Macro Economy Today 14th Edition Schiller Test Bank 1

Macro Economy Today 14th Edition
Schiller Test Bank
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Chapter 05 Test Bank

Student: ___________________________________________________________________________
1. National income accounting is defined as the

A. Use of economic theory to predict future income.
B. Measurement of aggregate economic activity.
C. Accounting cost associated with economic choices.
D. Assessment of the distribution of output.
2. National income accounts assist

A. Market investors in making more profitable investments.
B. Individuals in maximizing their incomes.
C. Economic policy makers in formulating policies and evaluating performance.
D. Analysts in measuring the performance of the stock market.
3. Prices are used in national income accounting for all of the following reasons except to
A. Add the values of output from different sectors of the economy.
B. Compare the value of output of one period with that of another.
C. Provide an index to measure the rate of inflation.
D. Provide an index to measure unemployment.
4. A nation's GDP is
A. C + I + G + (X -
M).
B. The sum of value added at some stages of the production process.
C. The total market value of all intermediate goods and services.
D. The total amount of money in circulation.
5. GDP can be calculated by all of the following methods except
A. Adding up the spending on goods and services by business, government, households, and foreigners, and
subtracting imports.
B. Adding up the "value added" at every stage of production in the economy.
C. Adding up all of the receipts of households, government, and business.
D. Adding up all income and expenses by consumers and businesses.
6. A nation's GDP can be calculated as

A. The sum of value added and intermediate goods.
B. The total value added at all stages of production.
C. NI plus depreciation.
D. PI plus depreciation.
7. DVD players can be added to bicycles to compute the GDP by

A. Multiplying output by price and adding the resulting dollar values.
B. Dividing output by price and adding the resulting dollar values.
C. Multiplying dollar values of output by price and adding the result.
D. Dividing dollar values of output by price and adding the result.
8. Suppose iPhones cost consumers $200 and USB cables cost consumers $25. What
contribution does the production of 2,000 iPhones and 1,200 USB cables make to GDP?
A. $1,200,000.
B. $430,000.
C. $200,000.
D. $580,000.
9. Suppose Blu-Ray players cost consumers $300 and Blu-Ray disks cost consumers $30. What
contribution does the production of 250 Blu-Ray players and 3,000 Blu-Ray disks make to the
GDP?
A. $75,000.
B. $165,000.
C. $90,000.
D. $125,000.
10. Which of the following is treated differently in computations of GNP as compared with GDP?
A. Sales in the underground economy.
B. Goods produced by U.S. firms located in foreign countries.
C. Intermediate goods.
D. The value of services performed by housewives.
11. Which of the following statements is correct concerning GDP and GNP?
A. GDP measures output within the nation's borders only.
B. GNP measures output within the nation's borders only.
C. GDP measures output produced by a nation's factors even if they are outside the nation's borders.
D. GNP measures output outside a nation's borders, but not inside it.
12. Which of the following would be included in U.S. GNP but not in U.S. GDP?
A. The tips received by a waiter in New Jersey.
B. Auto parts produced by a Japanese-owned firm operating in North Carolina.
C. Sales of used cars in the United States.
D. Chipsets produced by U.S.-owned firms operating in China.
13. GDP per capita

A. Is equal to a nation's GDP divided by its population.
B. Does not permit comparisons of the economic welfare of different nations.
C. Is real GDP corrected for price level changes.
D. Indicates the most efficient use of resources.
14. The GDP per capita is the most practical way to

A. Measure how much income households receive.
B. Measure how much output can be consumed on a sustainable basis.
C. Make international comparisons of the standard of living.
D. Analyze the growth rate of the economy through time.
15. If a nation has GDP of $12,500 billion and GDP per capita of $62,500, what is the nation's
population?
A. 180 million.
B. 200 million.
C. 625 million.
D. 230 million.
16. If GDP per capita was $500 in 2002 and the population was 25,000, the GDP would have been
approximately
A. $5,000,000.
B. $7,500,000.
C. $125,000,000.
D. None of the choices are correct.
17. If GDP grows more rapidly than population for a particular country over a period of time, then
we can determine that
A. Real GDP has decreased.
B. All citizens of this country are better off.
C. GDP per capita has increased.
D. GDP must rise at a slower rate in the future.
18. Which of the following is excluded from calculations of GDP?

A. Goods that are produced and sold during the time period.
B. Income received by managers of corporations.
C. The value of lawn mowing provided by a teenager for his own family.
D. Goods that bring little value to society.
19. Suppose you volunteer to help clean up your neighborhood, and the only payment you receive
is the sense of goodwill that develops with your neighbors. Your efforts cause the GDP of the
economy to
A. Remain unchanged.
B. Fall by the opportunity cost of the time you spend doing volunteer work.
C. Rise by the opportunity cost of the time spent by all of the people in the neighborhood on the volunteer project.
D. Rise by the value of increased cleanliness of the neighborhood.
20. Suppose a friend claims he is helping the economy by throwing trash on the street rather than in
trash cans because the extra expenditures necessary to clean up the streets will increase GDP.
Your friend is
A. Wrong. GDP will not be affected because nothing new is being produced.
B. Right. GDP will increase, ceteris paribus.
C. Wrong. GDP will not be affected because this is not a socially desirable use of resources and will therefore not
be included in GDP.
D. Wrong. GDP will decline because the neighborhood will be less clean.
21. Which of the following is directly included in the calculation of GDP?

A. The final sale of a brand new Cadillac.
B. The appreciation in value of shares of stock.
C. The sales of sand to a glassmaker.
D. The sales of land to a builder.
22. All of the following count as unreported income except

A. A waiter's tips that are not reported to the IRS.
B. The $5 you pay your friend to help you study for a test.
C. International trade in cocaine.
D. The money you pay a private tutor who works for Tutors Inc.
23. Which of the following would not be included in the calculation of GDP?
A. Income earned by an attorney.
B. Income earned by a CPA.
C. Contract work performed by an electrician.
D. Tips earned by a bartender who does not report them to the IRS.
24. When an individual makes repairs to her own home instead of hiring a company to make the
repairs, the activity is
A. Included in GDP because it represents production.
B. Productive but excluded from GDP because it is a nonmarket activity.
C. Excluded from GDP because it is an intermediate good.
D. Included in GDP but not included in GNP.
25. Which of the following items is definitely part of the underground economy?
A. Payments to family members for performing household tasks.
B. Income from legal pursuits.
C. Unreported income.
D. Child care services provided by a legitimate company.
26. Which of the following is not a final good or service?

A. A refrigerator purchased by a home owner.
B. Paper purchased by a textbook company.
C. A computer purchased by a local middle school.
D. A flu shot purchased by a teacher.
27. A furniture factory produces dining room sets. The lumber it purchases from the lumberyard is
a/an
A. Intermediate service.
B. Final good.
C. Intermediate good.
D. Final service.
28. If one added up the value of all intermediate goods that went into the production of real GDP,
the total value of intermediate goods would be
A. Less than the GDP.
B. Equal to the GDP.
C. Greater than the GDP.
29. To avoid counting the same output more than once, the calculation of GDP includes
A. Intermediate goods plus final goods.
B. Only the value of final goods.
C. The value added at each stage of production plus intermediate goods.
D. Only the output produced by U.S. factors of production.
30. Value added is the

A. Addition to GDP because nonmarket activities are captured.
B. Increase in market value of a product that takes place at each stage of the production process.
C. Difference between nominal GDP and real GDP.
D. Impact on third parties caused by market activities.
31. The sum of value added

A. Measures the intangible quality of goods and services produced in the economy.
B. Equals the sum of the value of intermediate goods.
C. Is one way to compute the GDP.
D. Equals net domestic product.
32. A computer manufacturer sells laptops to retail stores for $450 each. If the manufacturer pays
$200 for the components in each laptop and $75 in wages, the value added to each computer
by manufacturing is
A. $450.
B. $250.
C. $175.
D. $75.
33. A convenience store pays a farmer $1.25 per pineapple. If it costs the farmer $0.15 in seeds,
$0.25 in fertilizer, and $0.25 in forgone output to grow each pineapple, the value added by the
farmer to each pineapple is
A. $0.40.
B. $1.25.
C. $0.85.
D. $0.60.
34. If a farmer grows a head of cabbage with fertilizer costs of $0.10 and seed costs of $0.15 and
sells it to a wholesaler for $0.55, the total value added by the farmer is
A. $0.30.
B. $0.25.
C. $0.55.
D. $0.35.
35. The value of final output produced in a given period, measured in current prices, is
A. Real GDP.
B. Nominal GDP.
C. NDP.
D. GNP.
36. Real GDP is the

A. Value of output produced, including the nonmarket activities that are not counted in nominal GDP.
B. Value of final output produced in a given period measured in constant prices.
C. Value of final output produced in a given period measured in current prices.
D. Intangible quality of goods and services produced in the economy.
37. Real GDP is more accurate than nominal GDP in making comparisons of output over time
because
A. Nominal GDP can increase simply because of price increases over time.
B. Real GDP is not affected by output changes.
C. Nominal GDP is the hypothetical output that would be produced at full employment.
D. Real GDP is not affected by changes in productivity or the size of the labor force.
38. Real GDP is used most effectively to

D. Analyze the growth rate of the economy over time.
39. Suppose the total market value of all the final goods and services produced in the country of
Rushya was $8 billion in 2008 (measured in 2008 prices) and $9 billion in 2009 (measured in
2009 prices). Which of the following statements is definitely correct?
A. Production increased in Rushya between 2008 and 2009.
B. Real GDP increased in Rushya between 2008 and 2009.
C. Average price levels increased in Rushya between 2008 and 2009.
D. Whether real GDP increased cannot be determined with the information given.
Cannedada was $4 billion in 2008 (measured in 2008 prices) and $5 billion in 2009
(measured in 2009 prices). Which of the following statements is definitely correct?
A. Production increased in Cannedada between 2008 and 2009.
B. Average price levels increased in Cannedada between 2008 and 2009.
C. Nominal GDP decreased in Cannedada between 2008 and 2009.
D. The change in real GDP cannot be determined without more information.
41. In periods of rising prices, percentage increases in nominal GDP will

A. Exceed percentage increases in real GDP.
B. Equal percentage increases in real GDP.
C. Be less than percentage increases in real GDP.
D. Not change in relationship to real GDP.
42. If real GDP falls from one period to another and the price level stays the same, we can conclude
that
A. Nominal GDP increased.
B. Inflation increased.
C. Nominal GDP decreased.
D. NDP decreased.
43. If nominal GDP was $11,500 billion in 2003 and the price level in 2003 was 111.6, then real
GDP would have been approximately
A. $9,795 billion.
B. $10,305 billion.
C. $10,485 billion.
D. $9,750 billion.
44. If the price level is 100 for 2005 and the price level is 106.5 in 2007, a nominal GDP in 2007 of
$15,600 billion would mean that real GDP in 2007 (in 2005 prices) would be closest to
A. $14,647.9 billion.
B. $15,600.0 billion.
C. $14,751.3 billion.
D. $13,971.2 billion.
45. Assume nominal GDP is $10,000 trillion in period 1 and $15,000 trillion in period 2. If prices in
period 2 are twice as high as in period 1, real GDP in period 2 is
A. $10,000 trillion measured in period 1 prices.
B. $12,500 trillion measured in period 1 prices.
C. $15,000 trillion measured in period 1 prices.
D. $7,500 trillion measured in period 1 prices.
46. If real GDP in 2005 is $8,000 billion and the price level is 125, what is nominal GDP in 2005?
A. $10,000.0 billion
B. $9,200.5 billion
C. $6,830.6 billion
D. $5,000.0 billion
47.
According to the hypothetical economy in Figure 5.1, between 1960 and 1970 real GDP
declined but nominal GDP continued to rise. The increase in nominal GDP was due to
A. An increase in the price level greater than the decrease in output, causing the nominal dollar value of output
produced to increase.
B. An increase in the quantity of output produced.
C. A decrease in the price level.
D. An increase in the standard of living.
48.
In Figure 5.1, during the period between the early 1970s and 1980, real GDP grew at a faster
rate than nominal GDP. This is an indication that
A. Average price levels decreased.

B. Production increased at a faster rate than average price increased.
C. Production increased at a slower rate than average price increased.
D. Average price levels increased.
49.
In Figure 5.1, during the 1980-1990 time periods, real GDP was relatively constant but
nominal GDP increased. This can be explained by
A. Lower average price levels.

B. Inflation.
C. Higher levels of production.
D. A decrease in production per capita.
50.
According to the hypothetical economy in Figure 5.2, real GDP differs from nominal GDP from
1980 to 2000 because
A. Price level increases caused real GDP to increase.

B. Population growth exceeded output growth.
C. Inflation caused the dollar value of output to decrease.
D. Inflation caused the dollar value of output to increase.
51.
The base year for the calculation of real GDP for the hypothetical economy in Figure 5.2 is
closest to
A. 1960.
B. 1980.
C. 1990.
D. 2000.
52.
In Figure 5.2, the fact that real GDP is greater than nominal GDP during the 1960-1980
periods implies that
A. Average price levels during this period must have been lower than during the base period.
B. Per capita GDP must have increased.
C. Average price levels must have decreased during this period.
D. Production must have decreased during this period.
53. Inflation is
A. The increase in the market value of a product that takes place at each stage of the production process.
B. Included in the calculation of real GDP.
C. An increase in the average level of prices of goods and services.
D. A decrease in the price of all goods and services.
54. The purpose of chain-weighted price adjustments in the calculation of GDP is to

A. Adjust for changes in relative prices.
B. Adjust for changes in average prices.
C. Adjust for changes in production.
D. Convert NDP to GDP.
55. The alternative combinations of final goods and services that can be produced with all available
resources and technology are the
A. Real GDP.
B. Nominal GDP.
C. Production possibilities.
D. Net domestic product.
56. An economy's production possibilities curve indicates

A. The rate of economic growth.
B. The prices of any two goods.
C. The rate of investment.
D. How much the economy can produce.
57. The wearing out of plants and equipment is known as

A. Net domestic product.
B. Depreciation.
C. Inflation.
D. Chain-weighted adjustment.
58. Depreciation represents

A. The consumption of capital in the production process.
B. A loss of productive capability as a result of the inefficient use of resources.
C. Wasted capital.
D. Gross investment plus net investment.
59. Net domestic product (NDP) is determined by

A. Subtracting depreciation from GDP.
B. Adding consumption, investment, government expenditures, and net exports.
C. Adding appreciation to GDP.
D. Subtracting consumption from GDP.
60. Net domestic product is

A. Equal to GDP minus indirect business taxes.
B. The total market value of all goods produced in the period.
C. Equal to national income minus depreciation.
D. The market value of all final goods and services produced in the economy after adjusting for depreciation.
61. The account that gives the most accurate understanding of the economy's potential for growth
over the long term is
A. GDP.
B. NDP.
C. NI.
D. GNP.
62. The national income aggregate calculated by subtracting depreciation from GDP is known as
A. Net investment.
B. Net domestic product.
C. Gross investment.
D. Value added.
63. Gross investment is the

A. Expenditure on new plants, equipment, and residential construction, plus changes in business inventories.
B. Consumption of capital in the production process.
C. Wearing out of plant and equipment.
D. Alternative combinations of final goods and services that can be produced with all available resources and
technology.
64. An economy's production possibilities are most likely to expand if

A. Net investment is negative.
B. Net investment is zero.
C. Gross investment is greater than depreciation.
D. Depreciation is greater than gross investment.
65. A nation's production possibilities curve should, ceteris paribus, shift
A. Inward if gross investment exceeds depreciation.
B. Inward if net investment is zero.
C. Outward if net investment is positive.
D. Outward if gross investment is positive.
66. The stock of capital in the United States can grow only if
A. Depreciation is positive.
B. Gross investment minus depreciation is positive.
C. GDP minus depreciation is negative.
D. The production possibilities curve shifts inward toward the origin.
67. If depreciation is smaller than gross investment,

A. Net investment exceeds depreciation.
B. Gross investment is negative.
C. Net investment is positive.
D. The nation's capital stock is getting smaller.
68. If depreciation exceeds gross investment,

C. The difference between GDP and NDP is smaller than gross investment.
D. The nation's capital stock is being depleted.
69. The addition to the economy's capital stock can be found by

A. Subtracting NDP from GDP.
B. Subtracting depreciation from GDP.
C. Subtracting depreciation from gross investment.
D. Subtracting net income from gross investment.
70. A nation's capital stock will decline, ceteris paribus, for all of the following reasons except
A. The population increases faster than the capital stock.
B. Net investment is negative.
C. Depreciation exceeds gross investment.
71. If for a given year gross investment is $300 billion and depreciation is $75 billion, then, for that
year, the capital stock __________ and net investment was ________.
A. Increased by $250 billion; $225 billion
B. Increased by $225 billion; $225 billion
C. Decreased by $225 billion;$300 billion
D. Decreased by $300 billion; $300 billion
72. Which of the following typically purchases the most goods and services in the U.S. economy?
A. Foreigners.
B. Households.
C. Federal, state and local governments combined.
D. Businesses.
73. When calculating GDP, consumption makes up approximately

A. One-fifth of total output.
B. One-half of total output.
C. Two-thirds of total output.
D. One-third of total output.
74. Which of the following expenditures are included in consumption?

A. Police services.
B. Personal medical services.
C. Public highways.
D. Public parks.
75. The economic definition of investment includes all of the following except
A. Residential construction.
B. Net changes in business inventory.
C. Spending for plants and capital equipment.
D. A retirement portfolio of stocks and bonds.
76. Which of the following is investment, according to an economist?

A. The purchase of U.S. savings bonds.
B. A collection of rare coins.
C. An increase in business inventories.
D. The purchase of a new family car.
77. An increase in business inventories during a time period, ceteris paribus, will
A. Decrease GDP during that period.
B. Increase GDP during that period.
C. Not affect GDP during that period but will increase GDP in later periods when the inventory is sold.
D. Never affect GDP because changes in inventories are not included in the calculation of GDP.
78. Which of the following types of government spending is included in the calculation of GDP?
A. Federal spending only.
B. Federal, state, and local government spending for any purpose.
C. Federal, state, and local government spending on goods and services only.
D. Federal, state, and local spending on transfer payments only.
79. When we calculate GDP, government spending on goods and services makes up
approximately
C. One-tenth of total output.
80. Exports are

A. Goods and services sold to international buyers.
B. Not included in GDP.
C. Goods and services produced by the public sector.
D. Goods and services purchased from foreign sources.
81. Goods and services purchased from international sources are

A. Gross investment.
B. Imports.
C. Exports.
D. Net exports.
82. Ceteris paribus, if imports increase in any given year,

A. Exports will increase.
B. GDP will increase.
C. GDP will decrease.
D. NDP will increase.
83. In the U.S. GDP, imports

A. Include smuggled goods.
B. Include black-market goods.
C. Are the total of U.S. goods sent abroad.
D. Are goods purchased from foreign sources.
84. Net exports are

A. Goods sold to foreigners.
C. The value of exports minus the value of imports.
D. Exports that ultimately are imported back into the United States.
85. When we calculate GDP, imports are
A. Subtracted from total spending because they are part of another country's GDP.
B. Added to exports because both represent purchases of final goods.
C. Subtracted from exports to obtain gross exports.
D. Subtracted from exports and included in gross investment.
86.
According to the economy in Figure 5.3, net exports
A. Made a positive contribution to GDP from 1990 to 2000.

B. Were a positive number from 1970 to 1990.
C. Increased the size of GDP from 1970 to 1990.
D. Remained constant from 1990 to 2000.
87.
A. Were a negative number from 1990 to 2000.

B. Were a negative number from 1970 to 1985.
C. Made a positive contribution to GDP from 1970 to 1985.
D. Did not impact GDP from 1990 to 2000 because exports were greater than imports.
88. The components of GDP are

A. C + I + X - (G + M).
B. C + I + G + (X - M).
C. C + I - G + (X - M).
D. C + I + G - (X + M).
89. Which of the following statements is true?
A. The production possibilities of the economy define the limits to real income.
B. Consumption equals investment.
C. Market incomes equal business expenditures.
D. Every dollar spent on goods and services becomes income for the government.
90. Which of the following is a component included in the measure GDP, according to the income
approach?
A. Interest.
B. Investment.
C. Personal savings.
D. Consumption expenditures.
91. National income is a measure of

A. How well the economy is doing on a gross basis.
B. The income earned by the factors of production in producing GDP.
C. The income received by the factors of production plus depreciation.
D. The country's future productive capacity.
92. "Income received by households before payment of personal taxes" is known as

A. Disposable income.
C. Saving.
D. Personal income.
93. Transfer payments are part of personal income but not national income because
A. They are a payment for which no goods or services are exchanged.
B. Personal income is an earnings concept.
C. National income is a receipts concept.
D. They represent a payment to factors of production.
94. Social Security payments to retired persons are included in

A. Both GDP and personal income.
B. Personal income and disposable income.
C. National income but not personal income.
D. National income and subtracted to get personal income.
95. Which of the following best measures the household sector's contribution to the support of the
public sector?
A. GDP minus depreciation.
B. The difference between personal income and disposable income.
C. Government transfer payments.
D. Corporate profits taxes plus undistributed corporate profits.
96. Disposable income is

A. The amount of available income households have to either spend or save.
B. The amount the household sector earns in producing the GDP.
C. The amount households have left to spend after savings are subtracted.
D. Personal income plus income taxes.
97. The measure of what households receive after personal income tax is deducted is
A. Gross domestic product.
B. Personal income.
C. National income.
D. Disposable income.
98. Disposable income is equal to

A. Personal taxes + personal income.
B. Personal taxes - personal income.
C. Consumption - saving.
D. Consumption + saving.
99. In national income accounting, the two choices for disposable income are
A. Saving and consumption.
B. Saving and investment.
C. Consumption and investment.
D. Personal income and personal taxes.
100 The part of disposable income not spent on current consumption is

. A. Saving.
B. Dissaving.
C. Investment.
D. Social Security taxes.
101 The measure of the part of disposable income that is not consumed is
. A. GDP.
B. Net investment.
C. Saving.
D. Depreciation.
102
.
On the basis of Table 5.1, gross domestic product is
A. $6,980 billion.
B. $7,635 billion.
C. $6,810 billion.
D. $7,720 billion.
103
.
On the basis of Table 5.1, net domestic product is
A. $6,340 billion.
B. $6,170 billion.
C. $6,995 billion.
D. $7,080 billion.
104
.
On the basis of Table 5.1, personal income is
A. $5,620 billion.
B. $5,790 billion.
C. $6,530 billion.
D. $6,445 billion.
105
.
On the basis of Table 5.1, personal saving is
A. $1,215 billion.
B. $1,130 billion.
C. $305 billion.
D. $205 billion.
106
.
On the basis of Table 5.1, depreciation is
A. $640 billion.
B. $50 billion.
C. $85 billion.
D. $690 billion.
107
.
On the basis of Table 5.1, net exports are
A. $740 billion.
B. $825 billion.
C. -$85 billion.
D. $85 billion.
108
.
On the basis of Table 5.2, GDP is
A. $2,090 billion.
B. $4,210 billion.
C. $4,400 billion.
D. $4,020 billion.
109
.
On the basis of Table 5.2, national income is
A. $4,020 billion.
B. $3,785 billion.
C. $2,475 billion.
D. $3,595 billion.
110
.
On the basis of Table 5.2, disposable income is
A. $3,490 billion.
B. $2,805 billion.
C. $4,480 billion.
D. $3,680 billion.
111
.
A. $425 billion.
B. $125 billion.
C. -$125 billion.
D. $190 billion.
112
.
On the basis of Table 5.3, the value of the income aggregate that is defined as "the total market
value of all final goods and services produced in a given time period" (also known as the GDP)
is
A. $10,700 billion.
B. $12,400 billion.
C. $11,900 billion.
D. $12,300 billion.
113
.
On the basis of Table 5.3, the value of the income aggregate that is defined as "the amount of
output we could consume without reducing our stock of capital" (also known as the net
domestic product) is
A. $10,700 billion.
B. $12,400 billion.
C. $12,300 billion.
D. $11,900 billion.
114
.
On the basis of Table 5.3, the value of the income aggregate that is defined as "total income
earned by current factors of production" (also known as national income) is
A. $10,700 billion.
B. $12,300 billion.
C. $11,900 billion.
D. $12,000 billion.
115
.
On the basis of Table 5.3, the value of the income aggregate that is defined as "income
received by households before payment of personal taxes" (also known as personal income) is
A. $5,870 billion.
B. $10,070 billion.
C. $9,570 billion.
D. $10,600 billion.
116
.
On the basis of Table 5.3, the value of the income aggregate that is defined as "after-tax
income of consumers" (also known as disposable income) is
A. $8,570 billion.
B. $10,070 billion.
C. $11,570 billion.
D. $10,600 billion.
117
.
On the basis of Table 5.3, the value of the income aggregate that is defined as "the part of
disposable income not spent on current consumption" (also known as savings) is
A. -$500 billion.
B. $500 billion.
C. $370 billion.
D. $8,570 billion.
118
.
On the basis of Table 5.3, the net addition to the capital stock is
A. $1,000 billion.
B. $400 billion.
C. $1,400 billion.
D. $370 billion.
119 The value of total output must equal the value of total income in an economy for all of the
. following reasons except
A. One person's expenditures on goods and services is another person's income.
B. Income earned is spent on goods and services, which creates additional production.
C. For the circular nature of spending and income in the economy.
D. Government expenditures must equal government revenues.
120 Businesses return purchasing power to the circular flow in the form of
. A. Retained earnings.
B. Depreciation.
C. Business investment.
D. Profit.
121 The social well-being of a country
. A. Is best measured by per capita GDP.
B. Always increases when real GDP increases.
C. Decreases when real GDP decreases.
D. Is measured by more than changes in real GDP.
122 One In the News article titled "A Lot Going on Under the Table" reports that 83 percent of
. households make untaxed or unmeasured purchases. This is an example of
A. An intermediate good.
B. The underground economy.
C. Market activity.
D. Value added.
123 One In the News article states that the underground economy includes transactions that are
. untaxed or unaccounted for in GDP. According to this article, the underground economy
A. Involves a small percentage of households.
B. Includes only illegal transactions.
C. Is captured in GDP.
D. Impacts the amount of tax dollars collected.
124 A cartoon in the text shows two people watching television. On the screen are the
. words "Economic growth indicators are up, led by car repairs, divorce costs, open-heart
surgeries, and toxic waste cleanups." The cartoon illustrates the
A. Difference between economic welfare and social welfare.
B. Difference between GDP and national income.
C. Problem of measuring the difference in wealth between the United States and other nations.
D. Difference between GDP and NDP.
125 If a nation has a population of 100 million, a labor force of 60 million, and GDP of $200 billion,
. then GDP per capita must be
A. $2,000.00.
B. $3,333.33.
C. $200.00.
D. $333.33.
126 The increase in the market value of a good at a particular stage of production is known as
. A. Profit.
B. Value added.
C. Cost based accounting.
D. The input price.
127 To measure an economy's output adjusted for changes in the price level, one would use
. A. GDP per capita.
B. Value added.
C. Real GDP.
D. Nominal GDP.
128 Goods produced for the purpose of producing other goods are known as
. A. Services.
B. Exports.
C. Consumption goods.
D. Investment goods.
129 A major diversion that is not of the income flow to the private sector is
. A. Indirect business taxes.
B. Investment.
C. Wages.
130 If the price level is increasing at 4% and output is increasing at 5%, then
. A. Real GDP is increasing faster than nominal GDP.
B. Nominal GDP is increasing faster than real GDP.
C. Nominal GDP is increasing at 20%.
131 The measure of GDP is
. A. Geographically focused.
B. Globally focused.
C. Vertically focused.
D. Horizontally focused.
132 To calculate real GDP, we

. A. Measure in the prices of goods and services of that period.
B. Estimate future prices of goods and services.
C. Adjust the market value of goods and services for changing prices.
133 GDP is the total market value of all final goods and services produced in a given time period
. within a nation's borders.
True False
134 Comparisons of per capita GDP across international boundaries provide information on the
. distribution of GDP within each country.
True False
135 GDP is geographically focused, including all output produced within a nation's borders.
. True False
136 If a friend helps you with your homework, it will not be calculated in the GDP accounts. But if
. you hire a tutor who reports the income, the services will be counted in GDP.
True False
137 GDP can be calculated by summing up the "value added" at every stage of production.
. True False
138 In the calculation of real GDP, the value of goods and services is measured in the current prices
. for each year.
True False
139 Nominal GDP is not used to determine recessions because inflation can disguise the
. occurrence of recessions.
True False
140 The base period is the time period used for comparative analysis for the calculation of real
. GDP.
True False
141 For the nation's capital stock to grow, net investment must be positive.
. True False
142 Government spending in the national income accounts refers only to expenditures at the federal
. level.
True False
143 When U.S. net exports are negative, the United States consumes more output than it produces.
.
True False
144 Disposable income is what households have to spend or to save.
. True False
145 Savings equal the difference between personal income and consumption.
. True False
146 The dollar value of output for an economy must always equal the dollar value of income.
. True False
147 Without foreign trade, the dollars used to buy goods and services are included in the circular
. flow as consumption, investment, and government spending.
True False
148 What is the difference between GDP and GNP?

.
149 Explain the difference between intermediate goods and final goods and give an example of
. each.
150 Are there any measurement problems that occur with the GDP calculation? Explain.
.
151 Which is better for making comparisons over time, nominal GDP or real GDP, and why?
.
152 What are transfer payments, and how do they make their way into the GDP calculation?
.
153 How are total output and total income related to each other, and why?
.
Chapter 05 Test Bank Key
1. National income accounting is defined as the
A. Use of economic theory to predict future income.
B. Measurement of aggregate economic activity.
C. Accounting cost associated with economic choices.
D. Assessment of the distribution of output.
The prosperity of a nation may be measured by its total income created by all factors
of production.
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 01 Easy
Learning Objective: 05-01 What GDP measures-and what it doesn't.
Topic: MEASURES OF OUTPUT
2. National income accounts assist
A. Market investors in making more profitable investments.
B. Individuals in maximizing their incomes.
C. Economic policy makers in formulating policies and evaluating performance.
D. Analysts in measuring the performance of the stock market.
National income is one way to calculate an economy's well-being.
Blooms: Understand
Difficulty: 02 Medium
3. Prices are used in national income accounting for all of the following reasons except to
A. Add the values of output from different sectors of the economy.
B. Compare the value of output of one period with that of another.
C. Provide an index to measure the rate of inflation.
D. Provide an index to measure unemployment.
Prices are used to track the market value of output.
Blooms: Understand
4. A nation's GDP is
A. C + I + G + (X -
M).
B. The sum of value added at some stages of the production process.
C. The total market value of all intermediate goods and services.
D. The total amount of money in circulation.
GDP is a measure of total market value of all final goods and services produced within a
nation's borders. It can be represented by the equation: C+I+G+(X-M). Where C is
consumption, I is investment, G is government spending, and N and X represent
exports minus imports.
AACSB: Analytic
Blooms: Apply
Difficulty: 03 Hard
Topic: THE USES OF OUTPUT
5. GDP can be calculated by all of the following methods except
A. Adding up the spending on goods and services by business, government, households, and foreigners, and
subtracting imports.
B. Adding up the "value added" at every stage of production in the economy.
C. Adding up all of the receipts of households, government, and business.
D. Adding up all income and expenses by consumers and businesses.
GDP can be measured through total expenditures, total income, or total value added.
Blooms: Remember
Difficulty: 01 Easy
6. A nation's GDP can be calculated as
A. The sum of value added and intermediate goods.
B. The total value added at all stages of production.
C. NI plus depreciation.
D. PI plus depreciation.
The value added approach to calculating GDP measures how much of an increase in the
market value occurs at each particular stage of production.
AACSB: Analytic
Blooms: Apply
Difficulty: 03 Hard
7. DVD players can be added to bicycles to compute the GDP by
A. Multiplying output by price and adding the resulting dollar values.
B. Dividing output by price and adding the resulting dollar values.
C. Multiplying dollar values of output by price and adding the result.
D. Dividing dollar values of output by price and adding the result.
The total market value of all production of all goods and services is represented by
GDP. GDP = (QDVD x PDVD) + (QBIKE x PBIKE).
AACSB: Analytic
Blooms: Analyze
Difficulty: 03 Hard
8. Suppose iPhones cost consumers $200 and USB cables cost consumers $25. What
contribution does the production of 2,000 iPhones and 1,200 USB cables make to GDP?
A. $1,200,000.
B. $430,000.
C. $200,000.
D. $580,000.
GDP represents the total value of production in the economy at current market prices. In this
case, the value would be the quantity of iPhones multiplied by the cost of phones, added to
the price of USB cables multiplied by the cost of USB cables which is equivalent to $430,000
and can be calculated by: $430,000 = (200 ×2,000 + 25 ×1,200).
AACSB: Analytic
Blooms: Apply
Difficulty: 03 Hard
9. Suppose Blu-Ray players cost consumers $300 and Blu-Ray disks cost consumers $30.
What contribution does the production of 250 Blu-Ray players and 3,000 Blu-Ray disks make
to the GDP?
A. $75,000.
B. $165,000.
C. $90,000.
D. $125,000.
The total production of each product multiplied by the price of each product, then added
together, is the value of GDP. In this example GDP is equal to $165,000 = (300 ×250 +
30 ×3,000).
Blooms: Remember
Difficulty: 01 Easy
10. Which of the following is treated differently in computations of GNP as compared with GDP?
A. Sales in the underground economy.
B. Goods produced by U.S. firms located in foreign countries.
C. Intermediate goods.
D. The value of services performed by housewives.
GDP includes production within the political borders, while GNP measures production
by U.S.-owned factors of production regardless of where they may be located.
AACSB: Analytic
Blooms: Apply
Difficulty: 03 Hard
11. Which of the following statements is correct concerning GDP and GNP?
A. GDP measures output within the nation's borders only.
B. GNP measures output within the nation's borders only.
C. GDP measures output produced by a nation's factors even if they are outside the nation's borders.
D. GNP measures output outside a nation's borders, but not inside it.
GDP includes production within the political borders regardless of whose factors of
production are used to produce it, while GNP measures production by U.S.-owned factors of
production regardless of where they may be located.
Blooms: Remember
Difficulty: 01 Easy
12. Which of the following would be included in U.S. GNP but not in U.S. GDP?
A. The tips received by a waiter in New Jersey.
B. Auto parts produced by a Japanese-owned firm operating in North Carolina.
C. Sales of used cars in the United States.
D. Chipsets produced by U.S.-owned firms operating in China.
To count in U.S. GDP, something must be produced within the borders of the United States.
AACSB: Analytic
Blooms: Apply
Difficulty: 03 Hard
13. GDP per capita
A. Is equal to a nation's GDP divided by its population.
B. Does not permit comparisons of the economic welfare of different nations.
C. Is real GDP corrected for price level changes.
D. Indicates the most efficient use of resources.
GDP per capita is also known as average GDP. GDP per capita = Dollar value of GDP/Total
population
AACSB: Analytic
Blooms: Apply
Difficulty: 03 Hard
14. The GDP per capita is the most practical way to
D. Analyze the growth rate of the economy through time.
We can compare the GDP per capita of country A with the GDP per capita of country B to
determine which country's citizens are relatively more prosperous. Bear in mind, GDP per
capital cannot tell us about the way GDP is actually distributed or used- only a statistical
average.
Blooms: Understand
15. If a nation has GDP of $12,500 billion and GDP per capita of $62,500, what is the nation's
population?
A. 180 million.
B. 200 million.
C. 625 million.
D. 230 million.
Population is equal to GDP divided by GDP per capita ($12,500,000,000/$62,500
= 200,000,000).
AACSB: Analytic
Blooms: Apply
Difficulty: 03 Hard
16. If GDP per capita was $500 in 2002 and the population was 25,000, the GDP would have
been approximately
A. $5,000,000.
B. $7,500,000.
C. $125,000,000.
GDP equals GDP per capita multiplied by population ($500 ×25,000 = $12,500,000).
AACSB: Analytic
Blooms: Apply
Difficulty: 03 Hard
17. If GDP grows more rapidly than population for a particular country over a period of time, then
we can determine that
A. Real GDP has decreased.
B. All citizens of this country are better off.
C. GDP per capita has increased.
D. GDP must rise at a slower rate in the future.
As GDP per capita is calculated by (Total GDP/Total population), if GDP grows more rapidly
than population, GDP per capita has increased. GDP per capita is influenced by growth in
GDP and growth in the population.
AACSB: Analytic
Blooms: Apply
Difficulty: 03 Hard
18. Which of the following is excluded from calculations of GDP?
A. Goods that are produced and sold during the time period.
B. Income received by managers of corporations.
C. The value of lawn mowing provided by a teenager for his own family.
D. Goods that bring little value to society.
Nonmarket production is excluded from GDP.
Blooms: Remember
Difficulty: 01 Easy
100. Suppose you volunteer to help clean up your neighborhood, and the only payment you
receive is the sense of goodwill that develops with your neighbors. Your efforts cause the
GDP of the economy to
A. Remain unchanged.
B. Fall by the opportunity cost of the time you spend doing volunteer work.
C. Rise by the opportunity cost of the time spent by all of the people in the neighborhood on the volunteer
project.
D. Rise by the value of increased cleanliness of the neighborhood.
GDP will not increase if production is not a reported market activity.
AACSB: Analytic
Blooms: Apply
Difficulty: 03 Hard
20. Suppose a friend claims he is helping the economy by throwing trash on the street rather
than in trash cans because the extra expenditures necessary to clean up the streets will
increase GDP. Your friend is
A. Wrong. GDP will not be affected because nothing new is being produced.
B. Right. GDP will increase, ceteris paribus.
C. Wrong. GDP will not be affected because this is not a socially desirable use of resources and will therefore
not be included in GDP.
D. Wrong. GDP will decline because the neighborhood will be less clean.
Even wasteful spending on waste removal is a final service and technically causes real GDP
to rise.
AACSB: Analytic
Blooms: Apply
Difficulty: 03 Hard
21. Which of the following is directly included in the calculation of GDP?
A. The final sale of a brand new Cadillac.
B. The appreciation in value of shares of stock.
C. The sales of sand to a glassmaker.
D. The sales of land to a builder.
Final goods count in GDP but used, intermediate, and financial goods do not.
AACSB: Analytic
Blooms: Apply
Difficulty: 03 Hard
22. All of the following count as unreported income except
A. A waiter's tips that are not reported to the IRS.
B. The $5 you pay your friend to help you study for a test.
C. International trade in cocaine.
D. The money you pay a private tutor who works for Tutors Inc.
The calculation of GDP fails to capture market activities that aren't reported to tax or
census authorities-- also known as unreported income. Some activities are not reported
as income for obvious reasons: they are illegal, or someone is trying to avoid taxes.
AACSB: Analytic
Blooms: Analyze
Difficulty: 03 Hard
23. Which of the following would not be included in the calculation of GDP?
A. Income earned by an attorney.
B. Income earned by a CPA.
C. Contract work performed by an electrician.
D. Tips earned by a bartender who does not report them to the IRS.
Any income that is not reported from legal or illegal sources (known as unreported income)
does not officially count in GDP.
AACSB: Analytic
Blooms: Apply
Difficulty: 03 Hard
24. When an individual makes repairs to her own home instead of hiring a company to make the
repairs, the activity is
A. Included in GDP because it represents production.
B. Productive but excluded from GDP because it is a nonmarket activity.
C. Excluded from GDP because it is an intermediate good.
D. Included in GDP but not included in GNP.
If an individual uses his or her own time to make improvements rather than hiring a
company, then the activity will not be counted in GDP.
AACSB: Analytic
Blooms: Apply
Difficulty: 03 Hard
25. Which of the following items is definitely part of the underground economy?
A. Payments to family members for performing household tasks.
B. Income from legal pursuits.
C. Unreported income.
D. Child care services provided by a legitimate company.
The underground economy includes activities that are illegal or not reported for tax purposes.
Blooms: Understand
26. Which of the following is not a final good or service?
A. A refrigerator purchased by a home owner.
B. Paper purchased by a textbook company.
C. A computer purchased by a local middle school.
D. A flu shot purchased by a teacher.
The paper purchased by the textbook company is an intermediate good used in producing
the textbook.
AACSB: Analytic
Blooms: Apply
Difficulty: 03 Hard
27. A furniture factory produces dining room sets. The lumber it purchases from the lumberyard
is a/an
A. Intermediate service.
B. Final good.
C. Intermediate good.
D. Final service.
Any good used in the production of a final good is considered to be an intermediate good.
AACSB: Analytic
Blooms: Analyze
Difficulty: 03 Hard
28. If one added up the value of all intermediate goods that went into the production of real GDP,
the total value of intermediate goods would be
A. Less than the GDP.
B. Equal to the GDP.
C. Greater than the GDP.
By adding up the contribution of all stages of production, you are double-counting and
thereby overstating actual GDP. By adding up the 'marginal'contribution you get an accurate
measure of real GDP.
Blooms: Remember
Difficulty: 01 Easy
29. To avoid counting the same output more than once, the calculation of GDP includes
A. Intermediate goods plus final goods.
B. Only the value of final goods.
142. The value added at each stage of production plus intermediate goods.
143. Only the output produced by U.S. factors of production.
We do not count intermediate goods because they will be counted as part of the total market
value when the final good is sold.
Blooms: Understand
30. Value added is the
A. Addition to GDP because nonmarket activities are captured.
B. Increase in market value of a product that takes place at each stage of the production process.
C. Difference between nominal GDP and real GDP.
D. Impact on third parties caused by market activities.
As goods move along the supply chain from scratch to final retail sale, value is added at
each stage of the production process.
Blooms: Remember
Difficulty: 01 Easy
31. The sum of value added
A. Measures the intangible quality of goods and services produced in the economy.
B. Equals the sum of the value of intermediate goods.
C. Is one way to compute the GDP.
D. Equals net domestic product.
A final good's price should equal the total value added at each stage of production.
Blooms: Understand
32. A computer manufacturer sells laptops to retail stores for $450 each. If the manufacturer
pays $200 for the components in each laptop and $75 in wages, the value added to each
computer by manufacturing is
A. $450.
B. $250.
C. $175.
D. $75.
Value added is simply selling price of output minus cost of physical inputs. A computer, and
the physical computer parts to make the computer, has the same weight. The computer parts
are bought for $200 and sold in a different value-added format as a computer for $450. The
actual value added of assembly is $250. The wage cost of $75 is inside the value-added
component of $250.
AACSB: Analytic
Blooms: Apply
Difficulty: 03 Hard
33. A convenience store pays a farmer $1.25 per pineapple. If it costs the farmer $0.15 in seeds,
$0.25 in fertilizer, and $0.25 in forgone output to grow each pineapple, the value added by
the farmer to each pineapple is
A. $0.40.
B. $1.25.
C. $0.85.
D. $0.60.
Value added is equal to the sale price less any explicit intermediate input prices required
to produce the good.
AACSB: Analytic
Blooms: Apply
Difficulty: 03 Hard
34. If a farmer grows a head of cabbage with fertilizer costs of $0.10 and seed costs of $0.15
and sells it to a wholesaler for $0.55, the total value added by the farmer is
A. $0.30.
B. $0.25.
C. $0.55.
D. $0.35.
Value added is equal to the sale price less any explicit input prices required to produce the
good.
AACSB: Analytic
Blooms: Apply
Difficulty: 03 Hard
35. The value of final output produced in a given period, measured in current prices, is
A. Real GDP.
B. Nominal GDP.
C. NDP.
D. GNP.
Nominal GDP tracks the value of production in a given year.
Blooms: Remember
Difficulty: 01 Easy
Learning Objective: 05-02 The difference between real and nominal GDP.
36. Real GDP is the
A. Value of output produced, including the nonmarket activities that are not counted in nominal GDP.
B. Value of final output produced in a given period measured in constant prices.
C. Value of final output produced in a given period measured in current prices.
D. Intangible quality of goods and services produced in the economy.
Real GDP allows us to express production while controlling for changes to the price level.
Real GDP allows us to express production while controlling for changes to the price level
so we can make comparisons of production between time periods.
Blooms: Remember
Difficulty: 01 Easy
37. Real GDP is more accurate than nominal GDP in making comparisons of output over time
because
A. Nominal GDP can increase simply because of price increases over time.
B. Real GDP is not affected by output changes.
C. Nominal GDP is the hypothetical output that would be produced at full employment.
D. Real GDP is not affected by changes in productivity or the size of the labor force.
It's important to distinguish between increases in the quantity of goods and services from
increases in their prices. Real GDP tracks only changes to production while nominal GDP
tracks changes to production and prices; so nominal GDP is less useful.
Blooms: Understand
38. Real GDP is used most effectively to
D. Analyze the growth rate of the economy over time.
Growth in actual production means growth in the economy; real GDP is used to measure
this growth, which allows us to compare the output over time.
Blooms: Understand
Rushya was $8 billion in 2008 (measured in 2008 prices) and $9 billion in 2009 (measured in
2009 prices). Which of the following statements is definitely correct?
A. Production increased in Rushya between 2008 and 2009.
B. Real GDP increased in Rushya between 2008 and 2009.
C. Average price levels increased in Rushya between 2008 and 2009.
D. Whether real GDP increased cannot be determined with the information given.
Real GDP in year t can be calculated by dividing nominal GDP in year t by the price index.
Nominal GDP can increase if either real GDP or the price level increases, but it is impossible
to know with certainty whether one or both of these increased from 2008 to 2009 as price
index is unknown. More information is needed.
AACSB: Analytic
Blooms: Apply
Difficulty: 03 Hard
40. Suppose the total market value of all the final goods and services produced in the country
of Cannedada was $4 billion in 2008 (measured in 2008 prices) and $5 billion in 2009
(measured in 2009 prices). Which of the following statements is definitely correct?
A. Production increased in Cannedada between 2008 and 2009.
B. Average price levels increased in Cannedada between 2008 and 2009.
C. Nominal GDP decreased in Cannedada between 2008 and 2009.
D. The change in real GDP cannot be determined without more information.
Increases in nominal GDP are due to a rise in the price level, a rise in output, or both;
this example does not allow us to conclude with certainty whether production or prices
rose because more information is needed.
AACSB: Analytic
Blooms: Apply
Difficulty: 03 Hard
41. In periods of rising prices, percentage increases in nominal GDP will
A. Exceed percentage increases in real GDP.
B. Equal percentage increases in real GDP.
C. Be less than percentage increases in real GDP.
D. Not change in relationship to real GDP.
Nominal GDP shows more growth than there really is because it is reflecting changes in the
price level as well.
AACSB: Analytic
Blooms: Apply
Difficulty: 03 Hard
42. If real GDP falls from one period to another and the price level stays the same, we can
conclude that
A. Nominal GDP increased.
B. Inflation increased.
C. Nominal GDP decreased.
D. NDP decreased.
Production must have fallen and so must have nominal GDP because the price level
remained constant. Real GDP year t = (nominal GDP year t/price index)*100
AACSB: Analytic
Blooms: Apply
Difficulty: 03 Hard
43. If nominal GDP was $11,500 billion in 2003 and the price level in 2003 was 111.6, then real
GDP would have been approximately
A. $9,795 billion.
B. $10,305 billion.
C. $10,485 billion.
D. $9,750 billion.
Nominal GDP can be adjusted to remove changes to the price level, which is what real GDP is
used for. Real GDP is equal to nominal GDP divided by the price index and multiplied by
100: ($11,500/111.6) ×100.
AACSB: Analytic
Blooms: Apply
Difficulty: 03 Hard
44. If the price level is 100 for 2005 and the price level is 106.5 in 2007, a nominal GDP in 2007
of $15,600 billion would mean that real GDP in 2007 (in 2005 prices) would be closest to
A. $14,647.9 billion.
B. $15,600.0 billion.
C. $14,751.3 billion.
D. $13,971.2 billion.
Real GDP takes into account changes in the price level so that we are looking only at
changes in actual production. Real GDP is equal to nominal GDP divided by the price index
and multiplied by 100: ($15,600/106.5) ×100.
AACSB: Analytic
Blooms: Apply
Difficulty: 03 Hard
45. Assume nominal GDP is $10,000 trillion in period 1 and $15,000 trillion in period 2. If prices
in period 2 are twice as high as in period 1, real GDP in period 2 is
A. $10,000 trillion measured in period 1 prices.
B. $12,500 trillion measured in period 1 prices.
C. $15,000 trillion measured in period 1 prices.
D. $7,500 trillion measured in period 1 prices.
Real GDP will be lower than nominal GDP if the price level is increasing faster than
production is. Real GDP is equal to nominal GDP divided by the price index and multiplied by
100: ($15,000 trillion /200) ×100. The price index is 200 as the prices in period 2 are twice as
high as in period 1.
AACSB: Analytic
Blooms: Apply
Difficulty: 03 Hard
46. If real GDP in 2005 is $8,000 billion and the price level is 125, what is nominal GDP in 2005?
A. $10,000.0 billion
B. $9,200.5 billion
C. $6,830.6 billion
D. $5,000.0 billion
Nominal GDP is equal to real GDP multiplied by the price index and divided by 100: (8,000
×125)/100.
AACSB: Analytic
Blooms: Apply
Difficulty: 03 Hard
47.
According to the hypothetical economy in Figure 5.1, between 1960 and 1970 real GDP
declined but nominal GDP continued to rise. The increase in nominal GDP was due to
A. An increase in the price level greater than the decrease in output, causing the nominal dollar value of
output produced to increase.
B. An increase in the quantity of output produced.
C. A decrease in the price level.
D. An increase in the standard of living.
Nominal GDP can suggest the economy is doing well, but it could be a distortion since the
growth may be due to an increase in the price level only.
AACSB: Analytic
Blooms: Apply
Difficulty: 03 Hard
48.
In Figure 5.1, during the period between the early 1970s and 1980, real GDP grew at a faster
rate than nominal GDP. This is an indication that
A. Average price levels decreased.

B. Production increased at a faster rate than average price increased.
C. Production increased at a slower rate than average price increased.
D. Average price levels increased.
Nominal GDP can grow more slowly than real GDP if the prices are falling and production
is rising; the economy is actually doing well, but nominal GDP suggests it is not as nominal
GDP does not take into account the quantity of production.
AACSB: Analytic
Blooms: Analyze
Difficulty: 03 Hard
49.
In Figure 5.1, during the 1980-1990 time periods, real GDP was relatively constant but
nominal GDP increased. This can be explained by
A. Lower average price levels.

B. Inflation.
C. Higher levels of production.
D. A decrease in production per capita.
Real GDP can be constant and nominal GDP can be increasing. But this must be due to a
change in the price level and not actual production.
AACSB: Analytic
Blooms: Analyze
Difficulty: 03 Hard
50.
According to the hypothetical economy in Figure 5.2, real GDP differs from nominal
GDP from 1980 to 2000 because
A. Price level increases caused real GDP to increase.

B. Population growth exceeded output growth.
C. Inflation caused the dollar value of output to decrease.
D. Inflation caused the dollar value of output to increase.
When nominal GDP is rising faster than real GDP, the price level must be increasing.
AACSB: Analytic
Blooms: Apply
Difficulty: 03 Hard
51.
The base year for the calculation of real GDP for the hypothetical economy in Figure 5.2 is
closest to
A. 1960.
B. 1980.
C. 1990.
D. 2000.
In the base year, nominal GDP equals real GDP since both are expressed using the same-
year dollars thus is depicted by the intersection point year between the two curves.
AACSB: Analytic
Blooms: Analyze
Difficulty: 03 Hard
52.
In Figure 5.2, the fact that real GDP is greater than nominal GDP during the 1960-1980
periods implies that
A. Average price levels during this period must have been lower than during the base period.
B. Per capita GDP must have increased.
C. Average price levels must have decreased during this period.
D. Production must have decreased during this period.
Nominal GDP will differ from real GDP because nominal GDP does not control for changes
in the price level.
AACSB: Analytic
Blooms: Apply
Difficulty: 03 Hard
53. Inflation is
A. The increase in the market value of a product that takes place at each stage of the production process.
B. Included in the calculation of real GDP.
C. An increase in the average level of prices of goods and services.
D. A decrease in the price of all goods and services.
From year to year, if the average price level is rising, there must be inflation.
Blooms: Remember
Difficulty: 01 Easy
54. The purpose of chain-weighted price adjustments in the calculation of GDP is to
A. Adjust for changes in relative prices.
B. Adjust for changes in average prices.
C. Adjust for changes in production.
D. Convert NDP to GDP.
Chain-weighted indexes use a moving average of price levels in consecutive years as an
inflation adjustment. Since some prices fall while others rise, we can use the chain-
weighted method to accurately value the production in several different years.
Blooms: Understand
55. The alternative combinations of final goods and services that can be produced with all
available resources and technology are the
A. Real GDP.
B. Nominal GDP.
C. Production possibilities.
D. Net domestic product.
The production possibilities are the possible combinations of goods and services that our
economy can produce if we use our resources efficiently.
Blooms: Remember
Difficulty: 01 Easy
56. An economy's production possibilities curve indicates
A. The rate of economic growth.
B. The prices of any two goods.
C. The rate of investment.
D. How much the economy can produce.
When our resources are used efficiently, what we are capable of producing is defined as
the economy's production possibilities.
Blooms: Remember
Difficulty: 01 Easy
57. The wearing out of plants and equipment is known as
A. Net domestic product.
B. Depreciation.
C. Inflation.
D. Chain-weighted adjustment.
Since capital has a finite life, a portion of the capital stock wears out each year in producing
goods and services and must be replaced to maintain our production capabilities.
Blooms: Remember
Difficulty: 01 Easy
Learning Objective: 05-04 The major submeasures of output and income.
58. Depreciation represents
A. The consumption of capital in the production process.
B. A loss of productive capability as a result of the inefficient use of resources.
C. Wasted capital.
D. Gross investment plus net investment.
Every year, some capital wears out and must be replaced in order to maintain our current
production capabilities.
Blooms: Remember
Difficulty: 01 Easy
59. Net domestic product (NDP) is determined by
A. Subtracting depreciation from GDP.
B. Adding consumption, investment, government expenditures, and net exports.
C. Adding appreciation to GDP.
D. Subtracting consumption from GDP.
NDP indicates how much the economy is producing after adjusting for all capital that is
wearing out.
Blooms: Remember
Difficulty: 01 Easy
60. Net domestic product is
A. Equal to GDP minus indirect business taxes.
B. The total market value of all goods produced in the period.
C. Equal to national income minus depreciation.
D. The market value of all final goods and services produced in the economy after adjusting for depreciation.
Depreciation reduces the capital stock in the nation.
Blooms: Remember
Difficulty: 01 Easy
61. The account that gives the most accurate understanding of the economy's potential for
growth over the long term is
A. GDP.
B. NDP.
C. NI.
D. GNP.
NDP is the amount of output we could consume without reducing our stock of capital and
next year's production possibilities.
Blooms: Remember
Difficulty: 01 Easy
62. The national income aggregate calculated by subtracting depreciation from GDP is known
as
A. Net investment.
C. Gross investment.
D. Value added.
NDP indicates how much the economy is producing after adjusting for all capital that is
wearing out.
Blooms: Remember
Difficulty: 01 Easy
63. Gross investment is the
A. Expenditure on new plants, equipment, and residential construction, plus changes in business inventories.
B. Consumption of capital in the production process.
C. Wearing out of plant and equipment.
D. Alternative combinations of final goods and services that can be produced with all available resources and
technology.
Businesses invest in the economy by increasing the amount of physical capital.
Blooms: Remember
Difficulty: 01 Easy
64. An economy's production possibilities are most likely to expand if
A. Net investment is negative.
B. Net investment is zero.
C. Gross investment is greater than depreciation.
D. Depreciation is greater than gross investment.
Depreciation represents capital that is worn out; if it is replaced through investment, and
there is additional investment above that, then our production possibilities will increase.
Blooms: Understand
65. A nation's production possibilities curve should, ceteris paribus, shift
A. Inward if gross investment exceeds depreciation.
B. Inward if net investment is zero.
C. Outward if net investment is positive. D.
Outward if gross investment is positive.
As long as our gross investment is more than enough to replace worn-out capital and build
new capital (net investment), our production possibilities will increase.
AACSB: Analytic
Blooms: Apply
Difficulty: 03 Hard
66. The stock of capital in the United States can grow only if
A. Depreciation is positive.
B. Gross investment minus depreciation is positive.
C. GDP minus depreciation is negative.
D. The production possibilities curve shifts inward toward the origin.
The capital stock is reduced each year due to depreciation. As long as our investment is
enough to replace worn-out capital and build new capital, our production possibilities will
increase.
Blooms: Understand
67. If depreciation is smaller than gross investment,
C. Net investment is positive.
D. The nation's capital stock is getting smaller.
Gross investment is positive as long as some new plants and equipment are being produced.
But the stock of capital-the total collection of plants and equipment-won't grow unless gross
investment exceeds depreciation. That is, the flow of new capital must exceed depreciation,
or our stock of capital will decline.
Blooms: Understand
68. If depreciation exceeds gross investment,
C. The difference between GDP and NDP is smaller than gross investment.
D. The nation's capital stock is being depleted.
Gross investment is positive as long as some new plants and equipment are being produced.
But the stock of capital-the total collection of plants and equipment-won't grow unless gross
investment exceeds depreciation. That is, the flow of new capital must exceed depreciation,
or our stock of capital will decline.
Blooms: Understand
69. The addition to the economy's capital stock can be found by
A. Subtracting NDP from GDP.
B. Subtracting depreciation from GDP.
C. Subtracting depreciation from gross investment.
D. Subtracting net income from gross investment.
Only if gross investment is larger than depreciation will the capital stock grow.
Blooms: Remember
Difficulty: 01 Easy
70. A nation's capital stock will decline, ceteris paribus, for all of the following reasons except
A. The population increases faster than the capital stock.
B. Net investment is negative.
C. Depreciation exceeds gross investment.
The population and the capital stock are two separate variables; there is no explicit
connection between them.
AACSB: Analytic
Blooms: Apply
Difficulty: 03 Hard
71. If for a given year gross investment is $300 billion and depreciation is $75 billion, then, for
that year, the capital stock __________ and net investment was ________.
A. Increased by $250 billion; $225 billion
B. Increased by $225 billion; $225 billion
C. Decreased by $225 billion;$300 billion
D. Decreased by $300 billion; $300 billion
The capital stock will grow when gross investment is greater than depreciation; net
investment equals gross investment minus depreciation.
AACSB: Analytic
Blooms: Apply
Difficulty: 03 Hard
72. Which of the following typically purchases the most goods and services in the U.S.
economy?
A. Foreigners.
B. Households.
C. Federal, state and local governments combined.
D. Businesses.
Consumer spending in the United States is by far the largest share of total spending.
Blooms: Understand
73. When calculating GDP, consumption makes up approximately
C. Two-thirds of total output.
Consumption is very important to the U.S. economy.
Blooms: Understand
74. Which of the following expenditures are included in consumption?
A. Police services.
B. Personal medical services.
C. Public highways.
D. Public parks.
Consumption is spending by households directly on goods and services.
Blooms: Understand
75. The economic definition of investment includes all of the following except
A. Residential construction.
B. Net changes in business inventory.
C. Spending for plants and capital equipment.
D. A retirement portfolio of stocks and bonds.
In economics, the term 'investment'does not describe how one chooses to allocate one's
wealth among asset classes.
Blooms: Remember
Difficulty: 01 Easy
76. Which of the following is investment, according to an economist?
A. The purchase of U.S. savings bonds.
B. A collection of rare coins.
C. An increase in business inventories.
D. The purchase of a new family car.
Purchases of consumer durables and the allocation of one's personal wealth are not
considered investment, according to an economist.
AACSB: Analytic
Blooms: Apply
Difficulty: 03 Hard
77. An increase in business inventories during a time period, ceteris paribus, will
A. Decrease GDP during that period.
B. Increase GDP during that period.
C. Not affect GDP during that period but will increase GDP in later periods when the inventory is sold.
D. Never affect GDP because changes in inventories are not included in the calculation of GDP.
Business inventories represent production that remains unsold and are included
in investments.
Blooms: Understand
78. Which of the following types of government spending is included in the calculation of GDP?
A. Federal spending only.
B. Federal, state, and local government spending for any purpose.
C. Federal, state, and local government spending on goods and services only.
D. Federal, state, and local spending on transfer payments only.
Government spending at all levels represents an important contribution to GDP. Only
government spending on goods and services is included; transfer payments would not be
included.
Blooms: Understand
79. When we calculate GDP, government spending on goods and services makes up
approximately
C. One-tenth of total output.
Even in a market economy, the government can have a sizable influence on GDP.
Blooms: Understand
80. Exports are
A. Goods and services sold to international buyers.
C. Goods and services produced by the public sector.
D. Goods and services purchased from foreign sources.
Exports count toward U.S. GDP because they are produced within the borders of the United
States.
Blooms: Remember
Difficulty: 01 Easy
81. Goods and services purchased from international sources are
A. Gross investment.
B. Imports.
C. Exports.
D. Net exports.
Imports do not count toward U.S. GDP because they are produced outside the borders of the
United States.
Blooms: Remember
Difficulty: 01 Easy
82. Ceteris paribus, if imports increase in any given year,
A. Exports will increase.
B. GDP will increase.
C. GDP will decrease.
D. NDP will increase.
If imports rise, the GDP falls because more spending on consumption is geared toward
nondomestic goods. GDP=C+I+G+(X-M), where M=imports
Blooms: Remember
Difficulty: 01 Easy
83. In the U.S. GDP, imports
A. Include smuggled goods.
B. Include black-market goods.
C. Are the total of U.S. goods sent abroad.
D. Are goods purchased from foreign sources.
Imports do not count toward U.S. GDP because they are produced abroad.
Blooms: Remember
Difficulty: 01 Easy
84. Net exports are
A. Goods sold to foreigners.
C. The value of exports minus the value of imports.
D. Exports that ultimately are imported back into the United States.
Net exports, when positive, increase GDP, but decrease GDP when negative.
Blooms: Remember
Difficulty: 01 Easy
85. When we calculate GDP, imports are
A. Subtracted from total spending because they are part of another country's GDP.
B. Added to exports because both represent purchases of final goods.
C. Subtracted from exports to obtain gross exports.
D. Subtracted from exports and included in gross investment.
Imports cannot count toward domestic GDP because they are by definition produced abroad.
Blooms: Understand
86.
A. Made a positive contribution to GDP from 1990 to 2000.

B. Were a positive number from 1970 to 1990.
C. Increased the size of GDP from 1970 to 1990.
D. Remained constant from 1990 to 2000.
Net exports increase our GDP when they are positive because it means that we're producing
(and selling) more goods to the rest of the world than they're buying from us. (net exports
= exports - imports)
AACSB: Analytic
Blooms: Apply
Difficulty: 03 Hard
87.
A. Were a negative number from 1990 to 2000.

B. Were a negative number from 1970 to 1985.
C. Made a positive contribution to GDP from 1970 to 1985.
D. Did not impact GDP from 1990 to 2000 because exports were greater than imports.
When imports exceed exports, net exports will be negative.
AACSB: Analytic
Blooms: Apply
Difficulty: 03 Hard
88. The components of GDP are
A. C + I + X - (G + M).
B. C + I + G + (X - M).
C. C + I - G + (X - M).
D. C + I + G - (X + M).
Total spending of market participants, including consumption expenditures, investment
expenditures, government expenditures, and net exports will equal GDP.
Blooms: Remember
Difficulty: 01 Easy
89. Which of the following statements is true?
A. The production possibilities of the economy define the limits to real income.
B. Consumption equals investment.
C. Market incomes equal business expenditures.
D. Every dollar spent on goods and services becomes income for the government.
Total income must equal total production. So income is limited by what we are capable
of producing.
Blooms: Understand
Learning Objective: 05-03 Why aggregate income equals aggregate output.
Topic: MEASURES OF INCOME
90. Which of the following is a component included in the measure GDP, according to the
income approach?
A. Interest.
B. Investment.
C. Personal savings.
D. Consumption expenditures.
All income paid to the four factors of production is used to calculate GDP by using the
income approach. This includes wages, rent, interest, and profit.
Blooms: Remember
Difficulty: 01 Easy
91. National income is a measure of
A. How well the economy is doing on a gross basis.
B. The income earned by the factors of production in producing GDP.
C. The income received by the factors of production plus depreciation.
D. The country's future productive capacity.
National income is the flip side of national production and is calculated by: GDP
less depreciation plus net foreign factor income.
Blooms: Remember
Difficulty: 01 Easy
92. "Income received by households before payment of personal taxes" is known as
A. Disposable income.
C. Saving.
D. Personal income.
All income is earned by the households because they own all the factors of production.
Blooms: Remember
Difficulty: 01 Easy
93. Transfer payments are part of personal income but not national income because
A. They are a payment for which no goods or services are exchanged.
B. Personal income is an earnings concept.
C. National income is a receipts concept.
D. They represent a payment to factors of production.
National income is an efficiency concept with market exchange and thereby does not include
transfer payments. Transfer payments are government actions to influence inequity. Transfer
payments are added to national income to get personal income.
Blooms: Remember
Difficulty: 01 Easy
94. Social Security payments to retired persons are included in
A. Both GDP and personal income.
B. Personal income and disposable income.
C. National income but not personal income.
D. National income and subtracted to get personal income.
Transfer payments count toward personal income but do not represent income from
productive activities.
Blooms: Understand
95. Which of the following best measures the household sector's contribution to the support of
the public sector?
A. GDP minus depreciation.
B. The difference between personal income and disposable income.
C. Government transfer payments.
D. Corporate profits taxes plus undistributed corporate profits.
Taxes are the contribution to the government by households, as represented by personal
income minus disposable income.
AACSB: Analytic
Blooms: Apply
Difficulty: 03 Hard
96. Disposable income is
A. The amount of available income households have to either spend or save.
B. The amount the household sector earns in producing the GDP.
C. The amount households have left to spend after savings are subtracted.
D. Personal income plus income taxes.
Disposable income is after-tax income of households. Personal income is not fully available to
households because taxes must be subtracted before the household can spend or save.
Blooms: Remember
Difficulty: 01 Easy
97. The measure of what households receive after personal income tax is deducted is
A. Gross domestic product.
B. Personal income.
C. National income.
D. Disposable income.
Disposable income is equal to personal income less taxes paid.
Blooms: Remember
Difficulty: 01 Easy
98. Disposable income is equal to
A. Personal taxes + personal income.
B. Personal taxes - personal income.
C. Consumption - saving.
D. Consumption + saving.
The only two general uses of disposable income are saving and consumption.
Blooms: Remember
Difficulty: 01 Easy
99. In national income accounting, the two choices for disposable income are
A. Saving and consumption.
B. Saving and investment.
C. Consumption and investment.
D. Personal income and personal taxes.
Consumption and saving are the two choices of how to use disposable income.
Blooms: Understand
101. The part of disposable income not spent on current consumption is
A. Saving.
B. Dissaving.
C. Investment.
D. Social Security taxes.
Saving is equal to disposable income less consumption.
Blooms: Remember
Difficulty: 01 Easy
101. The measure of the part of disposable income that is not consumed is
A. GDP.
B. Net investment.
C. Saving.
D. Depreciation.
Disposable income less consumption is equal to saving.
Blooms: Remember
Difficulty: 01 Easy
102.
On the basis of Table 5.1, gross domestic product is
A. $6,980 billion.
B. $7,635 billion.
C. $6,810 billion.
D. $7,720 billion.
GDP can be obtained by adding C + I + G + (X - M). $4,565 + $865 + $1,465 + ($740
- $825).
AACSB: Analytic
Blooms: Analyze
Difficulty: 03 Hard
103.
On the basis of Table 5.1, net domestic product is
A. $6,340 billion.
B. $6,170 billion.
C. $6,995 billion.
D. $7,080 billion.
NDP is equal to GDP less depreciation. $4,565 + $225 + $1,465 + ($740 - $825).
AACSB: Analytic
Blooms: Analyze
Difficulty: 03 Hard
104.
On the basis of Table 5.1, personal income is
A. $5,620 billion.
B. $5,790 billion.
C. $6,530 billion.
D. $6,445 billion.
Personal income equates to the GDP ($4,565 + $865 + $1,465 + ($740 - $825)) minus
depreciation ($640) plus transfer payments and net foreign factor income and net interest
payments to households ($690 + $20 + $0). This result is subtracted by indirect business
taxes and Social Security taxes, corporate income taxes, and corporate retained earnings
($520 + $510 + $185 + $45).
AACSB: Analytic
Blooms: Analyze
Difficulty: 03 Hard
105.
On the basis of Table 5.1, personal saving is
A. $1,215 billion.
B. $1,130 billion.
C. $305 billion.
D. $205 billion.
Personal saving is equal to disposable income less consumption. Personal income equates
to the GDP ($4,565 + $865 + $1,465 + ($740 - $825)) minus depreciation ($640) plus
transfer payments and net foreign factor income and net interest payments to households
($690 + $20 + $0). This result is subtracted by indirect business taxes and Social Security
taxes, corporate income taxes, and corporate retained earnings ($520 + $510 + $185 + $45).
AACSB: Analytic
Blooms: Analyze
Difficulty: 03 Hard
106.
A. $640 billion.
B. $50 billion.
C. $85 billion.
D. $690 billion.
Depreciation is equal to gross investment minus net investment ($865 - $225).
AACSB: Analytic
Blooms: Analyze
Difficulty: 03 Hard
107.
On the basis of Table 5.1, net exports are
A. $740 billion.
B. $825 billion.
C. -$85 billion.
D. $85 billion.
Net exports are equal to exports minus imports ($740 - $825).
AACSB: Analytic
Blooms: Analyze
Difficulty: 03 Hard
108.
On the basis of Table 5.2, GDP is
A. $2,090 billion.
B. $4,210 billion.
C. $4,400 billion.
D. $4,020 billion.
GDP is the sum of consumption, investment, government expenditures, and net
exports, which is $2,850 + $700 + $810 + ($300 - $450) = $4,210.
AACSB: Analytic
Blooms: Analyze
Difficulty: 03 Hard
109.
On the basis of Table 5.2, national income is
A. $4,020 billion.
B. $3,785 billion.
C. $2,475 billion.
D. $3,595 billion.
National income is GDP less depreciation plus net foreign income, which is $4,210 - $190
+ $0 = $4,020.
AACSB: Analytic
Blooms: Analyze
Difficulty: 03 Hard
110.
On the basis of Table 5.2, disposable income is
A. $3,490 billion.
B. $2,805 billion.
C. $4,480 billion.
D. $3,680 billion.
Disposable income is personal income less personal taxes, which is $3,680 - $875 = $2,805.
AACSB: Analytic
Blooms: Analyze
Difficulty: 03 Hard
111.
A. $425 billion.
B. $125 billion.
C. -$125 billion.
D. $190 billion.
Gross investment minus net investment equals depreciation ($700 - $510 = $190).
AACSB: Analytic
Blooms: Analyze
Difficulty: 03 Hard
112.
On the basis of Table 5.3, the value of the income aggregate that is defined as "the total
market value of all final goods and services produced in a given time period" (also known as
the GDP) is
A. $10,700 billion.
B. $12,400 billion.
C. $11,900 billion.
D. $12,300 billion.
A dollar of spending represents a dollar of income, so total income is equal to total spending.
Blooms: Remember
Difficulty: 01 Easy
113.
On the basis of Table 5.3, the value of the income aggregate that is defined as "the amount
of output we could consume without reducing our stock of capital" (also known as the net
domestic product) is
A. $10,700 billion.
B. $12,400 billion.
C. $12,300 billion.
D. $11,900 billion.
The capital stock is reduced by $400 each year due to depreciation. This represents the
difference between gross investment and net investment.
Blooms: Remember
Difficulty: 01 Easy
114.
On the basis of Table 5.3, the value of the income aggregate that is defined as "total income
earned by current factors of production" (also known as national income) is
A. $10,700 billion.
B. $12,300 billion.
C. $11,900 billion.
D. $12,000 billion.
National income equals NDP plus net foreign income.
Blooms: Remember
Difficulty: 01 Easy
115.
On the basis of Table 5.3, the value of the income aggregate that is defined as "income
received by households before payment of personal taxes" (also known as personal income)
is
A. $5,870 billion.
B. $10,070 billion.
C. $9,570 billion.
D. $10,600 billion.
Personal income is equal to net income less indirect business taxes, corporate taxes,
retained earnings, and Social Security taxes, plus transfer payments and net interest.
Blooms: Remember
Difficulty: 01 Easy
116.
On the basis of Table 5.3, the value of the income aggregate that is defined as "after-tax
income of consumers" (also known as disposable income) is
A. $8,570 billion.
B. $10,070 billion.
C. $11,570 billion.
D. $10,600 billion.
Personal income less taxes is disposable income.
Blooms: Remember
Difficulty: 01 Easy
117.
On the basis of Table 5.3, the value of the income aggregate that is defined as "the part of
disposable income not spent on current consumption" (also known as savings) is
A. -$500 billion.
B. $500 billion.
C. $370 billion.
D. $8,570 billion.
The part of disposable income received but not spent by households is savings.
Blooms: Remember
Difficulty: 01 Easy
118.
On the basis of Table 5.3, the net addition to the capital stock is
A. $1,000 billion.
B. $400 billion.
C. $1,400 billion.
D. $370 billion.
Net investment represents the addition to capital after depreciation has been accounted for.
Blooms: Remember
Difficulty: 01 Easy
119. The value of total output must equal the value of total income in an economy for all of the
following reasons except
A. One person's expenditures on goods and services is another person's income.
B. Income earned is spent on goods and services, which creates additional production.
C. For the circular nature of spending and income in the economy.
D. Government expenditures must equal government revenues.
The government does not necessarily have to run a balanced budget for income to equal
expenditures.
Blooms: Understand
Topic: THE FLOW OF INCOME
120. Businesses return purchasing power to the circular flow in the form of
A. Retained earnings.
B. Depreciation.
C. Business investment.
D. Profit.
Business investment increases the productive capacity of the economy by purchasing
the factors of production in the factor market.
Blooms: Understand
121. The social well-being of a country
A. Is best measured by per capita GDP.
B. Always increases when real GDP increases.
C. Decreases when real GDP decreases.
D. Is measured by more than changes in real GDP.
Real GDP is only about numbers; society is also concerned with many other issues such as
education levels and access to health care.
Blooms: Understand
122. One In the News article titled "A Lot Going on Under the Table" reports that 83 percent of
households make untaxed or unmeasured purchases. This is an example of
A. An intermediate good.
B. The underground economy.
C. Market activity.
D. Value added.
Anything not officially reported as income will not be counted in GDP.
AACSB: Analytic
Blooms: Apply
Difficulty: 03 Hard
Topic: IN THE NEWS
123. One In the News article states that the underground economy includes transactions that are
untaxed or unaccounted for in GDP. According to this article, the underground economy
A. Involves a small percentage of households.
B. Includes only illegal transactions.
C. Is captured in GDP.
D. Impacts the amount of tax dollars collected.
Failing to report income from legal sources occurs due to tax avoidance.
AACSB: Analytic
Blooms: Apply
Difficulty: 03 Hard
Topic: IN THE NEWS
124. A cartoon in the text shows two people watching television. On the screen are the
words "Economic growth indicators are up, led by car repairs, divorce costs, open-heart
surgeries, and toxic waste cleanups." The cartoon illustrates the
A. Difference between economic welfare and social welfare.
B. Difference between GDP and national income.
C. Problem of measuring the difference in wealth between the United States and other nations.
D. Difference between GDP and NDP.
Just because spending is increasing does not necessarily mean that society is definitely
better off.
AACSB: Analytic
Blooms: Apply
Difficulty: 03 Hard
125. If a nation has a population of 100 million, a labor force of 60 million, and GDP of $200
billion, then GDP per capita must be
A. $2,000.00.
B. $3,333.33.
C. $200.00.
D. $333.33.
The GDP divided by the population equals the GDP per capita.
AACSB: Analytic
Blooms: Apply
Difficulty: 03 Hard
126. The increase in the market value of a good at a particular stage of production is known as
A. Profit.
B. Value added.
C. Cost based accounting.
D. The input price.
The value added is equal to the sales price minus the cost of intermediate goods.
Blooms: Understand
127. To measure an economy's output adjusted for changes in the price level, one would use
A. GDP per capita.
B. Value added.
C. Real GDP.
D. Nominal GDP.
Real GDP takes into account changes in the price level.
Blooms: Understand
128. Goods produced for the purpose of producing other goods are known as
A. Services.
B. Exports.
C. Consumption goods.
D. Investment goods.
Investment goods build up a nation's ability to produce goods through an increase in the
capital stock.
Blooms: Understand
129. A major diversion that is not of the income flow to the private sector is
A. Indirect business taxes.
B. Investment.
C. Wages.
Indirect business taxes do not represent a payment to any of the factors of production.
Blooms: Understand
130. If the price level is increasing at 4% and output is increasing at 5%, then
A. Real GDP is increasing faster than nominal GDP.
B. Nominal GDP is increasing faster than real GDP.
C. Nominal GDP is increasing at 20%.
Since both price and output are increasing, both will increase nominal GDP. Since prices
are fixed when we measure real GDP, only increases in output affect real GDP.
AACSB: Analytic
Blooms: Apply
Difficulty: 03 Hard
131. The measure of GDP is
A. Geographically focused.
B. Globally focused.
C. Vertically focused.
D. Horizontally focused.
The GDP includes all final output within a nation's borders regardless of whose factors of
production are used to produce it.
Blooms: Understand
132. To calculate real GDP, we
A. Measure in the prices of goods and services of that period.
B. Estimate future prices of goods and services.
C. Adjust the market value of goods and services for changing prices.
Real GDP is the value of output measured in constant prices.
Blooms: Understand
133. GDP is the total market value of all final goods and services produced in a given time period
within a nation's borders.
TRUE
GDP tracks production and is an important barometer of the economy's strength.
Blooms: Remember
Difficulty: 01 Easy
134. Comparisons of per capita GDP across international boundaries provide information on the
distribution of GDP within each country.
FALSE
Per capita GDP is simply the average; it does not take into account the actual distribution of
income.
Blooms: Understand
135. GDP is geographically focused, including all output produced within a nation's borders.
TRUE
GDP measures how well the economy is doing and so looks only at production within the
nation's borders.
Blooms: Remember
Difficulty: 01 Easy
136. If a friend helps you with your homework, it will not be calculated in the GDP accounts. But if
you hire a tutor who reports the income, the services will be counted in GDP.
TRUE
Nonmarket production does not get counted in official GDP figures.
Blooms: Understand
137. GDP can be calculated by summing up the "value added" at every stage of production.
TRUE
The value added is the amount by which the price goes up from the sale of an intermediate
or final good.
Blooms: Remember
Difficulty: 01 Easy
138. In the calculation of real GDP, the value of goods and services is measured in the current
prices for each year.
FALSE
Nominal GDP measures production using current prices, whereas real GDP using constant
prices.
Blooms: Remember
Difficulty: 01 Easy
139. Nominal GDP is not used to determine recessions because inflation can disguise the
occurrence of recessions.
TRUE
Inflation can make it seem like production is rising when it is not.
Blooms: Understand
140. The base period is the time period used for comparative analysis for the calculation of real
GDP.
TRUE
We can use the base period to express GDP in constant dollars.
Blooms: Remember
Difficulty: 01 Easy
141. For the nation's capital stock to grow, net investment must be positive.
TRUE
Because some capital wears out each year due to depreciation, the capital stock will grow
only if the worn-out part is replaced and even more capital is added.
Blooms: Understand
144. Government spending in the national income accounts refers only to expenditures at the
federal level.
FALSE
Government expenditures included in GDP involves local, state, and federal spending as
well.
Blooms: Remember
Difficulty: 01 Easy
143. When U.S. net exports are negative, the United States consumes more output than it
produces.
TRUE
Negative net exports indicate we are importing more than we are exporting.
Blooms: Understand
144. Disposable income is what households have to spend or to save.
TRUE
Consumption plus saving is equal to disposable income-what is left after all taxes have been
paid.
Blooms: Remember
Difficulty: 01 Easy
145. Savings equal the difference between personal income and consumption.
FALSE
Savings equal the difference between disposable income and consumption.
Blooms: Remember
Difficulty: 01 Easy
146. The dollar value of output for an economy must always equal the dollar value of income.
TRUE
This must be true because each dollar of spending is ultimately assigned to one of the four
factors of production.
Blooms: Understand
147. Without foreign trade, the dollars used to buy goods and services are included in the circular
flow as consumption, investment, and government spending.
TRUE
As income is used to buy goods and services, the money spent is counted as consumption,
investment, and government spending in the circular flow.
Blooms: Understand
148. What is the difference between GDP and GNP?
GDP is the market value of all final goods and services produced within a nation's borders even if foreign-
owned factors of production are used in the process. GNP is the market value of all final goods and services
produced using domestic-owned factors of production, regardless of where these factors are located. Some of
the output from a General Motors plant located in Mexico would be included in the U.S. GNP, but it would also
be included in the Mexican GDP.

Blooms: Understand
149. Explain the difference between intermediate goods and final goods and give an example of
each.
Final goods are goods that are ready to be consumed. Intermediate goods are those sold from producer to
producer. They become an input into the production of a final good. An example of a final good is a new car
purchased by a consumer at a car dealership. An example of an intermediate good is the tires that the car
manufacturer purchased from the tire manufacturer and placed on the car during assembly.

Blooms: Understand
150. Are there any measurement problems that occur with the GDP calculation? Explain.
GDP measures the value of output that is exchanged in the marketplace. Some production never reaches
the market and thus is not included in the GDP calculation. (An example would be someone who cleans
her own swimming pool instead of hiring a professional pool cleaning service.) There are also unreported
activities that are not included in GDP, such as a person who mows lawns and does not report the income.

Blooms: Understand
151. Which is better for making comparisons over time, nominal GDP or real GDP, and why?
Nominal GDP is the market value of all final goods and services produced within a given time period in the
dollars of that period. Real GDP is the market value of all final goods and services produced within a given time
period, adjusted for inflation. Because real GDP does not include price level changes, it allows more accurate
comparison of production over time. Nominal GDP is not good for making comparisons because it is impossible
to determine if output or only prices have changed.

Blooms: Understand
152. What are transfer payments, and how do they make their way into the GDP calculation?
Transfer payments are payments to individuals for which no good or service is exchanged in that time period.
When individuals receive transfer payments, they typically spend the dollars in the form of consumption;
so transfer payments enter GDP through consumption: GDP = C + I + G + Net exports. Transfer
payments themselves do not count as part of the GDP calculation, however.

Blooms: Understand
153. How are total output and total income related to each other, and why?
The value of total output must equal the value of total income. This is demonstrated by the circular flow. In a
closed economy, the income earned by households, businesses, and government is spent in the marketplace in
the form of consumption, investment, and government expenditure. This spending creates additional GDP, and
the circular flow continues.

Blooms: Understand
Chapter 05 Test Bank Summary
Category # of Questions
AACSB: Analytic 57
AACSB: Reflective Thinking 96
Accessibility: Keyboard Navigation 122
Blooms: Analyze 16
Blooms: Apply 41
Blooms: Remember 51
Blooms: Understand 45
Difficulty: 01 Easy 51
Difficulty: 02 Medium 45
Difficulty: 03 Hard 57
Learning Objective: 05-01 What GDP measures-and what it doesn't. 56
Learning Objective: 05-02 The difference between real and nominal GDP. 25
Learning Objective: 05-03 Why aggregate income equals aggregate output. 7
Learning Objective: 05-04 The major submeasures of output and income. 65
Topic: IN THE NEWS 2
Topic: MEASURES OF INCOME 33
Topic: MEASURES OF OUTPUT 89
Topic: THE FLOW OF INCOME 6
Topic: THE USES OF OUTPUT 21

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Macro Economy Today 14th Edition Schiller Test Bank 1

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Schiller Test Bank

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Chapter 05 Test Bank

1. National income accounting is defined as the

2. National income accounts assist

6. A nation's GDP can be calculated as

7. DVD players can be added to bicycles to compute the GDP by

13. GDP per capita

14. The GDP per capita is the most practical way to

18. Which of the following is excluded from calculations of GDP?

21. Which of the following is directly included in the calculation of GDP?

22. All of the following count as unreported income except

26. Which of the following is not a final good or service?

30. Value added is the

31. The sum of value added

36. Real GDP is the

38. Real GDP is used most effectively to

41. In periods of rising prices, percentage increases in nominal GDP will

A. Average price levels decreased.

A. Lower average price levels.

A. Price level increases caused real GDP to increase.

54. The purpose of chain-weighted price adjustments in the calculation of GDP is to

56. An economy's production possibilities curve indicates

57. The wearing out of plants and equipment is known as

58. Depreciation represents

59. Net domestic product (NDP) is determined by

60. Net domestic product is

63. Gross investment is the

64. An economy's production possibilities are most likely to expand if

67. If depreciation is smaller than gross investment,

68. If depreciation exceeds gross investment,

69. The addition to the economy's capital stock can be found by

73. When calculating GDP, consumption makes up approximately

74. Which of the following expenditures are included in consumption?

76. Which of the following is investment, according to an economist?

80. Exports are

81. Goods and services purchased from international sources are

82. Ceteris paribus, if imports increase in any given year,

83. In the U.S. GDP, imports

84. Net exports are

According to the economy in Figure 5.3, net exports

A. Made a positive contribution to GDP from 1990 to 2000.

According to the economy in Figure 5.3, net exports

A. Were a negative number from 1990 to 2000.

88. The components of GDP are

91. National income is a measure of

92. "Income received by households before payment of personal taxes" is known as

94. Social Security payments to retired persons are included in

96. Disposable income is

98. Disposable income is equal to

100 The part of disposable income not spent on current consumption is

On the basis of Table 5.1, gross domestic product is

On the basis of Table 5.1, net domestic product is

On the basis of Table 5.1, personal income is

On the basis of Table 5.1, personal saving is

On the basis of Table 5.1, depreciation is

On the basis of Table 5.1, net exports are

On the basis of Table 5.2, GDP is

On the basis of Table 5.2, national income is

On the basis of Table 5.2, disposable income is

On the basis of Table 5.2, depreciation is