Answer: B
Topic: Real and Nominal GDP
Level 2: Using Definitions and Concepts
166) One year after the base year, the price level rises.
In this year, nominal GDP is ____ real GDP, and
the GDP deflator is ____.
A) less than; less than 100
B) equal to; equal to 10
C) greater than; greater than 100
D) less than; greater than 100
Answer: C
Topic: GDP and Economic Welfare Comparisons
Level 2: Using Definitions and Concepts
167) What we produce during our working time is
____ as part of GDP and the enjoyment we gain
from our leisure time is ____ as part of GDP.
A) included; not included
B) included; included
C) not included; included
D) not included; not included
Answer: A
MEASURING GDP AND ECONOMIC GROWTH 177

Topic: GDP and Economic Welfare Comparisons Topic: Financing Investment

Level 2: Using Definitions and Concepts Level 3: Calculations and Predictions
168) Real GDP is not a good indicator of economic 171) Use the information in the table above to calcu-
welfare because ____. late the value of private saving.
A) it includes the underground economy A) −$15 million
B) it includes a direct measure of health and life B) $40 million
expectancy C) $25 million
C) it underestimates inflation D) $20 million
D) economic welfare depends on many factors not Answer: C
measured or not measured accurately by real
GDP Topic: Financing Investment
Answer: D Level 3: Calculations and Predictions
172) Use the information in the table above to calcu-
Item Millions of dollars late the value of government saving.
A) $15 million
Personal consumption 80
expenditure B) −$5 million
C) $5 million
Government purchases of 30
D) $45 million
goods and services
Answer: C
Net taxes 35
Gross private domestic 20 Item Billions of dollars
investment
Compensation of employees 80
Imports of goods and services 10
Net interest and rental income 30
Exports of goods and services 20
Corporate profits 10
Topic: Expenditure Approach
Proprietor’s income 20
Level 3: Calculations and Predictions
169) Using the information in the table above, calcu- Topic: Net Domestic Income at Factor Cost
late the value of GDP. Level 3: Calculations and Predictions
173) Use the information in the table above to calcu-
A) $185 million
late the value of net domestic income at factor
B) $145 million
cost.
C) $195 million
D) $140 million A) $80 billion
Answer: D B) $140 billion
C) $100 billion
Topic: Expenditure Approach, Net Exports D) $90 billion
Level 3: Calculations and Predictions Answer: B
170) Use the information in the table above to calcu-
late the value of net exports. Topic: Income Approach
Level 3: Calculations and Predictions
A) $10 million
174) Use the information in the table above plus the
B) $0
fact that indirect taxes less subsidies are $10 bil-
C) −$10 million
lion and depreciation is $30 billion to calculate
D) $30 million
the value of GDP.
Answer: A
A) $180 billion
B) $150 billion
C) $140 billion
D) $130 billion
Answer: A
178 CHAPTER 5

Nominal Real GDP Topic: Expenditure Approach

Level 4: Advanced Calculations and Predictions
GDP (billions of
179) In 2004, the country of Nerf had its imports
(billions of 2000 GDP
equal its exports. Nerf’s GDP was $500 million,
Year dollars) dollars) deflator
its consumer expenditure was $380 million, and
2003 90 120 its investment was $20 million. Nerf’s govern-
2004 125 125 ment purchases were ____.
Topic: Real and Nominal GDP A) $100 million
Level 3: Calculations and Predictions B) $900 million
175) Use the information in the table above to calcu- C) $500 million
late nominal GDP in 2003. D) zero
A) $75 billion Answer: A
B) $0.75 billion
C) $10,800 billion Topic: Financing Investment
D) $108 billion Level 4: Advanced Calculations and Predictions
Answer: D 180) Last year in the country of More, government
purchases of goods and services were $20 million
Topic: Real and Nominal GDP and the government had a budget deficit of $3
Level 3: Calculations and Predictions million. Consumption expenditure was $7 mil-
176) Use the information in the table above to calcu- lion, and there was dissaving of $2 million. GDP
late real GDP in 2004. in More was ____
A) $1 billion A) $28 million
B) $100 billion B) $32 million
C) $156.25 billion C) $22 million
D) $95 billion D) $26 million
Answer: B Answer: C
Topic: GDP Growth Rate Topic: Financing Investment
Level 3: Calculations and Predictions Level 4: Advanced Calculations and Predictions
177) If real GDP in 2003 is $9 trillion and real GDP 181) The country of Erdf has net exports of $5 million.
in 2004 is $9.27 trillion, then the economic Government purchases of goods and services are
growth rate in 2004 is ____. $15 million and the government has a budget
A) 2.7 percent surplus of $5 million. Investment is $5 million.
B) $0.27 trillion Private saving in Erdf is ____.
C) 3.0 percent A) $10 million
D) $9.27 trillion B) zero
Answer: C C) $15 million
Topic: Chain-Weighted Growth Rate D) $5 million
Level 3: Calculations and Predictions Answer: D
178) At 2003 prices, the value of production in 2004
was 6 percentage points higher than in 2003. At
2004 prices, the value of production in 2004 was
4 percentage points higher than in 2003. Using
the chain-weighted output index, real GDP is
____ in 2004 than in 2003.
A) 10 percent greater
B) 5 percent greater
C) 7.5 percent greater
D) 4 percent smaller
Answer: B
MEASURING GDP AND ECONOMIC GROWTH
Topic: Financing Investment
Level 4: Advanced Calculations and Predictions
182) The country of Erdf has net exports of −$5 mil-
lion. Government purchases of goods and services
are $15 million and the government has a budget
surplus of $5 million. Investment is $5 million.
National saving in Erdf is ____.
A) $10 million
B) $15 million
C) $5 million
D) −$5 million
Answer: A
Topic: Financing Investment
Level 4: Advanced Calculations and Predictions
183) If the government has a budget surplus and saving
is equal to investment, then ____.
A) aggregate expenditure does not equal aggregate
income
B) imports exceed exports
C) imports equal exports
D) imports are less than exports
Answer: D
Topic: Income Approach
Level 4: Advanced Calculations and Predictions
184) In the country of Darrowby, net domestic income
at factor cost is $2.0 million. Gross domestic
product is $3.0 million, and depreciation is $0.5
million. Indirect taxes less subsidies ____.
A) are $1 million
B) are $0.5 million
C) cannot be calculated
D) are −$0.5 million
Answer: B
Topic: Household Production
Level 4: Advanced Calculations and Predictions
185) Real GDP fluctuations tend to ____ fluctuations
in total production because household production
____.
A) overstate; increases during a recession and de-
creases during an expansion
B) overstate; decreases during a recession and in-
creases during an expansion
C) understate; decreases during a recession and in-
creases during an expansion
D) understate; increases during a recession and de-
creases during an expansion
Answer: A
179
Topic: Chain-Weighted Growth Rate
Level 4: Advanced Calculations and Predictions
186) Real GDP in 2003 is $10 trillion. Between 2003
and 2004, using 2003 prices, GDP grew 3 per-
cent and using 2004 prices real GDP grew 7 per-
cent. Using the chain-weighted output index
method, real GDP in 2004 is ____ trillion.
A) $10.5
B) $11
C) $10.1
D) $12.72
Answer: A
Topic: Expenditure Equals Income
Level 4: Advanced Calculations and Predictions
187) Choose the best statement.
A) GDP equals aggregate expenditure and equals
aggregate income.
B) An increase in government purchases increases
aggregate expenditure but does not change
GDP.
C) An increase in compensation of employees in-
creases aggregate income but does not change
GDP.
D) GDP always equals aggregate expenditure and
sometimes equals aggregate income.
Answer: A
Topic: GDP Growth Rate
Level 4: Advanced Calculations and Predictions
188) In the country of Kemper, real GDP in 2003 was
$5 billion and real GDP in 2004 was $5.5 billion.
The economic growth rate in 2004 was ____ .
A) 16.7 percent a year
B) $0.5 billion
C) 10 percent a year
D) 1 percent a year
Answer: C
180