Macroeconomics 11th Edition Arnold Test Bank

Macroeconomics 11th Edition Arnold
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Chapter 7—Macroeconomic Measurements, Part II: GDP and Real GDP
MULTIPLE CHOICE
1. Gross Domestic Product (GDP) is the total market value of all

a. final goods and services produced annually within a country's borders.
b. final and intermediate goods and services produced annually within a country's borders.
c. intermediate goods and services produced annually within a country's borders.
d. final goods and services produced every month within a country's borders.
ANS: A PTS: 1 DIF: Difficulty: Easy
NAT: BUSPROG: Analytic LOC: DISC: Measuring the Economy
KEY: Bloom's: Knowledge
2. In the definition of GDP, the words "total market value" refer to total
a. dollar value at base prices.
b. dollar value at current prices.
c. subjective value.
d. objective value.
e. a and d
ANS: B PTS: 1 DIF: Difficulty: Moderate
KEY: Bloom's: Comprehension
3. Which of the following illustrates double counting?

a. The total market value of the steel used to produce a car and the total market value of the car
itself are summed.
b. The total market value of tennis rackets and the total market value of tennis balls are
summed.
c. The total market value of picture frames and the total market value of camera film are
summed.
d. The total market value of eyeglasses and the total market value of carpet are summed.
e. b and c
ANS: A PTS: 1 DIF: Difficulty: Moderate
KEY: Bloom's: Application
4. The best reason economists take only final goods and services into account when calculating GDP is that
a. this is the way things have always been done.
b. they want to avoid the problem of final counting.
c. they want to avoid the problem of double counting.
d. this is the only way things can be done.
ANS: C PTS: 1 DIF: Difficulty: Easy
5. Which of the following items is a final good?

a. mustard in a deli
© 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated,
or posted to a publicly accessible website, in whole or in part.
b. tin purchased by a can company
c. a sweater purchased by someone in a department store
d. a and b
e. a, b, and c
ANS: C PTS: 1 DIF: Difficulty: Moderate
6. Underground activities are not counted in GDP because

a. some underground activities are illegal and the government doesn't want to place, for
instance, drug dealers on an equal footing with small businesses.
b. there are no written records of underground activities.
c. of a decision made in the 1930s and no one has gotten around to changing it yet.
d. although it is possible to accurately measure underground activities, it is harder than
measuring above-ground activities because with the latter, one doesn't have to dig as deep.
7. Which of the following is counted in GDP?

a. the trading of 100 shares of Microsoft stock
b. the services of a real estate broker
c. government transfer payments
d. the sale of a used car
e. none of the above
8. Which of the following would not be included in the measurement of GDP?

a. a bill from a car mechanic
b. wages of a card dealer working in a Las Vegas casino
c. commissions of a stockbroker
d. the increased value of shares of stock
e. c and d
ANS: D PTS: 1 DIF: Difficulty: Challenging
9. Which of the following would definitely not be included in the measurement of GDP?
a. value of the services of a painter who paints your garage
b. value of the services of a person who mows his or her own lawn
c. value of the services of a maid who cleans your house
d. value of the services of a plumber who fixes your kitchen sink
10. Gross Domestic Product is computed by using
a. base-year prices.
b. wholesale prices.
c. previous-year prices.
d. current-year prices.
ANS: D PTS: 1 DIF: Difficulty: Easy
11. Which of the following is a nonmarket good?

a. the corn you grow in your home garden and consume
b. the clothes you sew and sell to a neighbor who pays you by writing you a check
c. the self-portrait hanging in your den
d. a and c
e. a, b, and c
12. Which of the following statements is false?

a. The market value of all nonmarket goods is omitted from GDP.
b. The sale of used goods is omitted from GDP.
c. The market value of a person mowing his or her own lawn is omitted from GDP.
d. If a good is produced but not sold, it is included in GDP.
13. Net exports equals

a. exports divided by imports.
b. the sum of exports and imports.
c. exports minus imports.
d. exports during the year.
14. Macroeconomists define consumption as

a. purchases by the business sector.
b. wearing away and breakdown of capital goods.
c. the difference between imports and exports.
d. purchases by the household sector.
15. To macroeconomists, investment is mainly the purchases of goods and services

a. by businesses.
b. to hold as wealth, such as gold coins or art.
c. to hold as wealth, such as stocks and bonds.
d. in the period previous to the period being studied.
16. The expenditure approach to measuring GDP sums

a. consumption, investment, government purchases, and net exports.
b. sales, revenues, income, and wages.
c. profits, compensation of employees, consumption, and investment.
d. net exports, consumption, wages, and salaries.
e. consumption, interest, net exports, and federal government purchases
17. Suppose the total market value of all final goods and services produced this year in economy X is $4
million. Of the $4 million worth of goods, $3 million is sold and $1 million is held in inventory. For this
year, the GDP for economy X is
a. $4 million.
b. $3 million.
c. $1 million.
d. $7 million.
18. Government purchases consist of the total dollar amount(s) spent on goods and services by the
a. federal government only.
b. state governments only.
c. local governments only.
d. state and local governments.
e. federal, state, and local governments.
ANS: E PTS: 1 DIF: Difficulty: Easy
19. Leisure is
a. a good that is not counted in GDP.
b. a good that is counted in GDP.
c. neither a good nor a bad, and it is not counted in GDP.
d. a bad as far as economists are concerned, because it is not tangible.
20. The two ways of measuring Gross Domestic Product are the __________ approach and the __________
approach.
a. expenditure; income
b. expenditure; national product
c. national product; income
d. real gross domestic product; nominal gross domestic product
e. net national product; personal income
21. Investment is equal to all purchases of newly produced capital goods

a. minus changes in business inventories.
b. plus fixed investment minus inventory investment.
c. plus changes in business inventories.
d. plus changes in business inventories plus purchases of new residential housing.
22. Business firms make which of the following two types of investment?
a. foreign investment and domestic investment
b. fixed investment and capital investment
c. investment in stocks and investment in bonds
d. investment in new capital goods and investment in used capital goods to replace "worn-out"
capital goods
e. fixed investment and inventory investment
ANS: E PTS: 1 DIF: Difficulty: Moderate
23. National income equals

a. wages + salaries + corporate profits + net income.
b. compensation of employees + proprietors' income + corporate profits + rental income + net
interest.
c. compensation of employees + proprietors' income + indirect business taxes + rental income
+ net interest.
d. the monetary value of fringe benefits + tips + wages + profits + salaries.
24. The largest component of national income in the United States is

a. rental income.
b. proprietors' income.
c. compensation of employees.
d. corporate profits.
e. net interest.
25. If a person receives a (stock) dividend check, in the calculation of national income this is part of
a. compensation of employees.
b. proprietors' income.
c. rental income.
d. net interest.
e. corporate profits.
26. Capital consumption allowance refers to

a. capital goods being used up in production through natural wear, obsolescence, and
accidental destruction.
b. people sending money between countries.
c. the purchase of used factories.
d. the purchase of goods that allow households to consume more services.
27. Which of the following statements is true?

a. The main items that comprise indirect business taxes include excise taxes, income taxes,
and property taxes.
b. Capital consumption allowance is also known as depreciation.
c. A sales tax is an example of an indirect business tax.
d. b and c
e. a, b, and c
28. An example of income received but not earned is

a. government transfer payments.
b. undistributed profits.
c. compensation of employees.
d. rental income.
e. a and c
29. An example of income earned but not received is

a. welfare payments.
b. Social Security payments.
c. undistributed profits.
d. a and b
e. a, b, and c
30. In the United States, which is the largest dollar figure?

a. national income
b. gross domestic product
c. net domestic product
d. personal income
ANS: B PTS: 1 DIF: Difficulty: Easy
31. Net domestic product is the total value of

a. all final goods and services produced within a country's borders in a year.
b. only intermediate goods produced within a country's borders in a year.
c. all final goods and services produced within a country's borders in a year minus gross
private domestic investment.
d. only intermediate goods produced within a country's borders in a year plus gross private
domestic investment.
e. all final goods and services produced within a country's borders in a year minus capital
consumption allowance.

a. Indirect business taxes are a component of national income because when added to the other
components of national income, the sum must equal GDP.
b. Indirect business taxes must be subtracted from national income to yield a figure equal to
GDP.
c. Indirect business taxes are a part of national income because they are considered a payment
to a factor of production.
d. Indirect business taxes are not part of national income because they are not considered a
payment to a factor of production.
ANS: D PTS: 1 DIF: Difficulty: Moderate
33. Disposable income is

a. equal to GDP minus the capital consumption allowance.
b. that portion of personal income that can be used for consumption and saving.
c. the sum of all payments to suppliers of the factors of production.
d. the amount of income that individuals actually receive.
e. another term for personal income.
34. Personal income is

a. equal to GDP.
b. that portion of national income that can be used for consumption and saving.
c. the sum of all payments to suppliers of the factors of production.
d. the amount of income that individuals actually receive.
e. another term for disposable income.
35. To derive net domestic product (NDP) from gross domestic product (GDP), we must subtract
a. depreciation or capital consumption allowance from GDP.
b. gross private domestic investment from GDP.
c. imports from GDP.
d. inventory investment from GDP.
e. the statistical discrepancy from GDP.
36. In the United States, the largest expenditure component in GDP is

a. gross private domestic investment.
b. government purchases of goods and services.
c. consumption expenditures.
d. net exports.
37. Depreciation refers to a decrease in the value of a good caused by

a. an increase in the price level.
b. a decrease in the price level.
c. "wear and tear" of capital goods over time.
d. the depreciation allowance.
e. a decrease in purchasing power.
Exhibit 7-1
Consumption expenditures $ 4,150

Federal government purchases of goods and services 850
State and local government’s purchases 331
Investment 751
Proprietors income 150
Compensation of employees 4,080
Corporate profits 134
Corporate profits taxes 23
Rental income 31
Capital consumption allowance 295
Indirect business taxes 130
Net interest 147
Exports 300
Imports 320
Undistributed corporate profits 111
Transfer payments 66
Personal taxes 45
Dividends
0
Income Earned from the Rest of the World
252
Income Earned by the Rest of the World
1,347
Social insurance taxes 222
Statistical discrepancy 5
38. Refer to Exhibit 7-1. Which of the following summations represents GDP using the expenditure
approach?
a. $4,150 + $751 + $850 + $300
b. $4,150 + $751 + $850 - $331 + $300
c. $4,150 + $751 + $850 + $331 + $300
d. $4,150 + $751 + $850 + $331 + $300 - $320
e. $4,150 + $751 + $850 + $331 + $300 - $320 + $111
KEY: Bloom's: Application NOT: New
39. Refer to Exhibit 7-1. Which of the following summations represents net domestic product?
a. GDP - $222
b. GDP - $331
c. GDP - $412
d. GDP - $295
e. GDP + $134
40. Refer to Exhibit 7-1. What is the value of gross domestic product?
a. $6,062
b. $5,731
c. $3,072
d. $6,382
e. $2,637
41. Refer to Exhibit 7-1. What is the value of net domestic product?
a. $5,840
b. $5,731
c. $5,650
d. $5,767
e. $6,637
42. Refer to Exhibit 7-1. What is the value of national income?

a. $4,351
b. $4,252
c. $4,403
d. $2,996
e. $4,542
43. Refer to Exhibit 7-1. What is the value of personal income?

a. $4,252
b. $4,388
c. $5,072
d. $3,996
e. $4,207
44. Refer to Exhibit 7-1. What is the value of disposable income?

a. $3,618
b. $4,795
c. $3,727
d. $4,207
e. $4,017
45. In 2011, the U.S. GDP was approximately

a. $15.27 trillion.
b. $5.15 trillion.
c. $10.67 trillion
d. $20.83 trillion
KEY: Bloom's: Knowledge NOT: New
46. Sophia just bought shares of stock in IBM for $20,000 and paid a $300 commission to her broker. How
did this impact GDP?
a. It had no impact on GDP.
b. GDP increased by $300.
c. GDP increased by $20,000.
d. GDP increased by $19,700.
e. GDP increased by $20,300.
ANS: B PTS: 1 DIF: Difficulty: Challenging
47. Which of the following would not be included in the calculation of this year's GDP?
a. a headlight bulb purchased at Joe's Auto Supply by Olivia to replace a burnt out bulb in her
car
b. a headlight bulb purchased by Ford Motor Co. from a supplier
c. a headlight bulb produced but not sold this year and thus ending up as inventory
d. none of the above, i.e., all would be included
48. If in the process of calculating GDP, the market value of all intermediate goods is added to the market
value of all final goods, this would
a. overstate the actual value of GDP.
b. produce the correct value of GDP.
c. understate the actual value of GDP.
d. avoid the possible error of double counting.
49. Suppose there are five goods in the economy, A-E. The current-year quantity of each is 10A, 20B, 30C,
40D, and 50E. Current-year prices are $1 for each unit of A, $2 for each unit of B, $3 for each unit of C,
$4 for each unit of D, and $5 for each unit of E. Base-year prices are $1 for each good. Real GDP in the
current year equals _________ and GDP equals _________.
a. $550; $150
b. $130; $530
c. $150; $550
d. $530; $130
ANS: C PTS: 1 DIF: Difficulty: Challenging
50. Real GDP is GDP

a. in current-year prices.
b. in base-year prices.
c. in GDP-prices.
d. in that year's prices.
51. Real GDP is always measured in

a. cheaper dollars.
b. quality of goods produced.
c. base-year dollars.
d. nominal dollars.
e. current dollars.
52. The base year is the year

a. in which prices are unstable.
b. in which prices are lowest.
c. in which prices are highest.
d. that serves as a reference point or benchmark.
e. in which nominal output is largest.
53. Real GDP is the value of all __________ goods and services produced in a given year in __________
prices.
a. intermediate; that year's
b. intermediate; base-year
c. final; that year's
d. final; base-year
Exhibit 7-2
1990 2012
Goods Quantities 1990 Prices Quantities 2012 Prices
papayas 10 $1.00 20 $0.50
fish 15 $0.60 20 $0.80
skirts 8 $4.00 15 $4.00
54. Refer to Exhibit 7-2. GDP in 2012 is

a. $49.
b. $51.
c. $86.
d. $92.
e. not possible to calculate without the CPI.
55. Refer to Exhibit 7-2. Assuming that 1990 is the base year, Real GDP in 2012 is
a. $49.
b. $51.
c. $86.
d. $92.
e. not possible to calculate without the CPI.
56. Refer to Exhibit 7-2. GDP in 1990 is

a. $49.
b. $51.
c. $86.
d. $92.
e. impossible to calculate without the CPI.
57. "Economic growth" has occurred if the

a. inflation rate between this year and last year is zero or less.
b. GDP this year exceeds the Real GDP this year.
c. unemployment rate this year is above the natural rate of unemployment.
d. Real GDP this year exceeds the Real GDP of last year.
58. The typical U.S. business cycle, measured peak to peak, lasts approximately
a. 4 to 5 years.
b. 8 to 10 years.
c. 1 to 3 years.
d. 6 months to 2 years.
59. The standard definition of "recession" is

a. a period of a positive frictional unemployment rate.
b. two consecutive quarters of falling Real GDP.
c. the lowest point in a business cycle.
d. a period of negative inflation.
60. A recession is always part of a

a. contraction.
b. recovery.
c. detraction.
d. remission.
61. Which of the following is a macroeconomic measurement used to gauge macroeconomic activity?
a. Net domestic product
b. National income
c. Personal income
d. Disposable income
e. all of the above
ANS: E PTS: 1 DIF: Difficulty: Easy
62. If GDP in year 1 is the same dollar amount as the GDP in year 2, does it follow that Real GDP in year 1
is the same as Real GDP in year 2?
a. Yes, since prices must necessarily be the same in the two years.
b. No, since equal GDP figures do not account for population.
c. No, since prices may not be the same in the two years.
d. Yes, since equal GDP figures do account for a change in the quality of goods produced in
the two years.
63. Which of the following goods is an intermediate good?

a. lettuce that a restaurant buys to put on sandwiches
b. tires that a car company buys to put on the cars it produces
c. a television set that Chi-Mai buys to put in her college dorm room
d. a and b
e. b and c
64. Which of the following does GDP omit?

a. Jack purchases $2,300 worth of stock in company X.
b. Bob mows his lawn and washes and irons his shirts.
c. Helen receives $4,000 a year in Social Security payments.
d. a and b
e. a, b, and c
65. The sale of __________ goods is omitted from current GDP because __________.
a. intermediate goods; these goods do not constitute production
b. used goods; these goods were counted in an earlier year
c. illegal; these goods do not constitute economic value
d. b and c
e. a, b, and c
66. Suppose that in year 1 every adult in the country works 40 hours a week and GDP is $6.7 trillion. In year
2 every adult in the country works 45 hours a week and GDP is $7.5 trillion. Which of the following
statements is true?
a. Per-capita GDP is necessarily higher in year 2 than year 1.
b. People are "better off" in year 2 than in year 1 because there are more goods and services in
year 2 than year 1.
c. Government transfer payments were higher in year 2 than in year 1.
d. a and b
ANS: E PTS: 1 DIF: Difficulty: Challenging
67. Is it possible for a country with a relatively large GDP to have a relatively small per-capita GDP?
a. Yes, since the country with a relatively large GDP could have a relatively large population.
b. No, since countries with a relatively large GDP (such as the United States and Japan) also
have relatively high per-capita GDP.
c. Yes, but only under the condition that the country "produces" relatively more "bads" than
other countries.
d. Yes, since government transfer payments may be exorbitantly high in the country with the
relatively high GDP.
e. There is not enough information to answer this question.
68. Country A has a higher GDP than country B. What does this mean?
a. It means that on a per-capita basis the residents of country A are relatively better off (in
terms of the goods and services they have available to them) than the residents of country B.
b. It means that on a per-capita basis the residents of country A are richer than the residents of
country B.
c. It means that more goods and services were produced in country A than country B.
d. It means that the total market value of the final goods and services produced in country A is
greater than the total market value of the final goods and services produced in country B.
e. a and d
69. Look at the following data: durable goods = $200 billion; nondurable goods = $350 billion; services =
$600 billion; fixed investment + inventory investment = $200 billion; government purchases = $400
billion; exports = $30 billion; imports = $79 billion. GDP is equal to
a. $1,701 billion.
b. $1,201 billion.
c. $1,859 billion.
d. $1,010 billion.
e. There is not enough information to answer the question.
70. Look at the following data: consumption = $915 billion; exports = $40 billion; imports = $33 billion;
inventory investment = $123 billion; fixed investment = $500 billion; government purchases = $300
billion. GDP is equal to
a. $1,632 billion.
b. $1,466 billion.
c. $1,911 billion.
d. $1,845 billion.
71. Suppose you have data on durable goods, nondurable goods, fixed investment, government purchases,
exports, and imports. Can you compute GDP?
a. No, since data on services and prices are missing.
b. No, since data on inventory investment are missing.
c. No, since data on inventory investment and services are missing.
d. No, since data on services are missing.
e. Yes.

a. Government purchases is the largest component of GDP.
b. Net exports are equal to exports plus imports.
c. U.S. imports refer to the physical quantity of foreign-produced goods that are purchased by
residents of the United States.
d. Government purchases includes the spending on goods and services by all levels of
government (federal, state, and local).
e. c and d
73. Look at the following data: GDP = $11,920 billion; investment = $2,100 billion; exports = $500 billion;
government purchases = $1,450 billion; consumption = $8,500 billion. What does import spending
equal?
a. $630 billion
b. $370 billion
c. $1,320 billion
d. $430 billion
e. $474 billion
ANS: A PTS: 1 DIF: Difficulty: Challenging
74. Increases in import spending

a. raise GDP.
b. lower GDP.
c. are always balanced off in GDP by changes in exports.
d. may raise or lower GDP.

a. Domestic income is the total income earned by the people and businesses within a country's
borders.
b. National income is the total income earned by U.S. citizens and businesses, no matter where
they reside or are located.
c. Corporate profits is the largest component of national income.
d. National income = compensation of employees + proprietors' income + corporate profits +
rental income + net interest.
76. You have data for compensation of employees, proprietors' income, rental income, and net interest. Can
you compute national income?
a. Yes.
b. No, since data on indirect business taxes are missing.
c. No, since data on corporate profits is missing.
d. No, since data on the capital consumption allowance is missing.
e. No, since net interest has not been adjusted for profits.
77. Which of the following is the correct equation for computing personal income?
a. Personal income = National income + undistributed profits - social insurance taxes -
corporate profits taxes + transfer payments.
b. Personal income = National income - undistributed profits - social insurance taxes +
corporate profits taxes + transfer payments
c. Personal income = National income - taxes
d. Personal income = National income - undistributed corporate profits - social insurance taxes
- corporate profits taxes + transfer payments
78. Look at the following data: personal income = $4,900 billion; personal taxes = $900 billion; transfer
payments = $980 billion. What is disposable income?
a. $3,200 billion
b. $4,000 billion
c. $4,980 billion
d. $1,880 billion
e. There is not enough information to answer the question.

a. National income accountants consider the portion of corporate profits that is used to pay
corporate profits taxes to be income earned by households but not received.
b. Net domestic product (NDP) is a smaller dollar amount than GDP.
c. Personal income includes transfer payments.
d. b and c
e. a, b, and c
80. An economy produces 10X, 20Y, and 30Z in a year. Base-year prices for these goods are $1, $2, and $3,
respectively. Current-year prices for these goods are $2, $3, and $4, respectively. What is Real GDP?
a. $180
b. $200
c. $140
d. $240
81. Why do economists prefer to compare Real GDP figures for various years instead of GDP figures?
a. Because when GDP in one year is higher than in another year, there is no way to tell why it
is higher. Is it because output is higher, prices are higher, etc.? This is not the case with Real
GDP. If Real GDP is higher in one year than in another year, it is because output is higher.
b. Because when GDP in one year is higher than in another year, there is no way of knowing if
the quality of goods produced is higher in one year than the other. This is not the case with
Real GDP. If Real GDP is higher in one year than in another year, it is because the quality of
the goods produced is higher.
c. Actually the question is incorrect. Economists prefer to compare GDP figures instead of
Real GDP figures.
d. Because Real GDP is easier to compute than GDP.
e. Because when GDP in one year is higher than in another year, there is no way to tell if the
quality of life is higher in one year than the other. This is not the case with Real GDP. If Real
GDP is higher in one year than in another year, it is because the quality of life is higher.
82. If Real GDP was $8,742 billion in year 2 and it had been $8,509 billion in year 1, what was the
approximate economic growth rate during this time period?
a. 9.73 percent
b. 2.67 percent
c. 3.58 percent
d. 2.74 percent

a. Another name for capital consumption allowance is depreciation.
b. When there are two consecutive quarterly declines in Real GDP the economy is said to be in
recession (based on the standard definition).
c. The expansion of a business cycle refers to increases in Real GDP beyond the recovery.
d. a and b
e. a, b, and c
84. What is the proper sequence of the phases of a business cycle?

a. peak, contraction, trough, expansion, recovery
b. peak, contraction, recovery, trough, expansion
c. peak, contraction, trough, recovery, expansion
d. contraction, peak, trough, recovery, expansion
e. recovery, trough, peak, expansion, contraction
85. A business cycle refers to the

a. continued expansion in Real GDP.
b. recurrent swings (up and down) in Real GDP.
c. continued decline in Real GDP.
d. period when Real GDP grows at unusually high rates.
86. What does annual economic growth refer to?

a. annual increases in GDP
b. annual increases in consumption spending
c. annual increases in investment spending
d. annual increases in Real GDP
87. The sum of durable goods, nondurable goods, and services equals
a. investment.
b. fixed investment.
c. government purchases.
d. consumption.
e. net exports.
88. Investment equals inventory investment added to

a. business purchases of new capital goods.
b. purchases of new residential housing.
c. fixed investment.
d. business purchases of new capital goods and purchases of new residential housing.
e. either c or d
a. For purposes of computing GDP, the purchases of new residential housing are considered
investment although it is undertaken by the household sector.
b. Consumption includes spending on durable goods but not spending on services.
c. Investment includes fixed investment but not inventory investment.
d. b and c
e. a, b, and c
90. Consumption expenditures in the U.S. usually account for approximately __________ percent of GDP.
a. 40
b. 50
c. 60
d. 70
e. 80
91. Suppose that net exports are -$300 billion and exports are $500 billion. Imports equals
a. $800 billion.
b. $400 billion.
c. $200 billion.
d. -$200 billion.
92. Suppose that consumption spending is $4,200 billion, spending on durable goods is $1,200 billion, and
spending on services is $2,000 billion. What does spending on nondurable goods equal?
a. $7,200 billion
b. $1,000 billion
c. $2,200 billion
d. $3,200 billion
93. Suppose that inventory investment is $20 billion and (total) investment is $680 billion. What does
purchases of newly produced capital goods equal?
a. $715 billion
b. $785 billion
c. $750 billion
d. $35 billion
94. Suppose that nondurable goods spending is $200 billion, durable goods spending is $400 billion, new
residential housing spending is $500 billion, and spending on services is $700 billion. What does
consumption equal?
a. $600 billion
b. $1,100 billion
c. $1,800 billion
d. $1,300 billion
95. Suppose that fixed investment is $550 billion and (total) investment is $630 billion. What does
inventory investment equal?
a. $80 billion
b. $550 billion
c. $630 billion
d. $1,180 billion
96. In the business cycle, what is the difference between the recovery phase and the expansion phase?
a. The expansion phase occurs in the rising portion of the business cycle, while the recovery
phase occurs in the falling portion of the business cycle.
b. The expansion phase occurs in the falling portion of the business cycle, while the recovery
phase occurs in the rising portion of the business cycle.
c. The expansion phase is the period when Real GDP increases beyond the recovery phase.
d. The expansion phase must always preceed the recovery phase.
97. Which of the following is always a characteristic of the contraction phase of the business cycle?
a. lower unemployment rates
b. a decline in Real GDP
c. higher inflation rates
d. a decline in GDP
e. all of the above
98. When computing national income, which of the following is included in compensation of employees?
a. wages and salaries paid to employees
b. employers’ contributions to Social Security and employee benefit plans
c. the monetary value of fringe benefits, tips, and paid vacations
d. all of the above
99. In the survey of Harvard University students noted in the text, the majority of students chose to
a. be poorer in absolute terms, as long as they could be richer in relative terms.
b. be richer in absolute terms, even though they would be poorer in relative terms.
c. move into a poorer neighborhood even if they were relatively rich.
d. move into a richer neighborhood even if they were relatively poor.
KEY: Bloom's: Application MSC: Economics 24/7
100. GDP can rise as a result of a rise in __________________, and Real GDP can rise as a result of a rise in
_______________________.
a. prices or output; prices only.
b. prices only; prices or output.
c. prices or output; output only.
d. prices or output; prices or output.
101. Germany has a ____________________ GDP than Austria and has a _____________________ GDP
per capita than Austria.
a. larger; smaller
b. larger; larger
c. smaller; larger
d. smaller; smaller
102. In 1820 the country with the highest per capita GDP was ______________________. In 1900 the
country that ranked #1 in terms of per capita GDP was ___________________ and fifty years later the
top ranking was held by _________________________.
a. the Netherlands; New Zealand; the United States.
b. the Netherlands; Australia; Switzerland.
c. the United States; the United States; the United States.
d. Austria; Australia; New Zealand.
103. In 1900, the country with the highest per capita GDP was
a. Australia.
b. New Zealand.
c. the United States.
d. Belgium.
e. the Netherlands.
a. Australia.
b. the United States.
c. Austria.
d. Germany.
e. the Netherlands.
a. Switzerland.
b. New Zealand.
c. the United States.
d. Venezuela.
e. the Netherlands.
Exhibit 7-3
Durable goods $3,000

Services 6,000
Business purchases of capital goods 400
Fixed investment 850
Exports 600
Imports 800
Nondurable goods 700
Inventory investment
200
Government transfer payments 100
Purchases of new residential housing 450
Government purchases 900
106. Refer to Exhibit 7-3. Consumption is equal to
a. $3,700.
b. $9,000.
c. $10,150.
d. $8,200.
e. $9,700.
107. Refer to Exhibit 7-3. Investment is equal to

a. $850.
b. $1,250.
c. $200.
d. $2,200.
e. $1,050.
108. Refer to Exhibit 7-3. Net exports is equal to

a. $200.
b. -$200.
c. $600.
d. -$1,400.
e. $1,400
109. Refer to Exhibit 7-3. GDP is equal to

a. $13,050.
b. $11,550.
c. $8,600.
d. $11,450.
e. $14,000.
Exhibit 7-4
Economic Data for Country A
Year/Quarter Real GDP

2012/Quarter 1 $450 billion
110. Refer to Exhibit 7-4. Did Country A experience a recession (based on the standard definition) in 2012?
a. Yes, because Real GDP declined during two consecutive quarters in 2012
b. No, because Real GDP did not decline during three consecutive quarters in 2012.
c. Yes, because Real GDP was lower at the end of the year than it was at the beginning of the
year.
d. This information cannot be determined because the determination of a recession is based
upon GDP not Real GDP.
Exhibit 7-5
Economic Data for Country Z
Year GDP Real GDP

1 $400 billion $378 billion
111. Refer to Exhibit 7-5. What was Country Z’s economic growth rate between year 1 and year 2?
a. 7.3%
b. 8.3%
c. 5.3%
d. 6.8%
a. -3.0%
b. 2.6%
c. 14.0%
d. -2.2%
a. 6.1%
b. 2.3%
c. 3.0%
d. 18.2%
114. Refer to Exhibit 7-5. During year 3, Country Z experienced economic _____________ and
_________________.
a. decline; deflation (falling price level)
b. growth; inflation (rising price level)
c. growth; deflation (falling price level)
d. decline; inflation (rising price level)
TRUE/FALSE
1. Disposable income equals national income minus personal taxes.
ANS: F PTS: 1 DIF: Difficulty: Moderate

2. An example of income “earned-but-not-received" is corporate dividends.

3. Net domestic product (NDP) is the total value of new goods available in the economy after worn out
capital goods have been replaced.
ANS: T PTS: 1 DIF: Difficulty: Easy

4. Corporate profits can be broken into three categories: dividends, undistributed profits, and corporate
profits taxes.
ANS: T PTS: 1 DIF: Difficulty: Challenging

5. Net interest is the interest paid out by US households and government minus the interest income they
received.

6. Countries with a large GDP must also have a large per-capita GDP.

7. Net exports must always be a positive amount.
ANS: F PTS: 1 DIF: Difficulty: Easy

8. GDP includes some nonmarket goods.
ANS: T PTS: 1 DIF: Difficulty: Moderate

9. A transfer payment is a payment to a person that is made in return for goods and services supplied.

10. Some economists argue that GDP overstates overall economic welfare because it does not include the
impact of bads such as pollution.

11. Corporate profits is the largest category of national income.

12. For economists trying to determine peoples’ preferences, observing how people act is more important
than what people say in surveys.

KEY: Bloom's: Comprehension MSC: Economics 24/7
13. The GDP of country A may be higher than that of country B because the workers in country A work
more hours per week than workers in country B.

14. Sales tax is an example of an indirect business tax.

15. Compensation of employees is the largest spending component of GDP.
ANS: F PTS: 1 DIF: Difficulty: Easy

KEY: Bloom's: Knowledge NOT: New
16. If the GDP in one year is greater than it was in the previous year, then economic growth must have
occurred.

KEY: Bloom's: Comprehension NOT: New
17. If a business firm in Country A produces a good but does not sell it in that same year, that good will not
be counted in Country A’s GDP.

KEY: Bloom's: Comprehension NOT: New
ESSAY
1. List and explain the two different approaches used to measure GDP.
ANS:
The two different approaches are: the expenditure approach and the income approach. When using the
expenditure approach the amount of money spent by buyers on final goods and services is summed. The
spending by the four sectors of the economy (households, businesses, government and foreign sector) is
combined to yield the GDP. The income approach is computed by summing the income earned by the
different resources that were used to produce a country's goods and services (national income) and then
making some adjustments to arrive at GDP.
PTS: 1 DIF: Difficulty: Challenging NAT: BUSPROG: Analytic

LOC: DISC: Measuring the Economy KEY: Bloom's: Comprehension
2. Draw an appropriate diagram to represent the business cycle and label each of the five phases. Provide a
brief description of each phase.
ANS:
The five phases of the business cycle are: peak, contraction, trough, recovery and expansion. At the peak
of a business cycle Real GDP is at a temporary high. In the contraction phase Real GDP is declining. A
trough represents the low point in Real GDP, just before it begins to turn up. The recovery phase is the
period when GDP is rising, up until it reaches the initial peak. The expansion phase represents an
increase in GDP, beyond the initial peak and until the next peak.
PTS: 1 DIF: Difficulty: Moderate NAT: BUSPROG: Analytic

LOC: DISC: Measuring the Economy KEY: Bloom's: Application
3. With respect to the business cycle, describe the difference between the expansion phase and the recovery
phase.
ANS:
The recovery phase is the period when Real GDP is rising, up until it reaches the level of the initial peak.
The expansion phase represents an increase in Real GDP, beyond the initial peak and continues until the
next peak.
PTS: 1 DIF: Difficulty: Easy NAT: BUSPROG: Analytic

4. Explain why GDP figures do not necessarily measure happiness or well-being.
ANS:
Well-being and happiness are subjective. Just because a country is able to produce relatively more goods
does not mean that the people in that country are relatively happier. Perhaps their increased production
results in more pollution, more stress and less leisure. These people may actually be less happy than the
people living in a country with lower production, but a calmer way of life.
PTS: 1 DIF: Difficulty: Moderate NAT: BUSPROG: Analytic

5. Given that GDP is a measure of what is produced in a country, explain how the expenditure approach
can measure GDP. How are items produced, but not yet sold, accounted for in the expenditure
approach?
ANS:
The expenditure approach measures GDP by summing the purchases of final goods and services by the
four sectors of the economy. This is a reflection of production because an item can not be purchased
unless it has been produced. Even items that have been produced, but not yet sold, are accounted for in
the expenditure approach because national income accountants assume that anything that is produced
but not sold to consumers is bought by the firm that produced it. These items would show up as part of
the firms' inventory, and therefore would be counted as part of investment.

6. List and describe four of the six categories of economic exchanges that are omitted from GDP
calculations. Explain why these transactions are not included in GDP and give an example of each to
help support your answer.
ANS:
Certain nonmarket goods and services are not counted in GDP. For example, if a family hires a
babysitter to care for their children the service would be counted in GDP, but if a mother cares for her
own children there is no market transaction which would allow for the service to be counted in GDP
calculations. Underground activities consist of unreported exchanges. Most underground activities
occur because the activity is either illegal or the participants in the exchange are trying to avoid paying
taxes on the transaction. Since there is no official records of these transactions, it is impossible for them
to be included in GDP. Sales of used goods are excluded from GDP because GDP measures current
production and the value of the good was already captured in the year in which it was produced.
Financial transactions, such as the value of stocks and bonds traded, are not included in GDP since they
represent a transfer of ownership of an asset, as opposed to current production. Government transfer
payments, such as social security and veterans’ benefits, are not included in GDP because they do not
represent a payment made for current production. Leisure is too difficult for national income
accountants to quantify. If the residents of a country are able to consume more leisure time as a result of
a decrease in the average work week, this is a benefit to those residents, but the GDP statistics do not
reflect this improved situation.

7. Describe the three different reasons that investment can rise. Explain how one of these three changes
could be undesireable in terms of promoting the economic health and strength of the economy.
ANS:
Investment can rise as a result of: (1) an increase in business purchases of new capital goods; (2) the
purchase of new residential housing by individuals; and (3) an increase in inventory investment by firms.
An increase in inventory investment could result from increases in planned inventory investment or
increases in unplanned inventory investment. An increase in unplanned inventory investment would be
undesireable in terms of economic health as it is a reflection of the overproduction of output produced by
firms compared to buyers’ purchases (resulting in an increase in inventories).


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Macroeconomics 11th Edition Arnold Test Bank

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Macroeconomics 11th Edition Arnold

1. Gross Domestic Product (GDP) is the total market value of all

3. Which of the following illustrates double counting?

5. Which of the following items is a final good?

6. Underground activities are not counted in GDP because

7. Which of the following is counted in GDP?

8. Which of the following would not be included in the measurement of GDP?

11. Which of the following is a nonmarket good?

12. Which of the following statements is false?

13. Net exports equals

14. Macroeconomists define consumption as

15. To macroeconomists, investment is mainly the purchases of goods and services

16. The expenditure approach to measuring GDP sums

21. Investment is equal to all purchases of newly produced capital goods

23. National income equals

24. The largest component of national income in the United States is

26. Capital consumption allowance refers to

27. Which of the following statements is true?

28. An example of income received but not earned is

29. An example of income earned but not received is

30. In the United States, which is the largest dollar figure?

31. Net domestic product is the total value of

32. Which of the following statements is true?

33. Disposable income is

34. Personal income is

36. In the United States, the largest expenditure component in GDP is

37. Depreciation refers to a decrease in the value of a good caused by

Consumption expenditures $ 4,150

42. Refer to Exhibit 7-1. What is the value of national income?

43. Refer to Exhibit 7-1. What is the value of personal income?

44. Refer to Exhibit 7-1. What is the value of disposable income?

45. In 2011, the U.S. GDP was approximately

50. Real GDP is GDP

51. Real GDP is always measured in

52. The base year is the year

54. Refer to Exhibit 7-2. GDP in 2012 is

56. Refer to Exhibit 7-2. GDP in 1990 is

57. "Economic growth" has occurred if the

59. The standard definition of "recession" is

60. A recession is always part of a

63. Which of the following goods is an intermediate good?

64. Which of the following does GDP omit?

72. Which of the following statements is true?

74. Increases in import spending

75. Which of the following statements is false?

79. Which of the following statements is true?

83. Which of the following statements is true?

84. What is the proper sequence of the phases of a business cycle?

85. A business cycle refers to the

86. What does annual economic growth refer to?

88. Investment equals inventory investment added to

Durable goods $3,000

106. Refer to Exhibit 7-3. Consumption is equal to

107. Refer to Exhibit 7-3. Investment is equal to

108. Refer to Exhibit 7-3. Net exports is equal to

109. Refer to Exhibit 7-3. GDP is equal to

Economic Data for Country A

Year/Quarter Real GDP

Economic Data for Country Z

Year GDP Real GDP

1. Disposable income equals national income minus personal taxes.

ANS: F PTS: 1 DIF: Difficulty: Moderate

2. An example of income “earned-but-not-received" is corporate dividends.

ANS: F PTS: 1 DIF: Difficulty: Moderate