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MULTIPLE CHOICE
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Chapter 5 2
Figure 5-1
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Chapter 5 3
9. According to Figure 5-1, the contribution to GDP from the production of this car is
a. $2,350.
b. $16,300.
c. $19,700.
d. $36,000.
e. $59,550.
ANS: D PTS: 1 DIF: Medium REF: Ch 5, 1.a
OBJ: Ch 5, 1 TOP: Value added TYP: Applied
11. A soft-drink bottling company supplies six-packs of orange soda to retailers for a price of $2 each. If
the components in each six-pack cost the bottling company $1.50, the value added to each six-pack by
the bottling company is
a. $2.00.
b. $1.50.
c. $1.25.
d. $1.00.
e. $0.50.
ANS: E PTS: 1 DIF: Medium REF: Ch 5, 1.a
OBJ: Ch 5, 1 TOP: Value added TYP: Applied
12. When calculating GDP, inventory levels are important to economists because
a. they measure the level of underemployment.
b. they provide information about workers' attitudes.
c. we need to know them to fully understand foreign competition.
d. GDP cannot be calculated unless we know that inventories were double-counted.
e. we need to know them to calculate the total value of goods produced but not sold in a year.
ANS: E PTS: 1 DIF: Medium REF: Ch 5, 1.a
OBJ: Ch 5, 1 TOP: GDP TYP: Interpretive
13. What is the importance of not including intermediate goods when calculating GDP?
a. Avoiding single product counting
b. Restricting GDP to important goods
c. Keeping the consumer price index constant
d. Avoiding double counting
e. Restricting GDP to goods that can be priced
ANS: D PTS: 1 DIF: Easy REF: Ch 5, 1.a
OBJ: Ch 5, 2 TOP: GDP TYP: Interpretive
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from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
Chapter 5 4
17. Looking at the 2008 U.S. GDP statistics, the fact that net exports were negative means that
a. imports were greater than exports up to 2008.
b. exports were greater than imports up to 2008.
c. imports were greater than exports in 2008.
d. exports were greater than imports in 2008.
e. exports were greater than imports since 2000.
ANS: C PTS: 1 DIF: Easy REF: Ch 5, 1.a
OBJ: Ch 5, 2 TOP: GDP TYP: Interpretive
© 2011 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different
from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
Chapter 5 5
21. For a hypothetical economy in a given year, GDP equaled $1,190, consumption equaled $782,
government spending equaled $187, goods exported equaled $98, and goods imported equaled $157.
What was investment equal to?
a. $148
b. −$34
c. $280
d. $910
e. Cannot be determined from the information given.
ANS: C PTS: 1 DIF: Difficult REF: Ch 5, 1.a
OBJ: Ch 5, 3 TOP: Expenditures approach TYP: Applied
Figure 5-2
GDP Expenditures
Consumption Spending $1,640
Gross Investment $550
Government Purchases $320
Total Exports $280
GDP $2,630
22. Net exports for the economy described in Figure 5-2 are
a. −$280.
b. −$160.
c. +$120.
d. +$160.
e. Cannot be determined with the information given.
ANS: C PTS: 1 DIF: Difficult REF: Ch 5, 1.a
OBJ: Ch 5, 3 TOP: Expenditures approach TYP: Applied
© 2011 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different
from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
Chapter 5 6
23. Total imports for the economy described in Figure 5-2 are
a. $0.
b. $60.
c. $120.
d. $160.
e. Cannot be determined with the information given.
ANS: D PTS: 1 DIF: Difficult REF: Ch 5, 1.a
OBJ: Ch 5, 3 TOP: Expenditures approach TYP: Applied
25. Sales, excise, and income taxes are common taxes. Which of these taxes is (are) considered indirect
business taxes?
a. Only excise and income taxes
b. Only income taxes
c. Only income and sales taxes
d. Only excise and sales taxes
e. Excise, sales, and income taxes are all forms of indirect business taxes.
ANS: D PTS: 1 DIF: Medium REF: Ch 5, 1.a
OBJ: Ch 5, 4 TOP: Income approach TYP: Factual
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from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
Chapter 5 7
31. The production of a new machine to replace one that is worn out is
a. an increase in inventories.
b. part of gross investment.
c. a personal consumption expenditure.
d. not included in GNP.
e. not included in GDP.
ANS: B PTS: 1 DIF: Difficult REF: Ch 5, 1.b
OBJ: Ch 5, 4 TOP: Net national product TYP: Interpretive
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from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
Chapter 5 8
Figure 5-3
GNP Data
(Includes net factor income from abroad)
Consumption Spending $2,420
Net Investment $470
Government Spending $350
Capital Consumption Allowance $55
Exports $740
Imports $600
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from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
Chapter 5 9
41. The difference between personal income (PI) and disposable personal income (DPI) is
a. indirect business taxes.
b. personal tax payments.
c. social security benefits.
d. undistributed corporate income.
e. welfare benefits.
ANS: B PTS: 1 DIF: Easy REF: Ch 5, 1.b
OBJ: Ch 5, 4 TOP: Disposable income TYP: Factual
© 2011 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different
from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
Chapter 5 10
42. Which of the following national income accounts would be the smallest in any year?
a. NNP
b. NI
c. DPI
d. PI
e. GNP
ANS: C PTS: 1 DIF: Medium REF: Ch 5, 1.b
OBJ: Ch 5, 4 TOP: Disposable income TYP: Interpretive
43. All of the following are considered national income accounts except
a. DPI.
b. NNP.
c. CPI.
d. GNP.
e. NI.
ANS: C PTS: 1 DIF: Easy REF: Ch 5, 1.b
OBJ: Ch 5, 4 TOP: National income TYP: Factual
44. The GDP differs from the GNP because the GDP subtracts out
a. net exports.
b. net factor income from abroad.
c. investment.
d. government spending.
e. consumption.
ANS: B PTS: 1 DIF: Easy REF: Ch 5, 1.b
OBJ: Ch 5, 4 TOP: GNP TYP: Factual
© 2011 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different
from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
Chapter 5 11
48. If the average price level decreased, which of the following would happen as a result of this change?
a. The CPI would decrease.
b. Real GDP would decrease.
c. Real GNP would decrease.
d. Real PI would decrease.
e. Nominal GDP would decrease.
ANS: A PTS: 1 DIF: Medium REF: Ch 5, 2.b
OBJ: Ch 5, 6 TOP: Price index TYP: Interpretive
50. In the context of price indexes, the term COLAs stands for
a. Community Operated Living Arrangements.
b. Cost of Operations in a Law Firm.
c. Cost of Operating for Lesser Adjustments.
d. Cost-of-Living Adjustments.
e. Cooperative Ordinance of Los Angeles.
ANS: D PTS: 1 DIF: Easy REF: Ch 5, 2.b
OBJ: Ch 5, 6 TOP: Price index TYP: Factual
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from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
Chapter 5 12
52. The price index for the current year is 180. This means that, on average, prices in the current year are
a. $0.80 higher than prices in the base year.
b. $1.80 higher than prices in the base year.
c. 80 percent of prices in the base year.
d. 180 percent higher than prices in the base year.
e. 80 percent higher than prices in the base year.
ANS: E PTS: 1 DIF: Medium REF: Ch 5, 2.b
OBJ: Ch 5, 6 TOP: Price index TYP: Applied
53. The price index most commonly used in the United States is
a. the CPI.
b. the PPF price index.
c. the PPI.
d. the WPI.
e. the COLA.
© 2011 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different
from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
Chapter 5 13
57. Which of the following was generally true over the last 40 years?
a. The CPI and the GDPPI moved in the same direction with the PPI moving in the opposite
direction.
b. The CPI and the PPI moved in the same direction with the GDPPI moving in the opposite
direction.
c. The GDPPI and the PPI moved in the same direction with the CPI moving in the opposite
direction.
d. The CPI, the GDPPI, and the PPI moved in the same direction with somewhat more
volatile movements of PPI.
e. The CPI, the GDPPI, and the PPI moved in the same direction with somewhat more
volatile movements of CPI.
ANS: D PTS: 1 DIF: Medium REF: Ch 5, 2.b
OBJ: Ch 5, 6 TOP: Price Indexes TYP: Factual
58. If real GDP increased by 2% and nominal GDP increased by 4%, which of the following tool place?
a. Output increased and the price level increased.
b. Output increased and the price level decreased.
c. Output decreased and the price level increased.
d. Output decreased and the price level decreased.
e. Output increased and the price level remained unchanged.
ANS: A PTS: 1 DIF: Medium REF: Ch 5, 2.b
OBJ: Ch 5, 6 TOP: Nominal and Real GDP TYP: Applied
59. If real GDP increased by 3.5% and nominal GDP increased by 3.5%, which of the following tool
place?
a. Output increased and the price level increased.
b. Output increased and the price level decreased.
c. Output decreased and the price level increased.
d. Output decreased and the price level decreased.
e. Output increased and the price level remained unchanged.
ANS: E PTS: 1 DIF: Medium REF: Ch 5, 2.b
OBJ: Ch 5, 6 TOP: Nominal and Real GDP TYP: Applied
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from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
Chapter 5 14
61. The shadow economy is known by all of the following names except
a. the ghost economy.
b. the underground economy.
c. the parallel economy.
d. the informal economy.
e. the formal economy.
ANS: B PTS: 1 DIF: Medium REF: Ch 5, ES
OBJ: Ch 5, 6 TOP: Shadow economy TYP: Factual
62. Which of the following is a major force behind the size and growth of the shadow economy?
a. a decreasing burden of taxation
b. limited restrictions in the labor market
c. social security payments
d. inflation
e. social
ANS: C PTS: 1 DIF: Medium REF: Ch 5, ES
OBJ: Ch 5, 6 TOP: Shadow economy TYP: Factual
TRUE/FALSE
2. National Income accounting measures the output of an entire economy as well as the flow between
sectors. In practice, it estimates the amount of economic activity that occurs during a given period of
time.
3. The most common measure of a nation's output and output growth is the consumer price index.
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from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
Chapter 5 15
4. Because it involves the use of money, the sale of a used car for cash is counted as part of gross
domestic product.
5. The output produced by domestically owned firms in foreign locations is included in the U.S. GDP but
not in the U.S. GNP.
6. The sale of live cattle to a slaughterhouse constitutes a final transaction that is counted as part of gross
domestic product.
7. Goods that are produced inside the U.S. borders add to the U.S. GDP but services that are provided
insider the U.S. borders do not.
8. If a fisherman buys fishing equipment for $1,500 to catch trout in the river and he sells his catch to a
nearby restaurant for $2,000 which the restaurant serves to its customers generating total revenue of
$4,260, the total value added of the fish sold at the restaurant is equal to $7,760.
9. If a fisherman buys fishing equipment for $1,500 to catch trout in the river and he sells his catch to a
nearby restaurant for $2,000 which the restaurant serves to its customers generating total revenue of
$4,260, the value added by the fish restaurant amounts to $2,260.
10. Wheat produced in the U.S. but sold in Japan would not add to U.S. GDP.
11. By definition of GDP, total wage earnings and interest income must always equal consumption and
investment spending, government purchases, and net exports.
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from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
Chapter 5 16
12. GDP can only be calculated according to two different approaches: GDP as output and GDP as
income.
13. The capital consumption allowance is equal to the estimated value of depreciation plus the value of
accidental damage to capital stock.
14. GDP as income is equal to the sum of wages, interest rent, and profits, less net factor income from
abroad, plus capital consumption allowance and indirect business taxes.
15. When using the income approach to GDP, one would exclude local and state government purchases.
Figure 5-4
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from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
Chapter 5 17
20. If the prices of all goods and services never changed, nominal and real GDP would always be the
same.
21. If there is a rise in nominal GDP over a given year, then we know that there is growth in actual output
of goods and services.
23. Assume nominal GDP for year 1 is $150 and nominal GDP for year 2 is $200. At the same time, real
GDP in year 1 equals $130, and in year 2, real GDP is $150. This implies that both the price level and
the actual quantities produced have risen from year 1 to year 2.
24. A base year is a year against which other years are measured.
26. In most industrialized countries, real GDP grew at a relatively slow pace in the late 1990s and grew
very quickly in the early 2000s.
27. Relative to the PPI, the consumer price index is a broader measure of prices in the U.S. economy.
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from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
Chapter 5 18
29. Labor unions typically rely on the consumer price index when cost-of-living adjustments are
negotiated as part of wage contracts.
30. The circular flow diagram shows the different sectors in the economy are independent.
31. Estimating the size of the underground economy is a relatively easy task for specialized economists.
32. The consumer price index (CPI) represents the cost of a fixed market basket of goods purchased by a
hypothetical average household.
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from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.