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Chapter 15

Gross Domestic Product

1. Gross domestic product is officially measured by adding together the

a. quantity of each good and service produced by U.S. residents.

b. market value of all final goods and services produced within the borders of a nation.

c. quantity of goods and services produced by companies owned by U.S. citizens.

d. None of the answers above are correct.

ANS

a. Incorrect. Goods and services must be final goods.

b. Correct. Gross domestic product is officially measured by adding together the market value of all final goods and services produced within the borders of a nation.

c. Incorrect. Ownership does not matter-only produced within the borders of a nation.

d. Incorrect. Answer b. is correct.

2. Which of the following items is included in the calculation of GDP?

a. purchase of 100 shares of Microsoft stock

b. purchase of a used car

c. the value of a homemaker's services

d. sale of Gulf War military surplus

e. None of the answers above would be included

ANS

a. Incorrect. Shares of stock are not a newly produced final goods.

b. Incorrect. Used items are not newly produced final goods.

c. Incorrect. These services are controversial and difficulty to estimate.

d. Incorrect. Used items are not newly produced final goods.

e. Correct. None of the above would be included.

3. Which of the following expenditures would not be included in GDP?

a. purchase of a new lawnmower

b. purchase of a silver cup previously sold new in 1950

c. urchase of a ticket to the latest movie

d. All of the above would be counted in GDP

ANS

a. Incorrect. Newly produced final goods are included in GDP.

b. Correct. Used items are not included in GDP.

c. Incorrect. Newly produced final goods are included in GDP.

d. Incorrect. Answer b. could not be included.

4. Gross domestic product (GDP) includes

a. intermediate as well as final goods.

b. foreign goods as well as domestically produced goods.

c. used goods sold in the current time period.

d. only final goods and services.

ANS

a. Incorrect. GDP does not include intermediate goods.

b. Incorrect. GDP does not include goods produced outside the borders of a nation.

c. Incorrect. GDP includes only newly produced final goods.

d. Correct. Gross domestic product (GDP) includes only final goods and services.

5. GDP includes

a. the negative attributes in our quest for more goods and services such as soil erosion and deforested landscape.

b. all quality improvements resulting from higher quality goods replacing inferior goods.

c. the cleanup expenses associated with pollution.

d. the value of leisure time.

ANS

a. Incorrect. These are not newly produced goods.

b. Incorrect. GDP does not include quality improvement estimates.

c. Correct. GDP includes, the cleaning-up expenses associated with pollution, which is a newly produced good.

d. Incorrect. This is not a newly produced good.

6. The largest component of GDP is

a. personal consumption expenditures.

b. government spending.

c. durable goods.

d. net exports.

ANS

a. Correct. The largest component of GDP is personal consumption expenditures (C). See Exhibit 2 in the text.

b. Incorrect. This spending is less than personal consumption expenditures (C). See Exhibit 2 in the text.

c. Incorrect. This spending is less than personal consumption expenditures (C). See Exhibit 2 in the text.

d. Incorrect. This spending is less than personal consumption expenditures (C). See Exhibit 2 in the text.

7. The circular flow of economic activity is a model of the

a. flow of goods, resources, payments, and expenditures between the sectors of the economy.

b. influence of government on business behavior.

c. influence of business on consumers.

d. role of unions and government in the economy.

ANS

a. Correct. The circular flow of economic activity is a model of the flow of goods, resources, payments, and expenditures between the sectors of the economy.

b. Incorrect. It is a model of exchange and not influence.

c. Incorrect. It is a model of exchange and not influence.

d. Incorrect. It is a model of exchange and not the “role” of unions or government.

8. All final goods and services that make up GDP can be expressed as

a. GDP = C + I – G + (X + M).

b. GDP = C + I + G + (X + M).

c. GDP = C + I + G + (X – M).

d. GDP = C + I + (X – M).

e. GDP = C + I + G.

ANS

a. Incorrect. See formula in answer c.

b. Incorrect. See formula in answer c.

c. Correct. All final goods and services that make up GDP can be expressed in the form GDP = C + I + G + (X – M).

d. Incorrect. See formula in answer c.

9. The expenditure approach for the calculation of GDP includes spending on

a. consumption, investment, durable goods and exports.

b. consumption, gross private domestic investment, government spending for goods and services, and exports.

c. consumption, gross private domestic investment, government spending for goods and services, and net exports.

d. consumption, net private domestic investment, government spending for goods and services, and net exports.

e. consumption, gross private domestic investment, all government spending including transfer payments, and net exports.

ANS

a. Incorrect. This formula omits government spending and net exports.

b. Incorrect. This formula omits government spending and net exports.

c. Correct. The expenditure approach for the calculation of GDP includes spending on consumption, gross private domestic investment, government spending for goods and services, and net exports.

d. Incorrect. This formula should not include “net” private domestic investment.

10. Which of the following is a shortcoming of GDP?

a. GDP excludes changes in inventories.

b. GDP includes an estimate of illegal transactions.

c. GDP excludes nonmarket transactions.

d. GDP excludes business investment spending.

ANS

a. Incorrect. GDP includes change in inventories (I).

b. Incorrect. GDP does not include an estimate of illegal transactions.

c. Correct. GDP includes only market transactions.

d. Incorrect. GDP includes business investment spending (I).

11. National income (NI) is calculated by adjusting GDP for

a. depreciation.

b. investment and net exports.

c. Social Security insurance contributions and transfer payments.

d. corporate and personal income taxes.

ANS

a. Correct. National income (NI) is calculated by adjusting GDP for depreciation.

b. Incorrect. GDP includes investment (I) and net exports (NX).

c. Incorrect. Social Security and transfer payments are not newly produced final good and not included in GDP.

d. Incorrect. NI is not adjusted for taxes.

12. Which of the following is included in personal income but not in national income?

a. compensation for workers

b. proprietors’ income

c. corporate profits

d. Social Security payments

ANS

a. Incorrect. Income earned in resource markets is included in national income.

b. Incorrect. Income earned in resource markets is included in national income.

c. Incorrect. Income earned in resource markets is included in national income.

d. Correct. Transfer payments are not included in national income.

13. Which national income account should be examined to discover trends in the after-tax income that people have to save and spend?

a. gross domestic product (GDP)

b. gross national product (GNP)

c. national income (NI)

d. disposable personal income (DI)

ANS

a. Incorrect. GDP does not exclude taxes.

b. Incorrect. GNP does not exclude taxes.

c. Incorrect. NI does not exclude taxes.

d. Correct. Disposable personal income (DI) subtracts taxes from personal income (PI).

14. The equation for determining real GDP for year X is

a. nominal GDP for year X.

average nominal GDP

b. nominal GDP for year X - 100.

GDP for year X

c. nominal GDP for year X x 100.

GDP chain price index for year X

d. nominal GDP for year X x 100.

average family income

ANS

a. Incorrect. See answer c.

b. Incorrect. See answer c.

c. Correct. This is the correct formula.

d. Incorrect. See answer c.

15. The most broadly based price index is the

a. real GDP price index.

b. consumer price index.

c. producer price index.

d. GDP chain price index.

ANS

a. Incorrect. This is a meaningless index.

b. Incorrect. The CPI is a narrow index based on a market basket of goods purchased by the typical consumer.

c. Incorrect. This index is limited to wholesale transactions.

d. Correct. This index is not limited to a market basket purchased by consumers.

16. Which of the following would be counted as a final good for inclusion in GDP?

a. a piece of glass bought this year by a consumer to fix a broken window

b. a sheet of glass produced this year by Ford for windows in a new car

c. a tire produced this year and sold to a car maker for a new car sold this year

d. None of the above would be counted in GDP

ANS

a. Correct. This is a sale to the ultimate user so it is a final good.

b. Incorrect. This is an intermediate good not for the ultimate user.

c. Incorrect. This is an intermediate good not for the ultimate user.

d. Incorrect. Answer a. is correct.

17. Based on the circular flow model, money flows from households to businesses in

a. factor markets.

b. product markets.

c. neither factor nor product markets.

d. both factor and product markets.

ANS

a. Incorrect. In factor markets, money flows from businesses to households.

b. Correct. Based on the circular flow model, money flows from households to businesses in product markets.

c. Incorrect. Factor markets is the correct answer.

d. Incorrect. Factor markets is an incorrect answer.

18. If the underground economy is sizable, GDP will

a. understate the economy's performance.

b. overstate the economy's performance.

c. fluctuate unpredictably.

d. accurately reflect this subterranean activity.

ANS

a. Correct. Illegal transactions are unreported market transactions which would otherwise be included in GDP.

b. Incorrect. Illegal transactions are unreported market transactions which would otherwise be included in GDP.

c. Incorrect. The underground economy does not necessarily fluctuate unpredictably.

d. Incorrect. GDP does not include subterranean activity.

19. The income that people earn in resource or factor markets is called

a. national income.

b. personal income.

c. disposable personal income.

d. transfer payments.

e. net national product.

ANS

a. Correct. The income that people earn in resource or factor markets is called national income.

b. Incorrect. PI is income received, including transfer payment.

c. Incorrect. DI is PI less personal taxes.

d. Incorrect. Transfer payments are not “earned”-instead they are an “entitlement.”

20. Increased production, but not increased inflation, will result in higher

a. nominal GDP.

b. money GDP.

c. real GDP.

d. current dollar GDP.

ANS

a. Incorrect. Nominal GDP is not adjusted for inflation.

b. Incorrect. Money GDP is not adjusted for inflation.

c. Correct. Real GDP adjusts for inflation.

d. Incorrect. Current dollar GDP is not adjusted for inflation.

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