1)The three approaches to measuring economic activity are the

(a) cost, income, and expenditure approaches.

(b) product, income, and expenditure approaches.

(c) consumer, business, and government approaches.

(d) private, public, and international approaches.

2.      The value of a producer’s output minus the value of the inputs it purchases from other producers is

called the producer’s 

(a) surplus.

(b) profit.

(c) value added.

(d) gross product.

3.      The Bigdrill company drills for oil, which it sells for $200 million to the Bigoil company to be made

into gas. The Bigoil company’s gas is sold for a total of $600 million. What is the total contribution

to the country’s GDP from companies Bigdrill and Bigoil?

(a) $200 million

(b) $400 million

(c) $600 million

(d) $800 million

4.      Sam’s Semiconductors produces computer chips, which it sells for $10 million to Carl’s Computer

Company (CCC). CCC’s computers are sold for a total of $16 million. What is the value added to

CCC?

(a) $6 million

(b) $10 million

(c) $16 million

(d) $26 million

5.         The Compagnie Naturelle sells mounted butterflies, using butterfly bait it buys from another firm for

$20,000. It pays its workers $35,000, pays $1000 in taxes, and has profits of $3,000. What is its

value added?

(a) $3000

(b) $19,000

(c) $39,000

(d) $59,000

6.      To ensure that the fundamental identity of national income accounting holds, changes in

inventories are

(a) treated as part of expenditure. 

(b) treated as part of saving.

(c) ignored. 

(d) counted as consumption. 

7.      To what extent are homemaking and child-rearing accounted for in the government’s GDP

accounts?

(a) Not at all

(b) Only to the extent that they are provided for pay

(c) Only to the extent that taxes are paid on them

(d) All homemaking and childrearing are accounted for

8.      The measurement of GDP includes

(a) nonmarket goods such as homemaking and child-rearing.

(b) the benefits of clean air and water.

(c) estimated values of activity in the underground economy.

(d) purchases and sales of goods produced in previous periods.

9.      Which of the following is included in U.S. GDP?

(a) The sale of a new car from a manufacturer’s inventory

(b) The purchase of a watch from a Swiss company

(c) The sale of a used car

(d) A newly constructed house

10.    Because government services are not sold in markets,

(a) they are excluded from measurements of GDP.

(b) the government tries to estimate their market value and uses this to measure the government’s

contribution to GDP.

(c) they are valued at their cost of production.

(d) taxes are used to value their contribution.

11.    Intermediate goods are

(a) capital goods, which are used up in the production of other goods but were produced in earlier

periods.

(b) final goods that remain in inventories.

(c) goods that are used up in the production of other goods in the same period that they were

produced.

(d) either capital goods or inventories.

12.    Capital goods are

(a) a type of intermediate good.

(b) final goods, because they are not used up during a given year.

(c) produced in the same year as the related final good, whereas intermediate goods are produced in

different years.

(d) produced in one year, whereas final goods are produced over a period of more than one year.

13.    Marvin’s Metal Company produces screws that it sells to Ford, which uses the screws as a

component of its cars. In the national income accounts, the screws are classified as

(a) inventory.

(b) final goods.

(c) capital goods.

(d) intermediate goods.

14.    Fred the farmer purchased five new tractors at $20,000 each. Fred sold his old tractors to other

farmers for $50,000. The net increase in GDP of these transactions was

(a) $50,000.

(b) $100,000.

(c) $125,000.

(d) $150,000.

15.    Inventories include each of the following EXCEPT

(a) unsold finished goods.

(b) goods in process.

(c) raw materials held by firms.

(d) office equipment.

16.    GDP differs from GNP because

(a) GDP = GNP – net factor payments from abroad.

(b) GNP = GDP – net factor payments from abroad.

(c) GDP = GNP – capital consumption allowances.

(d) GNP = GDP – capital consumption allowances.

17.    If an American construction company built a road in Kuwait, this activity would be

(a) excluded from U.S. GNP.

(b) fully included in U.S. GDP.

(c) included in U.S. GNP only for that portion that was attributable to American capital and labor.

(d) included in U.S. GDP but not in U.S. GNP.

18.    Nations such as Egypt and Turkey may have wide differences between GNP and GDP because both

the countries

(a) have a high level of imports and exports relative to GNP.

(b) have a large portion of their GNP produced by multinational corporations.

(c) have a large number of citizens working abroad.

(d) purchase large amounts of military wares from other countries.

19.    If C = $500, I = $150, G = $100, NX = $40, and GNP = $800, how much is NFP?

(a) –$10

(b) –$5

(c) $5

(d) $10

20.    The income-expenditure identity says that

(a)  Y = C + S + T.

(b)  Y = C + I + G.

(c)  Y = C + I + G + NX.

(d)  Y = C + I + G + NX + CA.

21.       Which of the following is not a category of consumption spending in the national income accounts?

(a) Consumer durables

(b) Nondurable goods

(c) Services

(d) Housing purchases

22.    Consumer spending is spending by ___________ households on final goods and services produced

___________.

(a) domestic; domestically and abroad

(b) domestic; domestically

(c) domestic and foreign; domestically and abroad

(d) domestic and foreign; domestically

23.    In the expenditure approach to GDP, which of the following would be excluded from measurements

of GDP?

(a) Government payments for goods produced by foreign firms

(b) Government payments for goods produced by firms owned by state or local governments

(c) Government payments for welfare 

(d) All government payments are included in GDP

24.    Net national product equals 

(a) gross national product minus indirect business taxes.

(b) gross national product minus depreciation.

(c) national income minus indirect business taxes.

(d) national income plus depreciation.

25.    Monica grows coconuts and catches fish. Last year she harvested 1500 coconuts and 600 fish. She

values one fish as having a worth of three coconuts. She gave Rachel 300 coconuts and 100 fish for

helping her to harvest coconuts and catch fish, all of which were consumed by Rachel. Monica set

aside 200 fish to help with next year’s harvest. In terms of fish, Monica’s income would equal

(a) 700 fish.

(b) 900 fish.

(c) 1100 fish.

(d) 2700 fish.

26.    Monica grows coconuts and catches fish. Last year she harvested 1500 coconuts and 600 fish. She

values one fish as having a worth of three coconuts. She gave Rachel 300 coconuts and 100 fish for

helping her to harvest coconuts and catch fish, all of which were consumed by Rachel. Monica

consumed the remaining fish and coconuts. In terms of fish, total consumption by both Monica and

Rachel would equal

(a) 700 fish.

(b) 900 fish.

(c) 1100 fish.

(d) 2700 fish.

27.    Private disposable income equals

(a) GNP – taxes + transfers + interest.

(b) NNP – taxes + transfers + interest.

(c) national income – taxes + transfers + interest.

(d) national income – taxes – transfers + interest.

28.    The value of a household’s assets minus the value of its liabilities is called

(a) wealth.

(b) income.

(c) debt.

(d) stock.

29.    If a local government collects taxes of $500,000, has $350,000 of government consumption

expenditures, makes transfer payments of $100,000, and has no interest payments or investment, its

budget would

(a) show a surplus of $75,000.

(b) show a surplus of $50,000.

(c) be in balance with neither a surplus nor a deficit.

(d) show a deficit of $75,000.

30.    The government budget surplus equals

(a) government purchases plus transfers.

(b) net government receipts minus government purchases.

(c) government purchases minus net receipts.

(d) government purchases minus transfers.

31.    National saving equals private saving plus government saving, which in turn equals

(a)  C + S + T.

(b) GDP + C + G.

(c) GDP + NFP.

(d) GDP + NFP – C – G.

32.    The uses-of-saving identity says that an economy’s private saving is used for

(a) investment, interest expenses, and the government budget deficit.

(b) investment, the government budget deficit, and the current account.

(c) investment, interest expenses, the government budget deficit, and the current account.

(d) investment, interest expenses, the government budget deficit, transfer payments, and the current

account.

33.    The uses-of-saving identity shows that if the government budget deficit rises, then one of the

following must happen.

(a) Private saving must rise, investment must fall, and/or the current account must fall.

(b) Private saving must rise, investment must fall, and/or the current account must rise.

(c) Private saving must rise, investment must rise, and/or the current account must fall.

(d) Private saving must rise, investment must rise, and/or the current account must rise.

34.    In 2002, private saving was $1590 billion, investment was $1945 billion, and the current account

balance was –$489 billion. From the uses-of-saving identity, how much was government saving?

(a) –$134 billion

(b) –$844 billion

(c) $844 billion

(d) $134 billion

35.    In 2002, national saving was $1456 billion, investment was $1945 billion, and private saving was

$1590 billion. How much was the current account balance?

(a) $489 billion

(b) $221 billion

(c) –$221 billion

(d) –$489 billion

36.    In the mid-to-late 1980s, the United States had “twin deficits” because both ___________ and

___________ were negative.

(a) government saving; private saving

(b) saving; investment

(c) the current account; investment

(d) government saving; the current account

37.    The country of Old Jersey produces milk and butter, and it has published the following

macroeconomic data, where quantities are in gallons and prices are dollars per gallon.

2003

Good Quantity

Price

2004

Quantity

Price

Milk

Butter

  500

2000

$2

$1

  900

3000

$3

$2

Between 2003 and 2004, nominal GDP grew by

(a) 60.0%.

(b) 65.5%.

(c) 83.3%.

(d) 190.0%.

38.    The value of real GDP in the current year equals

(a) the value of current-year output in prices of the base year.

(b) the value of current-year output in prices of the current year.

(c) the value of base-year output in prices of the base year.

(d) the value of base-year output in prices of the current year.

39.    The country of Old Jersey produces milk and butter, and it has published the following

macroeconomic data, where quantities are in gallons and prices are dollars per gallon.

2003

Good Quantity

Price

2004

Quantity

Price

Milk

Butter

  500

2000

$2

$1

  900

3000

$3

$2

Between 2003 and 2004, the percent change in real GDP (based on 2003 as a base year) was

(a) 58%.

(b) 60%.

(c) 130%.

(d) 190%.

Level of difficulty: 3

Section: 2.4

40.    The country of Old Jersey produces milk and butter, and it has published the following

macroeconomic data, where quantities are in gallons and prices are dollars per gallon.

2003

Good Quantity

Price

2004

Quantity

Price

Milk

Butter

  500

2000

$2

$1

  900

3000

$3

$2

Between 2003 and 2004, the GDP deflator (based on 2003 as a base year) rose

(a) 60.00%.

(b) 81.25%.

(c) 83.33%.

(d) 123.00%.

41.    Currently, the U.S. national income and product accounts (NIPA) use what type of price index to

calculate real GDP?

(a) Fixed-weight

(b) Variable-weight

(c) Chain-weight

(d) Heavy-weight

42.    If nominal GDP for 2003 is $6400 billion and real GDP for 2004 is $6720 billion (in 2003 dollars),

then the growth rate of real GDP is

(a) 0%.

(b) 0.5%.

(c) 5%.

(d) 50%.

43.    If the price index was 100 in 1990 and 120 in 2000, and nominal GDP was $360 billion in 1990 and

$480 billion in 2000, then the value of 2000 GDP in terms of 1990 dollars would be

(a) $300 billion.

(b) $384 billion.

(c) $400 billion.

(d) $424 billion.

44.    Nominal GDP in 1970 was $1,035.6 billion, and in 1980 it was $2,784.2 billion. The GDP price

index was 30.6 for 1970 and 60.4 for 1980, where 1992 was the base year. Calculate the percent

change in real GDP in the decade from 1970 to 1980. Round off to the nearest percentage point.

(a) 36%

(b) 97%

(c) 136%

(d) 169%

45.    Nominal personal consumption expenditures in the United States were $1760.4 billion in 1980 and

rose to $3839.3 billion in 1990. The price index for personal consumption expenditures was 58.5 for

1980 and 92.9 for 1990, where 1992 was the base year. Calculate the percent change in real personal

consumption expenditures (rounded to the nearest percentage point) in the decade.

(a) 37%

(b) 59%

(c) 118%

(d) 137%

46.    A chain-weight price index

(a) equals the value of current output at current prices divided by the value of current output at

base-year prices.

(b) equals the value of a fixed basket at current prices divided by the value of a fixed basket at base-

year prices.

(c) is an average of fixed-weight and variable-weight indexes.

(d) is used to calculate the CPI. 

47.    A disadvantage of chain-weighting is that 

(a) past inflation rates change whenever the base year changes.

(b) past growth rates of real GDP change whenever the base year changes.

(c) it causes output growth to slow.

(d) the components of real GDP don’t sum to real GDP.

48.    The U.S. inflation rate ___________ in the 1960s and 1970s, ___________ in the 1980s, and

___________ in the 1990s.

(a) was steady; rose sharply; fell

(b) was steady; rose sharply; remained high

(c) rose; fell sharply; remained low

(d) rose; fell sharply; rose again

49.    In 2002 the GDP deflator for Old York was 300, and in 2004 it had risen to 330.75. Based on this

information the annual average inflation rate for the two years was

(a) 5%.

(b) 5.125%.

(c) 10%.

(d) 10.25%.

50.    If the price index last year was 1.0 and today it is 1.4, what is the inflation rate over this period?

(a) –4%

(b) 1.4%

(c) 4%

(d) 40%

51.    You are given information on the consumer price index (CPI), where the values given are those for

December 31 of each year.

Year CPI

1989

1990

1991

1992

1993

126.1

133.8

137.9

141.9

145.8

In which year was the inflation rate the highest?

(a) 1990

(b) 1991

(c) 1992

(d) 1993

52.    The consumer price index (CPI) was 180 for 2002 when using 1983 as the base year (1983 = 100).

Now suppose we switch and use 2002 as the base year (2002 = 100). What is the CPI for 1983 with

the new base year?

(a) 18.0

(b) 55.6

(c) 80.0

(d) 111.2

53.    The Boskin Commission concluded that the CPI overstates increases in the cost of living by

___________ percentage point(s) per year.

(a) Less than 1

(b) 1 to 2

(c) About 3

(d) Over 4

54.    The CPI may overstate inflation for all the following reasons EXCEPT 

(a) problems measuring changes in the quality of goods.

(b) substitution by consumers towards cheaper goods.

(c) problems measuring the quality of services.

(d) changes in Social Security benefits.

55.    The nominal interest rate minus the inflation rate is the

(a) depreciation rate.

(b) real interest rate.

(c) discount rate.

(d) forward rate.

56.    By Marks buys a one-year German government bond (called a bund) for $400. He receives principal

and interest totaling $436 one year later. During the year the CPI rose from 150 to 162. The nominal

interest rate on the bond was ___________, and the real interest rate was ___________.

(a) 9%; 1%

(b) 9%; –1%

(c) 36%; 24%

(d) 36%; 12%

57.    The expected real interest rate (r) is equal to

(a) nominal interest rate minus inflation rate.

(b) nominal interest rate minus expected inflation rate.

(c) expected nominal interest rate minus inflation rate.

(d) nominal interest rate plus expected inflation rate.

58.      By Marks buys a one-year German government bond (called a bund) for $400. He receives principal

and interest totaling $436 one year later. During the year the CPI rose from 150 to 162, but he had

thought the CPI would be at 159 by the end of the year. By Marks had expected the real interest rate

to be ___________, but it actually turned out to be ___________.

(a) 8%; 1%

(b) 6%; 3%

(c) 3%; 1%

(d) 1%; 3%

59.    Historical analysis of real interest rates in the United States shows that

(a) real interest rates were unusually low in both the 1970s and 1980s.

(b) real interest rates were unusually high in both the 1970s and 1980s.

(c) real interest rates were unusually low in the 1970s and unusually high in the 1980s.

(d) real interest rates were unusually low in the 1980s, spurring the economic growth that occurred

during the Reagan administration.

T Essay Questions

1.      Carl’s Computer Center sells computers to business firms. Businesses then use the computers to

produce other goods and services. Over the past year, sales representatives were paid $3.5 million,

$.5 million went for rent on the building, $.5 million went for taxes, $.5 million was profit for Carl,

and $10 million was paid for computers at the wholesale level. What was the firm’s total

contribution to GDP?

2.      What is the main conceptual difference between GDP and GNP? How different are GDP and GNP

for the United States? For countries with many citizens who work abroad?

3.      Citizens of the country of Heehaw produce hay and provide entertainment services (banjo playing).

In 1993 they produced $15 million worth of hay, with $11 million consumed domestically and the

other $4 million sold to neighboring countries. They provided $7 million worth of banjo-playing

services, $5 million in Heehaw, and $2 million in neighboring countries. They purchased $6 million

worth of soda pop from neighboring countries.

Calculate the magnitudes of GNP, GDP, net factor payments from abroad, net exports, and the

current account balance.

4.      In the country of Kwaki, people produce canoes, fish for salmon, and grow corn. In 1993 they

produced 5000 canoes using labor and natural materials only, but sold only 4000, as the economy

entered a recession. The cost of producing each canoe was $1000, but the ones that sold were priced

at $1250. They fished $30 million worth of salmon. They used $3 million of the salmon as fertilizer

for corn. They grew and ate $55 million of corn. What was Kwaki’s GDP in 1993?

5.      How does chain weighting lead to a different measurement of real GDP than the methods used by

the BEA prior to 1996? What are the advantages of chain weighting? What are the disadvantages?

6.      Explain how it was possible for U.S. national wealth to have risen substantially from 1990 to 1999,

yet national saving declined as a percentage of GDP.

7.      What is the difference between nominal and real economic variables? Why do economists tend to

concentrate on changes in real magnitudes?

8.      The country of Myrule has produced the following quantity of gauges and potatoes, with the price of

each listed in dollar terms.

Year

Gauges

1999

Quantity    Price

8,000         $4

2000

Quantity       Price

10,000           $3

Potatoes

6,000

$8

  5,000

$14

(a) Using 1999 as the base year, what is the growth rate of real GDP from 1999 to 2000? 

(b) Based on the GDP deflator, what is the inflation rate from 1999 to 2000?