Basics

1. Suppose an economys expenditures are equal to $7,000 billion. Income in the

economy is:
a. Less than $7,000 billion.
b. More than $7,000 billion.
c. Exactly $7,000 billion.
d. Somewhere between $7,000 billion and $8,000 billion.

2. National income accounting:

a. Provides a set of rules for determining macroeconomic policy.
b. Provides a set of rules and definitions for measuring economic activity in the
aggregate economy.
c. Is a useful tool for microeconomists.
d. Can be used to measure a nation's output but not its production or
consumption.

3. Real gross domestic product is best defined as:

a. The market value of goods and services produced in an economy.
b. All goods and services produced in an economy stated in the prices of a given
year.
c. The market value of all final goods and services produced in an economy
stated in the prices of a given year.
d. The market value of goods and services produced in an economy stated in
current-year prices.

4. The United States produces and sells millions of types of products. To add
them up to a single aggregate, each good is weighted by:
a. Its cost of production.
b. Its market price.
c. Its utility to consumers.
d. Its contribution to corporate profits.

5. To calculate nominal GDP:

a. Sum the quantity of all final goods and services produced in an economy in a
year.
b. Sum the quantity of all goods and services sold in an economy in a year.
c. Weight the output of each final good and service produced in an economy in
a year by its price that year and then sum the result.
d. Weight the output of each good and service produced in an economy in a year
by its price in that year, and then sum the result.
6. To compute GDP, the quantity of each final good or service produced must first
be weighted by:
a. Its market price.
b. Its cost of production.
c. Its share of total output.
d. Its contribution to corporate profits.

Intermediate and Final Goods and Services

7. Which of the following is an example of an intermediate product?

a. A pair of skis sold by a sporting goods retailer to a skier.
b. A share of IBM stock.
c. The lumber produced by Boise Cascade and sold to a builder of new houses.
d. An antique car sold to the highest bidder.

8. Which of the following is an example of a final good or service?

a. Unemployment compensation.
b. A CD player purchased as a gift.
c. Steel used in the production of appliances.
d. Vegetables purchased by local restaurants to make soup.

9. Double counting in the national income accounts will not occur if GDP is
computed by summing all:
a. Sales of final output.
b. Sales of final output and intermediate goods.
c. Sales.
d. Production costs.

10. Use the following information to answer the question. There are three firms
in an economy: X, Y, and Z. Firm X buys $200 worth of goods from Y, and $300
worth of goods from firm Z, and produces 250 units of output at $4 per unit. Firm
Y buys $150 worth of goods from firm X, and $250 worth of goods from firm Z,
and produces 300 units of output at $6 per unit. Firm Z buys $75 worth of goods
from firm X, and $50 worth of goods from firm Y, and produces 500 units at $2
per unit. Given this information, what is the economys GDP? Hint: remember
that part of each firms production is used by one of the other firms as a
production input (an intermediate product).
a. $1825.
b. $2700.
c. $2775.
d. $3800.

Components of GDP

11. Investment is the purchase of capital equipment, inventories, and:

a. Structures.
b. Nondurable goods.
c. Depreciation.
d. Import investment.

12. Which of the following would be considered an investment expenditure?

a. The Smiths buy a home that was built in 1990.
b. The federal government pays the salary of a captain in the Air Force.
c. Jacks Boat Storage buys a new boat lift.
d. Chairs-R-Us buys a used lathe to manufacture chairs.

13. For purposes of calculating GDP, which of the following payments is not included in
the government spending component?
a. Social security payments.
b. Wages paid by a local government to its road crew.
c. Wages paid by a state government to the workers in its welfare department.
d. The federal governments purchase of a submarine from a shipbuilder.

14. Spending on capital equipment, inventories, and structures is referred to as:

a. Consumption expenditure (C).
b. Investment expenditure (I).
c. Government expenditure (G).
d. Expenditure on net exports (X M)

15. The sale of illegal drugs:

a. Is included in GDP under services.
b. Is included in GDP under investment.
c. Is included in GDP as a component of home production (non-market activity).
d. Is not included in GDP.

16. Which of the following would be counted in the calculation of GDP?

a. The sale of a rare coin to a coin collector.
b. Homes that are rebuilt after being completely destroyed by a hurricane.
c. The sale of a 1966 Ford Fairmont.
d. The sale of cocaine in the black market.
17. Which of the following would NOT be counted as a final good for inclusion in GDP?
a. A piece of glass bought by a consumer to fix a broken window.
b. A sheet of glass purchased by a commercial builder of a new home.
c. A sheet of glass produced this year and ending up in the inventory of a retail store.
d. A home that is built this year, but is not sold.

18. Which of the following economic activities would not be included in US

GDP?
a. Dick hires a nanny for $10 an hour to help his wife take care of their kids.
b. Jose is a great hairdresser, often receiving $20 tips (which he reports on his
income taxes).
c. MaxiPress adds $8,000 worth of books to its inventory which remains unsold
by the end of the year.
d. Rita has a job after school washing dishes 2 hours each evening in her parents
diner. The other dishwashers get $6 an hour, but her parents give her room and
board instead.

19. Which of the following is not a part of US GDP?

a. The value of an insurance policy on a new BMW sold by a U.S. company.
b. The value of a BMW imported from Germany.
c. The value of a BMW produced in the U.S.
d. The commissions earned by a BMW dealership in the US.

20. If a used car dealer buys a car for $6,000 and resells it for $6,500, how much
has been added to GDP?
a. Nothing.
b. $500.
c. $6,000
d. $6,500.

GDP Calculations

21. If U.S. imports of goods and services exceed exports:

a. U.S. GDP is less than the sum of consumption, investment, and government purchases.
b. U.S. GDP exceeds the sum of consumption, investment, and government purchases.
c. U.S. net exports are positive.
d. U.S. GDP equals the sum of consumption, investment, and government purchases.
 billions of
dollars
Consumption 4,900
Investment 1,300
Transfer payments 1,050
Government expenditures 1,200
Exports 1,050
Imports 950
Net foreign factor income 20

22. Use the table above to calculate GDP.

a. 6,200.
b. 7,400.
c. 7,500.
d. 8,450.

23. Use the table above to calculate net exports.

a. -100.
b. 100.
c. 950.
d. 1050.

In billions of dollars
Consumption 3600
Investment 800
Transfer payments 750
Government expenditures 1000
Exports 650
Imports 450
Net foreign factor income -30

24. Calculate GDP using the table above.

a. 5570
b. 5600
c. 6050
d. 6320

25. Calculate net exports using the table above.

a. 170
b. 200
c. 450
d. 650
 In trillions of dollars
GDP 5.0
Government purchases 1.0
Transfer payments 0.2
Exports 0.4
Imports 0.5
Net foreign factor income 0.4

26. Refer to the table above. What is consumption in this economy?

a. $3.6 trillion.
b. $3.9 trillion.
c. $4.1 trillion.
d. There is not sufficient information to compute consumption.

Per-Capita GDP

27. Per capita real output product is best defined as:

a. The market value of all final goods and services produced in an economy in
current prices.
b. The market value of all final goods and services produced in an economy in
current prices divided by the population.
c. The market value of all final goods and services produced in an economy in
the prices of a given year.
d. The market value of all final goods and services produced in an economy in
the prices of a given year divided by the population.

28. Suppose the Gross Domestic Product in a country is $450 million and the population of
that country is $150 million. What is the per-capita GDP of that country?
a. $300 million.
b. $30 million.
c. $3 million.
d. $0.3 million.

Uses and Limitations of National Income Accounting

29. GDP is a:
a. Good measure of relative welfare in various countries.
b. Good measure of relative prices in various countries.
 c. Good measure of relative living standards in various countries.
d. Good measure of market activities at market prices.

30. Comparisons of GDP levels across countries are most accurate when:
a. The value of non-market activities is the same across countries.
b. Prices are the same across countries.
c. Prices and the value of non-market activities are the same across countries.
d. Prices for non-market activities are the same across countries.

Question Answer
In calculating this year's GDP, national exclude Social Security payments to
income accountants retirees
Assume you built a new house, bought a
investment went up since you built a new
used car, and bought some government
house
bonds. Which of the following is true?
if the underground economy grows,
Which of the following is FALSE?
people's standard of living will decline
Which of the following statements is
NDP cannot be greater than GDP
true?
Increases in unwanted business
an increase in investment
inventories are counted as
The difference between gross domestic
investment and net domestic investment the difference between GDP and NDP
is equal to
-the strd of lvng of the pple in U.S. went
Assume nominal GDP increased by up more than the strd of lvng of the people
4.2% in the U.S. but by only 3.4% in in GE -real econ growth in the U.S. was
Germany. We can definitely conclude higher than in GE -infl in U.S. was 0.8%
that higher than in GE -productivity growth in
U.S. was higher than in GE E)none
Assume you deplete your savings to buy
a new sofa and some government bonds
consumption will increase
and then take a vacation in a foreign
country. Which of the following is true?
If gross investment were zero, which of
net investment would be negative
the following would be true?
 -the difference between gross investment
and net investment -the difference between
Depreciation is GDP and NDP -the difference between
GNP and NNP -another word for capital
consumption allowances E)all of the above
If we counted the value of autoworkers'
salaries, wheels, tires, steel, body parts,
overstating GDP through double counting
and final car sales in calculating GDP,
then we would be
The difference between gross
equal to capital consumption allowances
investment and net investment is
In the United States, annual per-capita
$46,500
GDP in 2009 was around
As defined in our text, private domestic investment in labor productivity through
investment (I) does NOT include education and training
Assume a U.S. dealer bought 100 TVs
from South Korea for $250 each in
2009. He subsequently sold 80 of them
$16,000
in 2006 for $450 each, and the rest in
2010 for $400 each. By how much was
the U.S. GDP affected in 2009?
In 1994, U.S. GDP was $6,931, GNP
was $6,922, NNP was $6,104, and
national income was $5,495 (all depreciation was $818 billion
numbers are in billions of dollars). We
can conclude that
In a simple economy with no
depreciation, no government, and no
foreign sector, it is correct to say that for Y C S
any specified time period (say the month
of June)
Which of the following identities is
I - S (G - TA + TR) + NX
FALSE?
If private domestic saving in an
economy increases, which is the most an increase in private domestic investment
likely to occur?
 -private domestic saving can increase -
Assume the budget deficit increases. private domestic investment can decrease -
Which of the following can happen? imports can increase -exports can decrease
E)all of the above
If the government increases taxes, which
of the following is LEAST likely to a decrease in net exports
occur?
Assume that GDP = 4,800, consumption
= 3,400, private domestic savings = 400, -disposable income is 3,800 -private
government purchases = 1,200, and net domestic investment is 320 -the budget
exports = -120. Which of the following deficit is 200 D)all of the above
is true?
If private domestic saving is 960,
private domestic investment is 780, and
the government spends 300 more than it the trade deficit is 120
receives in tax revenues, then it follows
that
Assume that GDP = 8,100, consumption
= 5,400, gross private domestic
investment = 1,200, government imports exceed exports by 100
purchases = 1,600. Which of the
following is true?
Assume exports = 300, imports = 400,
tax revenues = 1,100, government
purchases = 1,400, private domestic 700
saving = 900. Then the level of private
domestic investment is
1-consumption has to increase by more
than $15 billion 2-government purchases
If imports increase by $15 billion, which have to increase by more than $15 billion
of the following has to happen for GDP 3-private domestic investment has to
to rise? increase by more than $15 billion E)either
1), 2), or 3) would be sufficient to increase
GDP
As a percentage of GNP, the U.S. sharply increased in the 1980s and then
federal debt decreased in the 1990s
If private domestic saving exceeds
private domestic investment by $220
billion and government spending the trade deficit is $120 billion
exceeds tax revenue by $340 billion,
then
If national income is 5,200, disposable
income is 4,400, consumption is 4,100,
the trade deficit is 110, and the budget 260
deficit is 150, what is the level of
private domestic investment?
Assume government purchases =
$1,500, the budget deficit = $120,
-private domestic investment is $1,190 -
consumption = $4,800, private domestic
national income is $7,400 -disposable
saving = $1,220, the trade deficit = $90,
income is $6,020 D)all of the above
and transfer payments = $0. Which of
the following is true?
If the U.S. budget deficit increased
substantially while private domestic
the U.S. imported more than it exported
saving and private domestic investment
remained roughly the same, then
Assume the budget deficit decreased by
$15 billion, private domestic saving
decreased by $20 billion, exports private domestic investment did not
increased by $10 billion, and imports change at all
increased by $15 billion. By how much
did private domestic investment change?
The budget deficits in the early 1980s
a decrease in net exports
were largely financed through
If the budget surplus increases, which of
exports will increase more than imports
the following is likely to happen?
If we look at U.S. net exports over the U.S. trade deficits decreased greatly in the
last four decades, we realize that early and mid 1980s
-more pple have been forced to work in
If the U.S. unemployment rate has part-time rather than full-time jobs -there
increased, which of the following must has been an decrease in the work force as
have occurred? fewer job openings were listed -more
people have become only "marginally
 attached" to the work force E)none of the
above
price changes in consumer expenditures
The PCE deflator measures
based on national income accounts
The GDP-deflator and the producer the PPI measures a fixed market basket but
price index (PPI) differ since the GDP-deflator doesn't
Assume that the prices of cars
manufactured in the U.S. increases due
to an increase in quality. Which of the nominal GDP should increase
following should happen if the same
number of cars is produced?
If nominal GDP was $9,200 billion in
Year 1 and $9,420 billion in Year 2 and we cannot determine the value of the GDP-
prices increased from Year 1 to Year 2, deflator or real GDP in Year 2
then
If nominal GDP is $8,820 billion and
the GDP-deflator is 105, then real GDP $8,400 billion
is
If nominal GDP increased from $8,000
billion in the base year to $8,400 billion
prices increased on average by 5 percent
in the following year and real GDP
stayed the same, which is true?
Assume that in 1962 nominal GDP was
about $600 billion and real GDP was
25
about $2,400 billion. The GDP-deflator
for that year was
1-the GDP-deflator is 110 2-prices
Assume nominal GDP was $8.0 trillion
increased on average by 10 percent 3-real
in Year 1 and $8.8 trillion in Year 2. If
GDP has not changed E)both 1) and 2) are
Year 1 is the base year, then
true, but only if 3) is true
The unemployment rate is most likely to more people who are currently out of work
decrease if decide to give up looking for a job
core inflation excludes price changes for
Which of the following is TRUE?
food and energy
The CPI, a price index used to measure 1-it only measures those goods that are
inflation, is imperfect since included in the market basket 2-it does not
 take into account quality improvements
E)only 1) and 2)
The consumer price index (CPI) and the
the composition of their market baskets is
producer price index (PPI) differ from
different
each other since
If the nominal interest rate on a
government bond is 6% and the rate of
+2%
inflation is 4%, what is your real rate of
return on this government bond?
-product prices in GB are much cheaper
than Mexico -product prices in GB are
Assume you can exchange 10 Mexican
much more expensive than Mexico -you
pesos for one U.S. dollar, but you need
can get about 36 Mexican pesos for one
only 0.64 British pounds to get one U.S
British pound -you can get about 64
dollar. What does this imply?
Mexican pesos for one British pound
E)none of the above

Question Answer
If factor markets were perfectly
competitive, then full employment the AS-curve would be vertical
would be the normal condition and
Assume you buried a $100 bill in a time
capsule in 1970 and dug it up 40 years
$22
later. What would be its purchasing
power in 2010?
additional resources (especially labor) can
The AS-curve is horizontal or very flat if be hired to produce additional output with
little or no increase in existing prices
Which of the following was NOT true investment as a share of GDP was below 3
during the Great Depression? percent
The level of GDP that corresponds to
full employment in the labor market is potential GDP
called
Most economists prior to Keynes the economy always adjusted rapidly to
thought that full employment
The Keynesian AS-curve differs from
the classical AS-curve, since Keynes
The Keynesian aggregate supply curve
implies that
In the Keynesian aggregate supply curve firms will always supply the amount of
case,
In which of the following cases will the
AS-curve be horizontal?
Given the Keynesian AS-curve,
expansionary monetary policy will
In the Keynesian supply curve case, a
fiscal expansion will
Which of the following is FALSE?
The AD-AS diagram used in this chapter
Which of the following is NOT reflected a change in real money balances due to a
in a shift of the AD-curve?
The slope of the AS-curve becomes
steeper
A decrease in real money supply caused
by an increase in the price level is
graphically represented by
The natural rate of unemployment is
Frictional unemployment is defined as
thought that nominal wages were rigid
even when there was unemployment
the price level is unaffected by current
levels of GDP
goods demanded at the existing price level
if nominal wages do not change even if
there is high unemployment
increase the level of output but leave the
price level unchanged
increase equilibrium income but have no
impact on prices
the AS-curve is more price elastic in the
long run than in the short run
-uses the avg price level of all goods and
services we buy as price -uses AS-curve
that is relatively more price elastic in the
med-run than the l-run -uses an AS-curve
that is vertical in l-run and horizontal in
the very s-run E)all of the above
change in the price level
-as nominal wages become more flexible -
as the economy approaches full
employment E)both A) and D)
movement along the AD-curve to the left
the unemployment rate that exists when
output is assumed to be at its full-
employment level
unemployment resulting from people
shifting between jobs and looking for new
jobs
 there is still some positive level of
If output is at its full-employment level,
unemployment due to frictions in the labor
then
market
A shift of the AD-curve to the left can be a decrease in government transfer
caused by payments
In the medium run, if government
the interest rate will increase while
purchases are increased and nominal
aggregate demand and prices may
money supply is decreased, we can
increase, decrease, or remain the same
expect that
a decrease in the price level increases real
The AD-curve has a negative slope since money balances, leading to lower interest
rates and increased spending
A shift of the AD-curve to the right
a decrease in taxes
could be caused by
-an increase in government expenditures -
an increase in nominal money supply -a
An increase in aggregate demand can be
decrease in taxes -an increase in business
caused by
and consumer confidence E)all of the
above
To maintain a fixed level of aggregate
demand, the Fed would have to respond buying bonds in the open market
to a tax increase by
In a normal AD-AS diagram with an
upward-sloping AS-curve, if the
government wanted to maintain a fixed increasing government spending
level of output, it would need to respond
to a decrease in money supply by
In the medium run, if government
interest rates will decrease, while output
purchases are decreased and nominal
and prices may increase, decrease, or
money supply is increased, then we can
remain the same
expect that
In an AD-AS diagram with an upward-
aggregate demand, the price level, and
sloping AS-curve, if a tax decrease is
output will all increase
combined with money expansion,
If government purchases and taxes are output, prices, and interest rates will all
both increased by the same lump sum, increase
we can expect the following in the
medium run:
In an AD-AS diagram with an upward-
increase output and the price level but
sloping AS-curve, an increase in money
lower the interest rate
supply will
When nominal money supply is held
real money balances decrease and real
constant and the price level increases,
interest rates increase
then
A decrease in nominal money supply
a shift of the AD-curve to the left
will be reflected in
Expansionary fiscal policy is very
effective in significantly increasing the if the economy is in a recession
level of output
Expansionary monetary policy will -in the Keynesian case -in the classical
increase nominal GDP case -in the medium run D)all of the above
In the classical supply curve case,
leave Y and i unchanged but increase P
monetary expansion will
Assume investment is very interest
sensitive and wages always adjust
immediately to maintain an equilibrium none of the above policies would succeed
in the labor market. Which of the in significantly increasing the level of
following would be most effective in output
significantly increasing the level of
output?
In which of the following cases is
if wages adjust rapidly to maintain
expansionary fiscal policy LEAST
equilibrium in the labor market
effective in increasing output?
An increase in government purchases
wages and prices are completely flexible
will not increase the level of output if
Fiscal policy will affect prices and
interest rates but not the level of output the AS-curve is vertical
if
41. In the AD-AS model, fiscal or
monetary policy cannot affect the level the long run only
of output in
The income velocity of money can be
V = (PY)/M
calculated using the following formula
If nominal GDP is $12,600 billion and
nominal money supply is $6,300 billion, V = 2
then the income velocity of money is
If restrictive monetary policy leads to a
-real money balances must be unchanged -
lower price level but leaves real output,
money is said to be neutral E)both A) and
employment, and real interest rates
D)
unchanged, then
-a fairly large increase in aggregate
A large decrease in the income tax rate demand -a fairly small increase in
will most likely cause aggregate supply -an increase in the price
level D)all of the above
-encourage technological progress -
remove unnecessary government
Supply-side economics involves policy
regulations -give investment tax credits to
measures designed to
stimulate specific capital investments
D)all of the above
Cutting income tax rates will most likely a large shift in the AD-curve but a small
cause shift in the AS-curve
When we say that potential GDP is
the fact that the long-run AS-curve shifts
exogenous with respect to the price
to the right over time
level, we refer to
In the long run, as potential GDP grows
at a steady pace and nominal money the level of output is essentially
supply is continuously increased over determined by shifts in the AS-curve
time
the price level increases or decreases
As nominal money supply is steadily
depending on the respective shifts in the
increased and the long-run AS-curve
AD-curve and the AS-curve, but the level
shifts to the right over time, we realize
of output is essentially determined by the
that
shifts in the AS-curve

National income accounts

Correct Answer: provide

macroeconomists with
 much of the data
needed for
macroeconomic
analysis, research, and
forecasting.

2. According to the fundamental

identity of national income
accounting,

Your Answer: total production =

total income =
total expenditure.

3. Which of the following statements

is true?

Your Answer: Capital goods

are produced
in one year
and final
goods are
produced over
a period of
more than one
year.
Correct Answer: Final goods
are produced
in the same
year as the
related final
good, whereas
capital goods
are produced
in different
years.

4. Mobin and Mona just bought their

new house. In the national income
accounting, this transaction is
considered as

Your Answer: inventory

investment.
Correct Answer: fixed
investment.
5. Gross national product

Your Answer: will be higher

in a private
sector
economy than
in an economy
where there is
also a public
sector that
taxes the
private sector.
Correct Answer: will exceed
gross
domestic
product if net
factor
payments
from abroad
are positive.

6. In using the expenditure approach

to GDP, consumption

Your Answer: includes

houses and all
purchases by
business
firms.
Correct Answer: includes
consumers
spending on
durable goods,
and
nondurable
goods, and
services.

7. Which of the following is

considered to be an investment in
the national income accounts?

Your Answer: money

deposited in a
bank
 Correct Answer: increases in
inventories of
unsold goods

8. Which of the following is not a

government transfer?

Your Answer: unemployment

insurance
benefits
Correct Answer: government
spending on
education

9. Other things held constant, private

disposable income would increase
if

Your Answer: government

purchases
increase.
Correct Answer: government
transfers
increase.

10. Wealth

Your Answer: is a flow

variable,
measured at a
point in time.
Correct Answer: is a stock
variable,
measured at a
point in time.

11. The nominal interest rate is equal

to

Your Answer: real interest rate

+ inflation rate.
12. Real GDP is obtained by

Your Answer: Nominal GDP

divided by GDP
deflator.