Deck 7: Taking the Nations Economic Pulse

Question 1

In recent years, people have benefited from greater amounts of leisure time. This trend

A) has caused GDP to rise.
B) has caused GDP to fall.
C) made GDP fluctuate randomly
D) is not accounted for in GDP.

Answer 1

is not accounted for in GDP.

Question 2

Which of the following is the most likely side effect of an increase in the relative size of the underground economy with the passage of time?

A) The growth rate of real GDP will tend to understate the growth rate of total output.
B) The growth rate of real GDP will tend to overstate the growth rate of total output.
C) The GDP deflator will tend to overstate any increase in inflation.
D) The GDP deflator will tend to understate any increase in inflation.

Answer 2

The growth rate of real GDP will tend to understate the growth rate of total output.

Question 3

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 3

real GDP will understate the growth rate of real income.

Question 4

If waitresses and taxi drivers do not report all of their income to the government, GDP will be understated. This is because the unreported income

A) involves the introduction of new goods.
B) is part of the underground economy.
C) is an example of nonmarket production.
D) represents an increase in leisure time.

Question 5

One difficulty of computing the value of GDP is that there are no market prices for

A) exports and imports.
B) business investments.
C) government goods and services.
D) resource values.

Question 6

GDP is not a perfect measure of welfare because it

A) treats a dollar spent on candy bars the same as a dollar spent on education
B) treats a dollar spent on exports the same as a dollar spent on imports
C) double counts the value of leisure time
D) double counts depreciation
E) counts illegal activities in the underground economy

Question 7

Comparisons of GDP between developed and underdeveloped countries are often misleading because underdeveloped countries produce

A) a greater share of their total production in the household sector, which understates their GDP relative to developed countries.
B) a smaller share of their total production in the household sector, which understates their GDP relative to developed countries.
C) a greater share of their total production in the household sector, which overstates their GDP relative to developed countries.
D) a smaller share of their total production in the household sector, which overstates their GDP relative to developed countries.

Question 8

One of the widely-acknowledged problems with the consumer price index (CPI) as a measure of the cost of living is that the CPI

A) fails to account for consumer spending on housing.
B) accounts only for consumer spending on food, clothing, and energy.
C) fails to account for the fact that consumers spend larger percentages of their incomes on some goods and smaller percentages of their incomes on other goods.
D) fails to account for the introduction of new goods.

Question 9

Over the last few decades, Americans have chosen to cook less at home and eat more at restaurants. This change in behavior, by itself, has

A) reduced measured GDP.
B) not affected measured GDP.
C) increased measured GDP only to the extent that the value of the restaurant meals exceeded the value of meals previously cooked at home.
D) increased measured GDP by the full value of the restaurant meals.

Question 10

Because GDP does not fully account for improvements in the quality of goods, the GDP calculation

A) tends to overstate the true value of output in the United States.
B) tends to understate the true value of output in the United States.
C) provides an accurate value of output in the United States.
D) measures the value correctly because price changes always capture the value of quality changes.

Question 11

GDP will tend to overstate the productive capacity of a country when

A) economic bads like pollution are produced and then must be cleaned up.
B) there is a sizable underground economy.
C) nonmarket production represents a large portion of the economy.
D) working conditions improve, allowing jobs to be completed safer and faster.

Question 12

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

A) increases in real GDP will understate the growth rate of real output.
B) increases in real GDP will overstate the growth rate of real output.
C) the GDP deflator will overstate the rate of inflation.
D) the GDP deflator will understate the rate of inflation.
E) both a and c are correct.

Question 13

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.

Question 14

Because of transactions which take place in the underground economy, the

A) GDP calculation tends to overstate the actual value of goods sold in the economy.
B) GDP calculation tends to accurately portray the value of goods sold in the economy.
C) GDP calculation tends to understate the actual value of goods sold in the economy.
D) value of the GDP calculation will be equal to the value of the national income calculation.
E) value of the GDP calculation through the expenditure approach will be greater then the value calculated through the income approach.

Question 15

Because GDP does not fully account for improvements in the quality of goods,

A) the inflation rate is understated and real GDP is overstated.
B) the inflation rate is overstated and real GDP is understated.
C) both the inflation rate and real GDP are overstated.
D) both the inflation rate and real GDP are understated.

Question 16

If the underground economy is sizable, then GDP will

A) understate the economy's performance.
B) overstate the economy's performance.
C) fluctuate unpredictably.
D) accurately reflect this subterranean activity.

Question 17

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 18

Over time, people have come to rely more on market-produced goods and less on goods that they produce for themselves. For example, busy people with high incomes, rather than cleaning their own houses, hire people to clean their houses. By itself, this change has

A) caused GDP to fall.
B) not caused any change in GDP.
C) caused GDP to rise.
D) probably changed GDP, but in an uncertain direction; the direction of the change depends on the difference in the quality of the cleaning that has resulted.

Question 19

Crime currently affects the measurement of GDP such that

A) expenditures on police protection and detention centers contribute to GDP.
B) the loss to victims due to crime is subtracted from GDP.
C) crime is completely ignored because it does not express the economic well-being indicated by GDP.
D) expenditures on police protection and detention centers are subtracted from GDP.

Question 20

Use of real GDP to measure changes in national output from one period to another can be misleading if

A) the price level is different for the two periods.
B) the share of production carried out in the nonmarket sector is different for the two periods.
C) the bundle of goods produced during the periods is quite similar.
D) the size of the export-import sector differs for the two periods.

Question 21

In recent years, technological improvements and the Internet have substantially reduced transaction costs and expanded the availability of low-cost access to information, communications, and entertainment. Most economists believe that these changes

A) cause GDP to overstate the growth rate of real output and the improvement in the well-being of people.
B) cause GDP to understate the growth rate of real output and the improvement in the well-being of people.
C) cause the consumer price index to increase more rapidly than the general level of prices.
D) reduce the gains from trade and thereby cause GDP to decline.

Question 22

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 23

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 24

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 25

Automobiles are now safer and get better gasoline mileage.  If there is an increase in the price of automobiles, which of the following is true?

A) All of the price increase reflects the improvement in the quality of the product rather than inflation.
B) A portion of the price increase reflects the improvement in the quality of the product rather than inflation.
C) All of the price increase reflects inflation rather than the improvement in the quality of the product.
D) There will be no effect on inflation.

Question 26

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 27

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 28

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 29

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 30

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 31

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 32

Refrigerators, air conditioners, and other appliances are now more durable and energy efficient​.  If there is an increase in the price of these products, which of the following is true?

A) Statisticians involved in the construction of price indexes will be able to fully separate the difference between improved product quality and inflation.
B) Statisticians involved in the construction of price indexes will not be able to fully differentiate between improved product quality and inflation.
C) All of the price increase reflects inflation rather than the improvement in the quality of the product.
D) There will be no effect on inflation.

Question 33

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 34

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 35

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 36

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 37

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 38

Technological changes that reduce transaction costs and expand the availability of low-cost access to information

A) increase GDP, but they generally fail to improve the welfare of people.
B) improve the well-being of people, but they often exert only a small impact on GDP, and sometimes they actually lead to a GDP reduction.
C) increase the consumer price index, but not the GDP deflator.
D) increase the GDP deflator, but not the consumer price index.

Question 39

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 40

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 41

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

Question 42

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 43

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 44

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 45

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 46

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 47

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 48

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 49

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 50

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 51

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 52

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 53

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 54

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 55

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 56

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 57

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 58

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 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 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 61

Suppose you received a 5 percent increase in your nominal wage. Over the year, inflation ran about 2 percent. Which of the following is true?

A) Your real wage fell.
B) Your nominal wage fell.
C) Both your nominal and real wages decreased.
D) Although your nominal wage fell, your real wage increased.
E) Both your nominal and real wages increased.

Question 62

The nominal salary paid to the president of the United States and the Consumer Price Index (CPI) are given for various years below. Table 7-9
Refer to Table 7-9. The salary of the president of the United States in 2000 was $400,000. In 1940, the president's salary was $75,000. If the Consumer Price Index was 8.1 in 1940 and 100 in 2000, the 1940 presidential salary measured in terms of the purchasing power of the dollar in 2000 would be

A) less than $75,000.
B) less than $400,000.
C) approximately $668,850.
D) approximately $750,000.
E) approximately $926,000.

Question 63

If ten years ago the price of a movie ticket was $5 and the average hourly wage was $10, and today the price of a movie ticket is $8 and the average hourly wage is $20, then

A) movies are now relatively cheaper in terms of work hours.
B) movies are now relatively more expensive in terms of work hours.
C) the relative price of movies has remained constant.
D) workers now need to work longer hours to earn one movie ticket.

Question 64

Which of the following is true about inflation?

A) It reduces the cost-of-living of the typical worker.
B) It is measured by changes in the cost of a typical market basket of goods between time periods.
C) It causes the purchasing power of a dollar to rise.
D) It has no effect on real resources.

Question 65

Suppose that the consumer price index of a country was 160 at year-end 2007 and 168 at the end of 2008. What was the country's inflation rate during 2008?

A) 5 percent
B) 8 percent
C) 60 percent
D) 68 percent

Question 66

If the consumer price index (CPI) at the end of year one was 100 and was 108 at the end of year two, the inflation rate during year two was

A) zero; the CPI of 100 indicates that prices were stable.
B) 8 percent.
C) 5 percent.
D) 108 percent.

Question 67

If nominal GDP rises from one year to the next, then

A) the economy must be producing a larger output of goods and services.
B) prices at which goods and services are sold must be higher.
C) either output, or the general level of prices, or both must be rising.
D) employment and productivity must be rising.

Question 68

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 69

The nominal salary paid to the president of the United States and the Consumer Price Index (CPI) are given for various years below. Table 7-9
Refer to Table 7-9. During which of the above years was the purchasing power of the president's salary highest?

A) 1920
B) 1940
C) 1960
D) 1980
E) 2000

Question 70

If the price of pizzas has risen from $4 to $5 at the same time that the price of an hour of aerobics class has risen from $20 to $30, then

A) pizzas have become relatively more expensive.
B) aerobics classes have become relatively more expensive.
C) the relative prices of pizzas and aerobics classes have remained constant.
D) workers' real income must have decreased.

Question 71

The consumer price index (CPI) is designed to measure

A) the impact of price changes on the value of real GDP.
B) the nominal value of consumer spending on food, clothing, and energy.
C) the total spending of households as a percentage of GDP.
D) the impact of price changes on the cost of the typical bundle of goods purchased by households.

Question 72

Which of the following is true of inflation?

A) It is an increase in the general price level of goods and services.
B) The purchasing power of money increases as the result of inflation.
C) Inflation is similar to interest payments on future money income, such as pensions and receipts from outstanding loans.
D) Inflation has no effect on real resources.

Question 73

Suppose that the consumer price index at year-end 2010 was 180 and by year-end 2011 had risen to 189. What was the inflation rate during 2011?

A) 4.8 percent
B) 5 percent
C) 6 percent
D) 9 percent

Question 74

The annual rate of inflation is

A) a change in real income of workers from one year to the next.
B) the percentage change in the general level of prices from one year to the next.
C) the increase in the purchasing power of the dollar from one year to the next.
D) the percentage increase in the total value of the goods and services produced from one year to the next.

Question 75

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 76

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.

Question 77

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 78

Suppose that the consumer price index (CPI) was 160 in 2010 and 166 in 2011, inflation during 2011 was

A) zero; prices were stable.
B) 3.8 percent.
C) 6 percent.
D) 66 percent.

Question 79

Suppose you received a 3 percent increase in your nominal wage. Over the year, inflation ran about 6 percent. Which of the following is true?

A) Your real wage fell.
B) Your nominal wage fell.
C) Both your nominal and real wages decreased.
D) Although your nominal wage fell, your real wage increased.
E) Both nominal and real wages increased.

Question 80

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