Deck 7: Taking the Nations Economic Pulse

Question 1

Which of the following would increase U.S. GDP?

A)Ford Motor Company begins to produce and sell cars in China.
B)Mercedes-Benz begins to produce and sell cars in Mississippi.
C)An American investor buys 100 shares of Ford stock.
D)An American investor purchases 100 shares of Mercedes-Benz stock.

Answer 1

Mercedes-Benz begins to produce and sell cars in Mississippi.

Question 2

If on-the-job working conditions have improved over time,

A)real GDP will understate the growth rate of real income.
B)real GDP will overstate the growth rate of real income.
C)the GDP deflator will overestimate inflation.
D)real GDP will overstate the growth rate of real income, and the GDP deflator will understate inflation.

Answer 2

real GDP will understate the growth rate of real income.

Question 3

Explain the two approaches to calculating GDP.

Answer 3

One approach involves adding up the expenditures on goods and services produced during the year. This figure would be the sum of personal consumption expenditures, government consumption and gross expenditures, gross private domestic investment, and net exports to foreigners. The other approach is calculated by adding up the income payments to resource suppliers and the other costs of producing those goods and services. Specifically, this method would sum employee compensation, proprietors' income, interest, rents, corporate profits, indirect business taxes, cost of depreciation, and the net income of foreigners.

Question 4

Which of the following accurately indicates how the recent outbreaks of terrorism have influenced the GDP of western nations?

A)Additional expenditures on security designed to protect individuals from terrorist attacks are subtracted from GDP.
B)Additional expenditures on security designed to protect individuals from terrorist attacks are added to GDP as part of output.
C)Since expenditures on the prevention of terrorism do not contribute to the well-being of individuals, they exert no impact on GDP.
D)Since terrorism is merely a redistribution of output, expenditures on the prevention of terrorism do not contribute to GDP.

Question 5

Answer the following questions:
a.What does GDP measure, and why is it a useful tool for economists, business decision makers, and government policy makers?
b.Explain at least two important things GDP does not measure.

Question 6

How much would be added to this year's GDP if you sold your four-year-old automobile for $4,000 and purchased a two-year-old model from an acquaintance for $10,000.

A)nothing
B)$6,000
C)$10,000
D)$14,000

Question 7

Use the table below to choose the correct answer. Gross domestic product equals

A)$550.
B)$510.
C)$595.
D)$610.

Question 8

What is the difference between real and nominal GDP? If the president of the United States (or your instructor) asked you to evaluate the economy over the past five years, which one would you use and why?

Question 9

National income is

A)personal income of individuals minus the taxes they pay.
B)gross national product minus depreciation.
C)employee compensation, self-employment income, interest, rents, plus corporate profits.
D)consumption, investment, government expenditures, and net exports.

Question 10

The consumer price index is calculated using a fixed basket of goods. Will this always give an accurate representation of the changing cost of living to consumers? Why or why not?

Question 11

Economists generally use GDP to measure a nation's total output because it is

A)equal to the sales value of all transactions conducted during a period and thus can be easily calculated.
B)the best available measure of the true costs of producing consumer goods.
C)unaffected by changes in the prices of products over time.
D)a relatively reliable measure of the value of all final product goods and services produced during a specific time period.

Question 12

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

A)the sale of a rare, old coin to a coin collector
B)the damage to a house caused by a hurricane
C)the brokerage commission from the sale of 100 shares of Microsoft stock
D)the sale of cocaine in the black market

Question 13

The dollar value of GDP increased approximately 4 percent during the year, but real GDP fell 2 percent. Which of the following best explains this data?

A)The real capacity of the economy increased more rapidly than money output.
B)In the international sector, there was a balance of trade deficit of approximately 2 percent of GDP.
C)The inflation rate was approximately 6 percent during the year.
D)The general level of prices rose approximately 2 percent.

Question 14

Answer the following questions:
a.In 2004, four major hurricanes hit Florida.Explain how this destruction of property, and the rebuilding that went on afterward, affected GDP.
b.Explain how GDP has trouble accounting for other parts of the economy as well.

Question 15

Your father tells you he earned $3.00 per hour when he was 16 in 1977; you remember making $6.00 per hour when you were 16 in 1999. Given that the CPI was 36.7 in 1977 and 166.1 in 1999, which of the following is the 1999 real equivalent of your father's hourly earnings when he was 16?

A)$4.48
B)$6.78
C)$13.58
D)$15.01

Question 16

Figure 9-3
Accurate measurement of GDP is important to business decision-makers because this information will help them better determine the

A)general happiness of a country's citizens.
B)course of the economy and the direction of demand for their products.
C)economic well-being of a particular group within a country.
D)amount of leisure time available and the quality of life in a country.

Question 17

Per capita GDP is

A)real GDP divided by the GDP deflator
B)a measure of income per person
C)a measure of resources available to each person
D)an indicator of the overall production of a government

Question 18

If the GDP deflator in 2009 was 120 compared to a value of 100 during the 2004 base year, this would indicate that

A)the inflation rate during 2009 was 20 percent.
B)the general level of prices during 2009 was 20 percent higher than during 2004.
C)the inflation rate during 2009 was 120 percent.
D)real GDP was 20 percent higher in 2009 than 2004.

Question 19

Assume that between 1999 and 2009 nominal GDP increased from $7 trillion to $12 trillion and that the GDP deflator rose from 100 to 150. Which of the following expresses GDP for 2009 in terms of 1999 prices?

A)$7.5 trillion
B)$8.0 trillion
C)$9.0 trillion
D)$18.0 trillion

Question 20

As per capita GDP has risen in the United States and other countries,

A)life expectancy and leisure time have also risen and infant mortality and illiteracy have gone down..
B)life expectancy has risen but leisure time has gone down, while infant mortality and illiteracy have remained the same.
C)various quality of life variables have been unaffected.
D)most quality of life variables such as life expectancy and expenditures on leisure time activities have fallen.

Question 21

Last year your job at the university cafeteria paid you $9 an hour and the price of a ten-minute long distance call to your girlfriend in California was $4. This year your cafeteria job pays $9.90 per hour and the ten-minute phone call now costs $4.10. You are clearly

A)worse off because of inflation.
B)worse off because the phone call is now relatively more expensive.
C)better off because your wage rate went up.
D)better off because the phone call now costs less work.

Question 22

Suppose that the nominal value of GDP increased by approximately 2 percent during a given year, but real GDP decreased by 3 percent. Which of the following best explains these events?

A)The money supply decreased by approximately 5 percent.
B)Prices fell by approximately 5 percent.
C)Prices increased by approximately 5 percent.
D)The real productive capacity of the economy increased by approximately 5 percent.

Question 23

Gross domestic product is

A)the market value of all goods and services exchanged within a country during a time period.
B)the market value of all domestic assets, regardless of whether they are owned by citizens or foreigners.
C)the compensation received during a period for labor services plus interest, rents, and corporate profits.
D)the market value of final goods and services produced within a country during a time period.

Question 24

If national income accountants fail to make an adequate adjustment for increases in the quality of goods and services over time,

A)real GDP will overstate the growth rate of real output.
B)the GDP deflator will underestimate inflation.
C)the GDP deflator will overestimate inflation.
D)real GDP will overstate the growth of real output, and the GDP deflator will understate inflation.

Question 25

A real estate salesperson sells a house in 2011 that was built in 1994. How does this transaction get counted in the GDP statistics?

A)The price of the house and the real estate salesperson's commission are both included in 2011's GDP.
B)Neither the price of the house or the commission is included in 2011's GDP.
C)The real estate salesperson's commission but not the price of the house is included in 2011's GDP.
D)The price of the house would be included in both 1994's GDP and the GDP for 2011.

Question 26

Gross domestic product is equal to the market value of all goods and services

A)exchanged during a period.
B)produced domestically during a period.
C)produced by the citizens of a nation during a period.
D)produced domestically during a period minus the depreciation of productive assets.

Question 27

Gross domestic product is a measure of both

A)the market value of a nation's capital assets (physical capital) and the costs that were incurred producing those assets.
B)the expenditures on and sales revenues derived from all goods and services exchanged during a period.
C)the market value of the output produced during a period and the cost of producing that output.
D)the asset holdings of people and the happiness that they derived from the ownership of those assets.

Question 28

What is meant by a final good or service as opposed to an intermediate good or service? Why are only final goods and services included in the calculation of GDP?

Question 29

Your grandfather tells you that he earned $.50 per hour at his job when he was a boy in 1929.
a.Given that the CPI was 17.1 in 1929 and 184.0 in 2003, how much would you have to make in 2003 to have the same real hourly wage?
b.You made $5.50 an hour working during 2003.Were you better off than your grandfather in terms of purchasing power? Explain.
c.Your grandfather also tells you that a soda cost $.05 in 1929, and you know a soda cost $.55 in 2003.You decide to use the price of a soda as the price index.How much would the 2003 "soda equivalent" of $.50 per hour in 1929 be?

Question 30

If you wanted to measure whether the output of an economy was increasing or decreasing across time periods, you would use the real GDP data rather than the nominal GDP data because

A)exports are excluded from real GDP but not nominal.
B)real GDP incorporates the impact of federal budget deficits and surpluses; nominal GDP does not.
C)real GDP reflects the impact of transfer payments on the economy, but nominal GDP does not.
D)real GDP adjusts for changes in the general level of prices, but nominal GDP does not.

Question 31

Which of the following would be included in this year's GDP?

A)the value of a used car, at its sale price
B)the value of a new domestic automobile, at its sale price
C)a sale of Microsoft stock from one individual to another
D)the face value of a life insurance policy paid to a woman at the death of her husband

Question 32

The GDP deflator is designed to

A)adjust nominal GDP for changes in the unemployment rate.
B)adjust nominal GDP so as to include the problem of externalities.
C)adjust nominal GDP for changes in the price level.
D)calculate changes in the price of food and other consumer goods.

Question 33

Discuss the problems with GDP as a measure of a country's current production and income.

Question 34

Answer the following questions:
a.What is the difference between gross domestic product and gross national product?
b.Give an example of a transaction that would be counted in GDP but not in GNP.
c.Give an example of a transaction that would be counted in GNP but not GDP.

Question 35

Determine whether each of the following transactions will be counted in the 2005 GDP of the United States. If the transaction is counted, identify which expenditure component (personal consumption, gross investment, government consumption and gross investment, or net exports) will be affected.
a.Norm, a frequent visitor to a local bar, purchases a Budweiser beer.(Budweiser beer is domestically produced.)
b.The owner of the local bar purchases a new domestically made cooler unit in which to store his beer.
c.Carla, a U.S.foreign exchange student, works her way through college in Germany as a waitress in a bar.
d.On her night off, Carla purchases a Budweiser beer for her friend in the German bar.

Question 36

Nominal gross domestic product for the United States was $7,661.6 billion in 1996 and $8,110.9 billion in 1997. The GDP deflator was 109.5 in 1996 and 111.6 in 1997.
a.What was the 1997 real GDP expressed in 1996 prices?
b.What were the 1996 and 1997 GDPs expressed in base-year prices?
c.What was the percent change in the nominal GDP between 1996 and 1997?
d.What was the percent change in real GDP between 1996 and 1997?
e.What was inflation between 1996 and 1997?

Question 37

When the expenditure approach is used to measure GDP, the major components of GDP are

A)consumption, investment, indirect business taxes, and depreciation.
B)employee compensation, rents, interest, self-employment income, and corporate profits.
C)employee compensation, corporate profits, depreciation, and indirect business taxes.
D)consumption, investment, government consumption and gross investment, and net exports.

Question 38

The primary value of real GDP is its ability to measure year to year changes in

A)real output.
B)income inequality.
C)real social welfare.
D)the general level of prices.

Question 39

Which of the following is GDP designed to measure?

A)the total market value of goods and services produced domestically during the year
B)changes in the cost of purchasing the typical consumer market basket of goods from one year to another
C)the total size of the domestic underground economy
D)the standard of living of the average citizen

Question 40

Indicate whether the following transactions would be included in GDP. If they are included, indicate which component (consumption, investment, government consumption and gross investment, or net exports) of GDP would be affected.
a.A Czech student attending school in Florida takes a summer job as a lifeguard.
b.A New York company buys welding equipment from a St.Louis firm to help it build jet fighters.
c.The IRS purchases a new computer from the GATS computer company (an American-owned business producing and operating in Germany) that will allow it to better detect income tax evasion.

Question 41

Which of the following transactions would enter directly into the determination of GDP?

A)a bicycle you purchased at a garage sale
B)the retirement check your uncle received for spending 25 years in the Marine Corps
C)the DVD player you purchased from Best Buy
D)the five shares of Microsoft stock your grandparents gave you for making an A in economics

Question 42

Which of the following transactions would increase GDP?

A)a new tricycle purchased at a department store sale by the parents of a three-year-old child
B)the retirement check your uncle received for spending 25 years in the Marine Corps
C)the five shares of Microsoft stock your grandparents gave you for making an A in economics
D)the $200 you lost when your wallet was stolen

Question 43

Which of the following does not contribute to GDP?

A)You lose $50 playing cards with friends.
B)You pay a doctor $200 to treat an arm that you broke in an accident.
C)You pay $300 for this month's rent on your apartment.
D)Your economics textbook is revised, and you buy the new edition.

Question 44

A firm purchases $600,000 worth of raw materials and pays wages and salaries of $100,000 and dividends of $200,000. If the firm sells its output for $1 million, the firm's value added to GDP is

A)$300,000.
B)$400,000.
C)$900,000.
D)$1,000,000.

Question 45

Which of the following would increase GDP?

A)buying a used car
B)buying a newly constructed house
C)buying an imported rug
D)giving a domestically produced rug to charity

Question 46

Which one of the following transactions would be included in GDP?

A)Ava pays $50 for a used picture frame at a neighborhood garage sale.
B)Ethan donates $500 to his town's junior college scholarship fund.
C)Emily pays $500 to fix the front end of her car damaged in a recent accident.
D)Mia pays $5,000 to purchase 100 shares of Microsoft stock.

Question 47

A professional gambler moves from a state where gambling is illegal to a state where gambling is legal. Most of his income was, and continues to be, from gambling. His move

A)necessarily raises GDP.
B)necessarily decreases GDP.
C)doesn't change GDP because gambling is never included in GDP.
D)doesn't change GDP because in either case his income is included.

Question 48

If Honda (a Japan-based firm) produces a car in Ohio and exports it to Japan, in which country's GDP will the car be counted?

A)Japan's, because Honda is a Japanese company
B)Japan's because that is where the car is purchased
C)The GDP of the United States because that is where it was built
D)Both Japan and the United States

Question 49

Which of the following would not affect this year's GDP?

A)the paint you purchased when painting your house
B)the new car your parents purchased and gave to you as a birthday present
C)a Gateway computer purchased by the U.S.government
D)the value of a used car you purchased, at its sale price

Question 50

A business produced $10 million of goods in 2010 but sold only $9 million. Is the $1 million increase in inventory counted as part of the 2010 gross domestic product?

A)No, because inventories are intermediate goods.
B)No, because if these inventories were sold in 2011, they would be counted twice.
C)Yes, because these inventories are part of the output of the economy in 2010.
D)Yes, but they will be added to the 2010 GDP only if they are sold in 2011.

Question 51

Which of the following events will increase GDP?

A)losing $500 playing blackjack in your dorm
B)selling an antique writing desk for $500 cash
C)a burglar stealing your CD player
D)the police department hiring an extra detective to track down the burglar who stole your CD player

Question 52

A firm purchases $400,000 worth of raw materials and pays wages and salaries of $300,000 and dividends of $100,000. If the firm sells its output for $1 million, the firm's value added to GDP is

A)$400,000.
B)$600,000.
C)$800,000.
D)$1,000,000.

Question 53

In computing GDP, market prices are used to value final goods and services because

A)market prices reflect the values of goods and services to the buyer.
B)market prices do not change much over time, so it is easy to make comparisons between years.
C)if market prices are out of line with how people value goods, the government sets price ceilings and price floors.
D)None of the above is correct; market prices are not used in computing GDP.

Question 54

If a used car dealer purchases a used car for $3,000, makes repairs and refurbishes it, then sells it for $8,000, the

A)dealer contributes value added equal to $5,000, but nothing is added to GDP.
B)dealer contributes value added equal to $5,000, and consequently $5,000 is added to GDP.
C)dealer contributes nothing to production because only existing goods are involved.
D)dealer contributes value added equal to $8,000, but only $5,000 is added to GDP.

Question 55

Gross domestic product

A)is the sum of all exchanges of goods and services during a period.
B)includes financial transactions such as the purchase of stocks or bonds traded during a period.
C)is the sum of expenditures for both intermediate and final user goods.
D)is the sum of the total spending on all final-user goods and services produced domestically during a period.

Question 56

Which of the following would increase the GDP of the United States?

A)A resident of California buys a case of wine from a winery in France.
B)A resident of Germany buys a software program from a company in Washington.
C)A resident of Florida spends $3,000 on a vacation in Mexico.
D)A Japanese investor purchases 100 shares of a computer company located in Illinois.

Question 57

General Motors Corporation (a U.S.-based firm) produces a Saab vehicle in Sweden, and sells it in the United States. In which country's GDP is it included?

A)Sweden and the United States
B)The United States because it was sold there
C)The United States because GM is a U.S.company
D)Sweden because it was produced there

Question 58

If a local shop buys a used motorcycle for $1,000, makes repairs and refurbishes it, then resells it for $2,500, the

A)shop contributes value added equal to $1,500, but nothing is added to GDP.
B)shop contributes value added equal to $1,500, and consequently $1,500 is added to GDP.
C)shop contributes nothing to production because only existing goods are involved.
D)shop contributes value added equal to $2,500, but only $1,500 is added to GDP.

Question 59

Which of the following would increase GDP?

A)You buy 100 shares of Wal-Mart stock.
B)Your car is destroyed by a fire, and you purchase a two-year-old car to replace it.
C)Your car is damaged by a fire, and you hire a mechanic to repair it.
D)Your car is damaged by a fire, and you reduce the number of hours you work to repair the car yourself.

Question 60

Which of the following transactions would be included in this year's GDP?

A)Noah purchases a five-year-old house from William.
B)Noah rents a five-year-old house from William.
C)Noah purchases 100 shares of AT&T stock from William.
D)Noah purchases an antique at William's garage sale.

Question 61

One bag of flour is sold for $1.50 to a bakery, which uses the flour to bake bread that is sold for $4.00 to consumers. A second bag of flour is sold to a consumer in a grocery store for $2.00. Taking these three transactions into account, what is the effect on GDP?

A)GDP increases by $1.50.
B)GDP increases by $3.50.
C)GDP increases by $6.00.
D)GDP increases by $7.50.

Question 62

Gross domestic product equals the sum of

A)all income earned by domestic producers of goods and services minus indirect business taxes and depreciation during the year.
B)the purchases of final goods and services produced domestically during a year.
C)the amount received by firms for consumer goods and services.
D)incomes received by households minus the sale of factor services supplied domestically.

Question 63

Which of the following events will reduce GDP?

A)A hurricane destroys your house.
B)You lose $500 playing poker.
C)You pay $500 to repair the damage done to your house by a hurricane.
D)You work 15 hours less this month so that you can repair the damage done to your home by a hurricane.

Question 64

Suppose a country had $3.5 billion of net exports and bought $6.8 billion of goods and services from foreign countries. This country would have

A)$10.3 billion of exports and $6.8 billion of imports.
B)$10.3 billion of imports and $6.8 billion of exports.
C)$6.8 billion of exports and $3.5 billion of imports.
D)$6.8 billion of imports and $3.5 billion of exports.

Question 65

Suppose a country had net exports of $7.5 billion and sold $44.6 billion of goods and services abroad. This country had

A)$44.6 billion of imports and $52.1 billion of exports.
B)$52.1 billion of exports and $44.6 billion of imports.
C)$44.6 billion of imports and $37.1 billion of exports.
D)$44.6 billion of exports and $37.1 billion of imports.

Question 66

Which of the following activities is not counted in our calculations of GDP?

A)the purchase of a hammer for household repairs
B)the labor services of a volunteer group building a home for a poor widow
C)the purchase of new, domestically-produced tires for your old foreign car
D)a haircut received and paid for at a beauty salon

Question 67

Gross domestic product during a period is measured by adding

A)incomes received by households minus the sale of factor services supplied domestically.
B)factor payments made by domestic firms minus retained earnings and indirect business taxes.
C)expenditures on new final goods and services produced domestically.
D)the market value of all goods and services produced domestically and then subtracting net exports from that figure.

Question 68

Which of the following would contribute to GDP?

A)An American company buys stock in another American company.
B)An American company produces goods in Canada.
C)A Canadian company buys stock in an American company.
D)A Canadian company produces goods in the United States.

Question 69

GDP during a period can be calculated by summing either

A)the purchases of domestically produced final goods and services or the cost incurred in the production of those goods.
B)the amount received by business firms for consumer goods and services or the spending of business firms on investment goods and services.
C)all household expenditures on final goods and services or all business purchases of factors of production.
D)sales of goods and services to foreigners or the purchase of goods and services from foreigners

Question 70

The GDP of a country can be derived by summing

A)the expenditures on final user goods and services produced domestically during the year.
B)the payments to employees and owners of capital resources and then subtracting depreciation and indirect business taxes.
C)the market value of all goods and services produced domestically during the period and then subtracting net exports from that figure.
D)the income payments to the resource suppliers and net exports.

Question 71

Until recently, George lived in a home that was newly constructed in 2005. In 2005, he paid $200,000 for the brand new house. He sold the house in 2006 for $225,000. Which of the following statements is correct regarding the sale of the house?

A)The 2006 sale increased 2006 GDP by $225,000 and had no effect on 2005 GDP.
B)The 2006 sale increased 2006 GDP by $25,000 and had no effect on 2005 GDP.
C)The 2006 sale increased 2006 GDP by $225,000; furthermore, the 2006 sale caused 2005 GDP to be revised upward by $25,000.
D)The 2006 sale affected neither 2005 GDP nor 2006 GDP.

Question 72

U.S. GDP and U.S. GNP are related as follows:

A)GNP = GDP - Income earned by foreigners in the U.S.+ Income earned by U.S.citizens abroad.
B)GNP = GDP + Income earned by foreigners in the U.S.- Income earned by U.S.citizens abroad.
C)GNP = GDP + Value of exported goods - Value of imported goods.
D)GNP = GDP - Value of exported goods + Value of imported goods.

Question 73

U.S. imports are

A)not added to U.S.GDP because they are produced abroad
B)added to U.S.GDP because they are consumed domestically
C)added to U.S.GDP because they represent an increase in inventories
D)added to U.S.GDP as government purchases because the government decides what goods may be imported
E)not added to U.S.GDP because they are intermediate goods

Question 74

Which of the following transactions would be included in this year's GDP for the United States?

A)Deion sends $100 to a hotel in Costa Rica as a deposit for his vacation.
B)Deion buys a travel guide written by a Costa Rican woman living in the United States.
C)Deion buys a shirt while on vacation in Costa Rica.
D)Deion spends money in an American-owned restaurant in Costa Rica.

Question 75

U.S. exports are

A)not included in U.S.GDP because they are consumed abroad
B)included in U.S.GDP because they are produced domestically
C)included in U.S.GDP because they represent an increase in inventories
D)included in U.S.GDP as government purchases because the government decides what goods may be exported
E)not included in U.S.GDP because they are not subject to a tariff

Question 76

Which of the following transactions would be included in this year's GDP for the United States?

A)You buy a rug imported from Mexico.
B)You buy stock in an American textile company.
C)You purchase a table over the Internet from a North Carolina furniture manufacturer.
D)You purchase a table over the Internet from a Mexican manufacturer.

Question 77

Which of the following events will leave GDP unchanged?

A)You purchase 100 shares of Wal-Mart stock.
B)You pay $500 to repair the damage done to your car by an uninsured motorist.
C)You decide to work five more hours per week at your job to pay for the repairs performed on your car.
D)You purchase a new car at an auction.

Question 78

Which one of the following events will leave GDP unchanged?

A)You pay $500 to repair your car damaged in an accident.
B)You buy a new domestic car to replace one that was stolen.
C)You lose $500 playing blackjack with friends.
D)You work extra hours this month to help make up for the money you lost playing blackjack.

Question 79

Which one of the following events will reduce GDP?

A)Mrs.Lee hires a housekeeper.
B)You buy the ingredients to bake a loaf of bread, but you burn the bread and throw it away.
C)You decide to work five more hours per week at your bookkeeper job, even though you need more time to study.
D)An automobile manufacturer lays off 200 workers as the result of a fire in the paint shop.

Question 80

Which of the following would not be included in GDP?

A)the real estate commission on the sale of a used home
B)an attorney's fee for handling the sale of a used home
C)the value of a used home, at its sale price
D)fees paid to have the house cleaned