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The Macro Economy Today, 15e (Schiller)

Chapter 5 National Income Accounting

1) National income accounting is defined as the

A) Use of economic theory to predict future income.

B) Measurement of aggregate economic activity.

C) Accounting cost associated with economic choices.

D) Assessment of the distribution of output.

Answer: B

Explanation: The prosperity of a nation may be measured by its total income created by all

factors of production.

Difficulty: 1 Easy

Topic: Measures of Output

Learning Objective: 05-01 What GDP measures—and what it doesn’t.

Bloom’s: Remember

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

2) National income accounts assist

A) Market investors in making more profitable investments.

B) Individuals in maximizing their incomes.

C) Economic policy makers in formulating policies and evaluating performance.

D) Analysts in measuring the performance of the stock market.

Answer: C

Explanation: National income is one way to calculate an economy’s well-being.

Difficulty: 2 Medium

Topic: Measures of Output

Learning Objective: 05-01 What GDP measures—and what it doesn’t.

Bloom’s: Understand

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

No reproduction or distribution without the prior written consent of McGraw-Hill Education.3) Prices are used in national income accounting for all of the following reasons except to

A) Add the values of output from different sectors of the economy.

B) Compare the value of output of one period with that of another.

C) Provide an index to measure the rate of inflation.

D) Provide an index to measure unemployment.

Answer: D

Explanation: Prices are used to track the market value of output.

Difficulty: 2 Medium

Topic: Measures of Output

Learning Objective: 05-01 What GDP measures—and what it doesn’t.

Bloom’s: Understand

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

4) A nation’s GDP is

A) C + I + G + (X – M).

B) The sum of value added at some stages of the production process.

C) The total market value of all intermediate goods and services.

D) The total amount of money in circulation.

Answer: A

Explanation: GDP is a measure of total market value of all final goods and services produced

within a nation’s borders. It can be represented by the equation: C+I+G+(X-M). Where C is

consumption, I is investment, G is government spending, and N and X represent exports minus

imports.

Difficulty: 3 Hard

Topic: The Uses of Output

Learning Objective: 05-01 What GDP measures—and what it doesn’t.

Bloom’s: Apply

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

No reproduction or distribution without the prior written consent of McGraw-Hill Education.5) GDP can be calculated by all of the following methods except

A) Adding up the spending on goods and services by business, government, households, and

foreigners, and subtracting imports.

B) Adding up the “value added” at every stage of production in the economy.

C) Adding up all of the receipts of households, government, and business.

D) Adding up all income and expenses by consumers and businesses.

Answer: D

Explanation: GDP can be measured through total expenditures, total income, or total value

added.

Difficulty: 1 Easy

Topic: Measures of Output

Learning Objective: 05-01 What GDP measures—and what it doesn’t.

Bloom’s: Remember

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

6) A nation’s GDP can be calculated as

A) The sum of value added and intermediate goods.

B) The total value added at all stages of production.

C) NI plus depreciation.

D) PI plus depreciation.

Answer: B

Explanation: The value added approach to calculating GDP measures how much of an increase

in the market value occurs at each particular stage of production.

Difficulty: 3 Hard

Topic: Measures of Output

Learning Objective: 05-01 What GDP measures—and what it doesn’t.

Bloom’s: Apply

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

No reproduction or distribution without the prior written consent of McGraw-Hill Education.7) For an economy with only two goods, skate boards can be added to bicycles to compute the

GDP by

A) Multiplying output by price and adding the resulting dollar values.

B) Dividing output by price and adding the resulting dollar values.

C) Multiplying dollar values of output by price and adding the result.

D) Dividing dollar values of output by price and adding the result.

Answer: A

Explanation: The total market value of all production of all goods and services is represented by

GDP. GDP = (QSKATE × PSKATE) + (QBIKE × PBIKE).

Difficulty: 3 Hard

Topic: Measures of Output

Learning Objective: 05-01 What GDP measures—and what it doesn’t.

Bloom’s: Analyze

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

8) Suppose iPhones cost consumers $200 and USB cables cost consumers $25. What

contribution does the production of 2,000 iPhones and 1,200 USB cables make to GDP?

A) $1,200,000.

B) $430,000.

C) $200,000.

D) $580,000.

Answer: B

Explanation: GDP represents the total value of production in the economy at current market

prices. In this case, the value would be the quantity of iPhones multiplied by the cost of phones,

added to the price of USB cables multiplied by the cost of USB cables which is equivalent to

$430,000 and can be calculated by: $430,000 = (200 *2,000 + 25 *1,200).

Difficulty: 3 Hard

Topic: Measures of Output

Learning Objective: 05-01 What GDP measures—and what it doesn’t.

Bloom’s: Apply

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

No reproduction or distribution without the prior written consent of McGraw-Hill Education.9) Suppose Blu-Ray players cost consumers $300 and Blu-Ray disks cost consumers $30. What

contribution does the production of 250 Blu-Ray players and 3,000 Blu-Ray disks make to the

GDP?

A) $75,000.

B) $165,000.

C) $90,000.

D) $125,000.

Answer: B

Explanation: The total production of each product multiplied by the price of each product, then

added together, is the value of GDP. In this example GDP is equal to $165,000 = (300*250 + 30

*3,000).

Difficulty: 1 Easy

Topic: Measures of Output

Learning Objective: 05-01 What GDP measures—and what it doesn’t.

Bloom’s: Remember

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

10) Which of the following is treated differently in computations of GNP as compared with

GDP?

A) Sales in the underground economy.

B) Goods produced by U.S. firms located in foreign countries.

C) Intermediate goods.

D) The value of services performed by housewives.

Answer: B

Explanation: GDP includes production within the political borders, while GNP measures

production by U.S.-owned factors of production regardless of where they may be located.

Difficulty: 3 Hard

Topic: Measures of Output

Learning Objective: 05-01 What GDP measures—and what it doesn’t.

Bloom’s: Apply

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

No reproduction or distribution without the prior written consent of McGraw-Hill Education.11) Which of the following statements is correct concerning GDP and GNP?

A) GDP measures output within the nation’s borders only.

B) GNP measures output within the nation’s borders only.

C) GDP measures output produced by a nation’s factors even if they are outside the nation’s

borders.

D) GNP measures output outside a nation’s borders, but not inside it.

Answer: A

Explanation: GDP includes production within the political borders regardless of whose factors

of production are used to produce it, while GNP measures production by U.S.-owned factors of

production regardless of where they may be located.

Difficulty: 1 Easy

Topic: Measures of Output

Learning Objective: 05-01 What GDP measures—and what it doesn’t.

Bloom’s: Remember

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

12) Which of the following would be included in U.S. GNP but not in U.S. GDP?

A) The tips received by a waiter in New Jersey.

B) Auto parts produced by a Japanese-owned firm operating in North Carolina.

C) Sales of used cars in the United States.

D) Chipsets produced by U.S.-owned firms operating in China.

Answer: D

Explanation: To count in U.S. GDP, something must be produced within the borders of the

United States.

Difficulty: 3 Hard

Topic: Measures of Output

Learning Objective: 05-01 What GDP measures—and what it doesn’t.

Bloom’s: Apply

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

No reproduction or distribution without the prior written consent of McGraw-Hill Education.13) GDP per capita

A) Is equal to a nation’s GDP divided by its population.

B) Does not permit comparisons of the economic welfare of different nations.

C) Is real GDP corrected for price level changes.

D) Indicates the most efficient use of resources.

Answer: A

Explanation: GDP per capita is also known as average GDP. GDP per capita = Dollar value of

GDP/Total population

Difficulty: 3 Hard

Topic: Measures of Output

Learning Objective: 05-01 What GDP measures—and what it doesn’t.

Bloom’s: Apply

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

14) The GDP per capita is the most practical way to

A) Measure how much income households receive.

B) Measure how much output can be consumed on a sustainable basis.

C) Make international comparisons of the standard of living.

D) Analyze the growth rate of the economy through time.

Answer: C

Explanation: We can compare the GDP per capita of country A with the GDP per capita of

country B to determine which country’s citizens are relatively more prosperous. Bear in mind,

GDP per capital cannot tell us about the way GDP is actually distributed or used- only a

statistical average.

Difficulty: 2 Medium

Topic: Measures of Output

Learning Objective: 05-01 What GDP measures—and what it doesn’t.

Bloom’s: Understand

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

No reproduction or distribution without the prior written consent of McGraw-Hill Education.15) If a nation has GDP of $12,500 billion and GDP per capita of $62,500, what is the nation’s

population?

A) 180 million.

B) 200 million.

C) 625 million.

D) 230 million.

Answer: B

Explanation: Population is equal to GDP divided by GDP per capita ($12,500,000,000/$62,500

= 200,000,000).

Difficulty: 3 Hard

Topic: Measures of Output

Learning Objective: 05-01 What GDP measures—and what it doesn’t.

Bloom’s: Apply

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

16) If GDP per capita was $500 in 2002 and the population was 25,000, the GDP would have

been approximately

A) $5,000,000.

B) $7,500,000.

C) $125,000,000.

D) None of the choices are correct.

Answer: D

Explanation: GDP equals GDP per capita multiplied by population ($500 *25,000 =

$12,500,000).

Difficulty: 3 Hard

Topic: Measures of Output

Learning Objective: 05-01 What GDP measures—and what it doesn’t.

Bloom’s: Apply

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

No reproduction or distribution without the prior written consent of McGraw-Hill Education.17) If GDP grows more rapidly than population for a particular country over a period of time,

then we can determine that

A) Real GDP has decreased.

B) All citizens of this country are better off.

C) GDP per capita has increased.

D) GDP must rise at a slower rate in the future.

Answer: C

Explanation: As GDP per capita is calculated by (Total GDP/Total population), if GDP grows

more rapidly than population, GDP per capita has increased. GDP per capita is influenced by

growth in GDP and growth in the population.

Difficulty: 3 Hard

Topic: Measures of Output

Learning Objective: 05-01 What GDP measures—and what it doesn’t.

Bloom’s: Apply

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

18) Which of the following is excluded from calculations of GDP?

A) Goods that are produced and sold during the time period.

B) Income received by managers of corporations.

C) The value of lawn mowing provided by a teenager for his own family.

D) Goods that bring little value to society.

Answer: C

Explanation: Nonmarket production is excluded from GDP.

Difficulty: 1 Easy

Topic: Measures of Output

Learning Objective: 05-01 What GDP measures—and what it doesn’t.

Bloom’s: Remember

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

No reproduction or distribution without the prior written consent of McGraw-Hill Education.19) Suppose you volunteer to help clean up your neighborhood, and the only payment you

receive is the sense of goodwill that develops with your neighbors. Your efforts cause the GDP

of the economy to

A) Remain unchanged.

B) Fall by the opportunity cost of the time you spend doing volunteer work.

C) Rise by the opportunity cost of the time spent by all of the people in the neighborhood on the

volunteer project.

D) Rise by the value of increased cleanliness of the neighborhood.

Answer: A

Explanation: GDP will not increase if production is not a reported market activity.

Difficulty: 3 Hard

Topic: Measures of Output

Learning Objective: 05-01 What GDP measures—and what it doesn’t.

Bloom’s: Apply

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

20) Suppose a friend claims he is helping the economy by throwing trash on the street rather than

in trash cans because the extra expenditures necessary to clean up the streets will increase GDP.

Your friend is

A) Wrong. GDP will not be affected because nothing new is being produced.

B) Right. GDP will increase, ceteris paribus.

C) Wrong. GDP will not be affected because this is not a socially desirable use of resources and

will therefore not be included in GDP.

D) Wrong. GDP will decline because the neighborhood will be less clean.

Answer: B

Explanation: Even wasteful spending on waste removal is a final service and technically causes

real GDP to rise.

Difficulty: 3 Hard

Topic: Measures of Output

Learning Objective: 05-01 What GDP measures—and what it doesn’t.

Bloom’s: Apply

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

No reproduction or distribution without the prior written consent of McGraw-Hill Education.21) Which of the following is directly included in the calculation of GDP?

A) The final sale of a brand new Cadillac.

B) The appreciation in value of shares of stock.

C) The sales of sand to a glassmaker.

D) The sales of land to a builder.

Answer: A

Explanation: Final goods count in GDP but used, intermediate, and financial goods do not.

Difficulty: 3 Hard

Topic: Measures of Output

Learning Objective: 05-01 What GDP measures—and what it doesn’t.

Bloom’s: Apply

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

22) All of the following count as unreported income except

A) A waiter’s tips that are not reported to the IRS.

B) The $5 you pay your friend to help you study for a test.

C) International trade in cocaine.

D) The money you pay a private tutor who works for Tutors Inc.

Answer: D

Explanation: The calculation of GDP fails to capture market activities that aren’t reported to tax

or census authorities– also known as unreported income. Some activities are not reported as

income for obvious reasons: they are illegal, or someone is trying to avoid taxes.

Difficulty: 3 Hard

Topic: Measures of Output

Learning Objective: 05-01 What GDP measures—and what it doesn’t.

Bloom’s: Analyze

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

23) Which of the following would not be included in the calculation of GDP?

A) Income earned by an attorney.

B) Income earned by a CPA.

C) Contract work performed by an electrician.

D) Tips earned by a bartender who does not report them to the IRS.

Answer: D

Explanation: Any income that is not reported from legal or illegal sources (known as unreported

income) does not officially count in GDP.

Difficulty: 3 Hard

Topic: Measures of Output

Learning Objective: 05-01 What GDP measures—and what it doesn’t.

Bloom’s: Apply

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

No reproduction or distribution without the prior written consent of McGraw-Hill Education.24) When an individual makes repairs to her own home instead of hiring a company to make the

repairs, the activity is

A) Included in GDP because it represents production.

B) Productive but excluded from GDP because it is a nonmarket activity.

C) Excluded from GDP because it is an intermediate good.

D) Included in GDP but not included in GNP.

Answer: B

Explanation: If an individual uses his or her own time to make improvements rather than hiring

a company, then the activity will not be counted in GDP.

Difficulty: 3 Hard

Topic: Measures of Output

Learning Objective: 05-01 What GDP measures—and what it doesn’t.

Bloom’s: Apply

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

25) Which of the following items can you definitively say is part of the underground economy?

A) Payments to family members for performing household tasks.

B) Income from legal pursuits.

C) Unreported income.

D) Child care services provided by a legitimate company.

Answer: C

Explanation: The underground economy includes activities that are illegal or not reported for tax

purposes.

Difficulty: 2 Medium

Topic: Measures of Output

Learning Objective: 05-01 What GDP measures—and what it doesn’t.

Bloom’s: Understand

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

No reproduction or distribution without the prior written consent of McGraw-Hill Education.26) Which of the following is not a final good or service?

A) A refrigerator purchased by a home owner.

B) Paper purchased by a textbook company.

C) A computer purchased by a local middle school.

D) A flu shot purchased by a teacher.

Answer: B

Explanation: The paper purchased by the textbook company is an intermediate good used in

producing the textbook.

Difficulty: 3 Hard

Topic: Measures of Output

Learning Objective: 05-01 What GDP measures—and what it doesn’t.

Bloom’s: Apply

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

27) A furniture factory produces dining room sets. The lumber it purchases from the lumberyard

is a/an

A) Intermediate service.

B) Final good.

C) Intermediate good.

D) Final service.

Answer: C

Explanation: Any good used in the production of a final good is considered to be an

intermediate good.

Difficulty: 3 Hard

Topic: Measures of Output

Learning Objective: 05-01 What GDP measures—and what it doesn’t.

Bloom’s: Analyze

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

No reproduction or distribution without the prior written consent of McGraw-Hill Education.28) If one added up the value of all intermediate goods that went into the production of real

GDP, the total value of intermediate goods would be

A) Less than the GDP.

B) Equal to the GDP.

C) Greater than the GDP.

D) None of the choices are correct.

Answer: C

Explanation: By adding up the contribution of all stages of production, you are double-counting

and thereby overstating actual GDP. By adding up the ‘marginal’ contribution you get an accurate

measure of real GDP.

Difficulty: 1 Easy

Topic: Measures of Output

Learning Objective: 05-01 What GDP measures—and what it doesn’t.

Bloom’s: Remember

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

29) To avoid counting the same output more than once, the calculation of GDP includes

A) Intermediate goods plus final goods.

B) Only the value of final goods.

C) The value added at each stage of production plus intermediate goods.

D) Only the output produced by U.S. factors of production.

Answer: B

Explanation: We do not count intermediate goods because they will be counted as part of the

total market value when the final good is sold.

Difficulty: 2 Medium

Topic: Measures of Output

Learning Objective: 05-01 What GDP measures—and what it doesn’t.

Bloom’s: Understand

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

No reproduction or distribution without the prior written consent of McGraw-Hill Education.30) Value added is the

A) Addition to GDP because nonmarket activities are captured.

B) Increase in market value of a product that takes place at each stage of the production process.

C) Difference between nominal GDP and real GDP.

D) Impact on third parties caused by market activities.

Answer: B

Explanation: As goods move along the supply chain from scratch to final retail sale, value is

added at each stage of the production process.

Difficulty: 1 Easy

Topic: Measures of Output

Learning Objective: 05-01 What GDP measures—and what it doesn’t.

Bloom’s: Remember

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

31) The sum of value added

A) Measures the intangible quality of goods and services produced in the economy.

B) Equals the sum of the value of intermediate goods.

C) Is one way to compute the GDP.

D) Equals net domestic product.

Answer: C

Explanation: A final good’s price should equal the total value added at each stage of production.

Difficulty: 2 Medium

Topic: Measures of Output

Learning Objective: 05-01 What GDP measures—and what it doesn’t.

Bloom’s: Understand

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

No reproduction or distribution without the prior written consent of McGraw-Hill Education.32) A computer manufacturer sells laptops to retail stores for $450 each. If the manufacturer

pays $200 for all of the components in each laptop and $75 in wages to it’s workers, the value

added to each computer by manufacturing is

A) $450.

B) $250.

C) $175.

D) $75.

Answer: B

Explanation: Value added is simply selling price of output minus cost of physical inputs. A

computer, and the physical computer parts to make the computer, has the same weight. The

computer parts are bought for $200 and sold in a different value-added format as a computer for

$450. The actual value added of assembly is $250. The wage cost of $75 is inside the value-

added component of $250.

Difficulty: 3 Hard

Topic: Measures of Output

Learning Objective: 05-01 What GDP measures—and what it doesn’t.

Bloom’s: Apply

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

33) A convenience store pays a farmer $1.25 per pineapple. If it costs the farmer $0.15 in seeds,

$0.25 in fertilizer, and $0.25 in forgone output to grow each pineapple, the value added by the

farmer to each pineapple is

A) $0.40.

B) $1.25.

C) $0.85.

D) $0.60.

Answer: C

Explanation: Value added is equal to the sale price less any explicit intermediate input prices

required to produce the good.

Difficulty: 3 Hard

Topic: Measures of Output

Learning Objective: 05-01 What GDP measures—and what it doesn’t.

Bloom’s: Apply

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

No reproduction or distribution without the prior written consent of McGraw-Hill Education.34) If a farmer grows a head of cabbage with fertilizer costs of $0.10 and seed costs of $0.15 and

sells it to a wholesaler for $0.55, the total value added by the farmer is

A) $0.30.

B) $0.25.

C) $0.55.

D) $0.35.

Answer: A

Explanation: Value added is equal to the sale price less any explicit input prices required to

produce the good.

Difficulty: 3 Hard

Topic: Measures of Output

Learning Objective: 05-01 What GDP measures—and what it doesn’t.

Bloom’s: Apply

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

35) The value of final output produced in a given period, measured in current prices, is

A) Real GDP.

B) Nominal GDP.

C) NDP.

D) GNP.

Answer: B

Explanation: Nominal GDP tracks the value of production in a given year.

Difficulty: 1 Easy

Topic: Measures of Output

Learning Objective: 05-02 The difference between real and nominal GDP.

Bloom’s: Remember

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

No reproduction or distribution without the prior written consent of McGraw-Hill Education.36) Real GDP is the

A) Value of output produced, including the nonmarket activities that are not counted in nominal

GDP.

B) Value of final output produced in a given period, adjusted for changing prices.

C) Value of final output produced in a given period measured in current prices.

D) Intangible quality of goods and services produced in the economy.

Answer: B

Explanation: Real GDP allows us to express production while controlling for changes to the

price level. Real GDP allows us to express production while controlling for changes to the price

level so we can make comparisons of production between time periods.

Difficulty: 1 Easy

Topic: Measures of Output

Learning Objective: 05-02 The difference between real and nominal GDP.

Bloom’s: Remember

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

37) Real GDP is more accurate than nominal GDP in making comparisons of output over time

because

A) Nominal GDP may change simply because of price changes over time.

B) Real GDP is not affected by output changes.

C) Nominal GDP is the hypothetical output that would be produced at full employment.

D) Real GDP is not affected by changes in productivity or the size of the labor force.

Answer: A

Explanation: It’s important to distinguish between increases in the quantity of goods and

services from increases in their prices. Real GDP tracks only changes to production while

nominal GDP tracks changes to production and prices; so nominal GDP is less useful.

Difficulty: 2 Medium

Topic: Measures of Output

Learning Objective: 05-02 The difference between real and nominal GDP.

Bloom’s: Understand

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

No reproduction or distribution without the prior written consent of McGraw-Hill Education.38) Real GDP is used most effectively to

A) Measure how much income households receive.

B) Measure how much output can be consumed on a sustainable basis.

C) Make international comparisons of the standard of living.

D) Analyze the growth rate of the economy over time.

Answer: D

Explanation: Growth in actual production means growth in the economy; real GDP is used to

measure this growth, which allows us to compare the output over time.

Difficulty: 2 Medium

Topic: Measures of Output

Learning Objective: 05-02 The difference between real and nominal GDP.

Bloom’s: Understand

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

39) Suppose the total market value of all the final goods and services produced in the country of

Rushya was $8 billion in 2008 (measured in 2008 prices) and $9 billion in 2009 (measured in

2009 prices). Which of the following statements is definitely correct?

A) Production increased in Rushya between 2008 and 2009.

B) Real GDP increased in Rushya between 2008 and 2009.

C) Average price levels increased in Rushya between 2008 and 2009.

D) Whether real GDP increased cannot be determined with the information given.

Answer: D

Explanation: Real GDP in year t can be calculated by dividing nominal GDP in year t by the

price index. Nominal GDP can increase if either real GDP or the price level increases, but it is

impossible to know with certainty whether one or both of these increased from 2008 to 2009 as

price index is unknown. More information is needed.

Difficulty: 3 Hard

Topic: Measures of Output

Learning Objective: 05-02 The difference between real and nominal GDP.

Bloom’s: Apply

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

No reproduction or distribution without the prior written consent of McGraw-Hill Education.40) Suppose the total market value of all the final goods and services produced in the country of

Cannedada was $4 billion in 2008 (measured in 2008 prices) and $5 billion in 2009 (measured in

2009 prices). Which of the following statements is definitely correct?

A) Production increased in Cannedada between 2008 and 2009.

B) Average price levels increased in Cannedada between 2008 and 2009.

C) Nominal GDP decreased in Cannedada between 2008 and 2009.

D) The change in real GDP cannot be determined without more information.

Answer: D

Explanation: Increases in nominal GDP are due to a rise in the price level, a rise in output, or

both; this example does not allow us to conclude with certainty whether production or prices rose

because more information is needed.

Difficulty: 3 Hard

Topic: Measures of Output

Learning Objective: 05-02 The difference between real and nominal GDP.

Bloom’s: Apply

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

41) In periods of rising prices, percentage increases in nominal GDP will

A) Exceed percentage increases in real GDP.

B) Equal percentage increases in real GDP.

C) Be less than percentage increases in real GDP.

D) Not change in relationship to real GDP.

Answer: A

Explanation: Nominal GDP shows more growth than there really is because it is reflecting

changes in the price level as well.

Difficulty: 3 Hard

Topic: Measures of Output

Learning Objective: 05-02 The difference between real and nominal GDP.

Bloom’s: Apply

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

No reproduction or distribution without the prior written consent of McGraw-Hill Education.42) If real GDP falls from one period to another and the price level stays the same, we can

conclude that

A) Nominal GDP increased.

B) Inflation increased.

C) Nominal GDP also decreased.

D) NDP also decreased.

Answer: C

Explanation: Production must have fallen and so must have nominal GDP because the price

level remained constant. Real GDP year t = (nominal GDP year t/price index)*100

Difficulty: 3 Hard

Topic: Measures of Output

Learning Objective: 05-02 The difference between real and nominal GDP.

Bloom’s: Apply

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

43) If nominal GDP was $11,500 billion in 2003 and the price level in 2003 was 111.6, then real

GDP would have been approximately

A) $9,795 billion.

B) $10,305 billion.

C) $10,485 billion.

D) $9,750 billion.

Answer: B

Explanation: Nominal GDP can be adjusted to remove changes to the price level, which is what

real GDP is used for. Real GDP is equal to nominal GDP divided by the price index and

multiplied by 100: ($11,500/111.6) *100.

Difficulty: 3 Hard

Topic: Measures of Output

Learning Objective: 05-02 The difference between real and nominal GDP.

Bloom’s: Apply

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

No reproduction or distribution without the prior written consent of McGraw-Hill Education.44) If the price level is 100 for 2005 and the price level is 106.5 in 2007, a nominal GDP in 2007

of $15,600 billion would mean that real GDP in 2007 (in 2005 prices) would be closest to

A) $14,647.9 billion.

B) $15,600.0 billion.

C) $14,751.3 billion.

D) $13,971.2 billion.

Answer: A

Explanation: Real GDP takes into account changes in the price level so that we are looking only

at changes in actual production. Real GDP is equal to nominal GDP divided by the price index

and multiplied by 100: ($15,600/106.5) *100.

Difficulty: 3 Hard

Topic: Measures of Output

Learning Objective: 05-02 The difference between real and nominal GDP.

Bloom’s: Apply

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

45) Assume nominal GDP is $10,000 trillion in period 1 and $15,000 trillion in period 2. If

prices in period 2 are twice as high as in period 1, real GDP in period 2 is

A) $10,000 trillion measured in period 1 prices.

B) $12,500 trillion measured in period 1 prices.

C) $15,000 trillion measured in period 1 prices.

D) $7,500 trillion measured in period 1 prices.

Answer: D

Explanation: Real GDP will be lower than nominal GDP if the price level is increasing faster

than production is. Real GDP is equal to nominal GDP divided by the price index and multiplied

by 100: ($15,000 trillion /200) *100. The price index is 200 as the prices in period 2 are twice as

high as in period 1.

Difficulty: 3 Hard

Topic: Measures of Output

Learning Objective: 05-02 The difference between real and nominal GDP.

Bloom’s: Apply

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

No reproduction or distribution without the prior written consent of McGraw-Hill Education.46) If real GDP in 2005 is $8,000 billion and the price level is 125, what is nominal GDP in

2005?

A) $10,000 billion

B) $9,200.5 billion

C) $6,830.6 billion

D) $5,000 billion

Answer: A

Explanation: Nominal GDP is equal to real GDP multiplied by the price index and divided by

100: (8,000 *125)/100.

Difficulty: 3 Hard

Topic: Measures of Output

Learning Objective: 05-02 The difference between real and nominal GDP.

Bloom’s: Apply

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

No reproduction or distribution without the prior written consent of McGraw-Hill Education.47)

According to the hypothetical economy in Figure 5.1, between 1960 and 1970 real GDP declined

but nominal GDP continued to rise. The increase in nominal GDP was due to

A) An increase in the price level greater than the decrease in output, causing the nominal dollar

value of output produced to increase.

B) An increase in the quantity of output produced.

C) A decrease in the price level.

D) An increase in the standard of living.

Answer: A

Explanation: Nominal GDP can suggest the economy is doing well, but it could be a distortion

since the growth may be due to an increase in the price level only.

Difficulty: 3 Hard

Topic: Measures of Output

Learning Objective: 05-02 The difference between real and nominal GDP.

Bloom’s: Apply

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

No reproduction or distribution without the prior written consent of McGraw-Hill Education.48)

In Figure 5.1, during the period between the early 1970s and 1980, real GDP grew at a faster rate

than nominal GDP. This is an indication that

A) Average price levels decreased.

B) Production increased at a faster rate than average price increased.

C) Production increased at a slower rate than average price increased.

D) Average price levels increased.

Answer: A

Explanation: Nominal GDP can grow more slowly than real GDP if the prices are falling and

production is rising; the economy is actually doing well, but nominal GDP suggests it is not as

nominal GDP does not take into account the quantity of production.

Difficulty: 3 Hard

Topic: Measures of Output

Learning Objective: 05-02 The difference between real and nominal GDP.

Bloom’s: Analyze

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

No reproduction or distribution without the prior written consent of McGraw-Hill Education.49)

In Figure 5.1, during the 1980-1990 time periods, real GDP was relatively constant but nominal

GDP increased. This can be explained by

A) Lower average price levels.

B) Inflation.

C) Higher levels of production.

D) A decrease in production per capita.

Answer: B

Explanation: Real GDP can be constant and nominal GDP can be increasing. But this must be

due to a change in the price level and not actual production.

Difficulty: 3 Hard

Topic: Measures of Output

Learning Objective: 05-02 The difference between real and nominal GDP.

Bloom’s: Analyze

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

No reproduction or distribution without the prior written consent of McGraw-Hill Education.50)

According to the hypothetical economy in Figure 5.2, real GDP differs from nominal GDP from

1980 to 2000 because

A) Price level increases caused real GDP to increase.

B) Population growth exceeded output growth.

C) Inflation caused the dollar value of output to decrease.

D) Inflation caused the dollar value of output to increase.

Answer: D

Explanation: When nominal GDP is rising faster than real GDP, the price level must be

increasing.

Difficulty: 3 Hard

Topic: Measures of Output

Learning Objective: 05-02 The difference between real and nominal GDP.

Bloom’s: Apply

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

No reproduction or distribution without the prior written consent of McGraw-Hill Education.51)

The base year for the calculation of real GDP for the hypothetical economy in Figure 5.2 is

closest to

A) 1960.

B) 1980.

C) 1990.

D) 2000.

Answer: B

Explanation: In the base year, nominal GDP equals real GDP since both are expressed using the

same-year dollars thus is depicted by the intersection point year between the two curves.

Difficulty: 3 Hard

Topic: Measures of Output

Learning Objective: 05-02 The difference between real and nominal GDP.

Bloom’s: Analyze

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

No reproduction or distribution without the prior written consent of McGraw-Hill Education.52)

In Figure 5.2, the fact that real GDP is greater than nominal GDP during the 1960-1980 periods

implies that

A) Average price levels during this period must have been lower than during the base period.

B) Per capita GDP must have increased.

C) Average price levels must have decreased during this period.

D) Production must have decreased during this period.

Answer: A

Explanation: Nominal GDP will differ from real GDP because nominal GDP does not control

for changes in the price level.

Difficulty: 3 Hard

Topic: Measures of Output

Learning Objective: 05-02 The difference between real and nominal GDP.

Bloom’s: Apply

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

No reproduction or distribution without the prior written consent of McGraw-Hill Education.53) Inflation is

A) The increase in the market value of a product that takes place at each stage of the production

process.

B) Included in the calculation of real GDP.

C) An increase in the average level of prices of goods and services.

D) A decrease in the price of all goods and services.

Answer: C

Explanation: From year to year, if the average price level is rising, there must be inflation.

Difficulty: 1 Easy

Topic: Measures of Output

Learning Objective: 05-01 What GDP measures—and what it doesn’t.

Bloom’s: Remember

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

54) The purpose of chain-weighted price adjustments in the calculation of GDP is to

A) Adjust for changes in relative prices.

B) Adjust for changes in average prices.

C) Adjust for changes in production.

D) Convert NDP to GDP.

Answer: A

Explanation: Chain-weighted indexes use a moving average of price levels in consecutive years

as an inflation adjustment. Since some prices fall while others rise, we can use the chain-

weighted method to accurately value the production in several different years.

Difficulty: 2 Medium

Topic: Measures of Output

Learning Objective: 05-01 What GDP measures—and what it doesn’t.

Bloom’s: Understand

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

No reproduction or distribution without the prior written consent of McGraw-Hill Education.55) The alternative combinations of final goods and services that can be produced with all

available resources and technology are the

A) Real GDP.

B) Nominal GDP.

C) Production possibilities.

D) Net domestic product.

Answer: C

Explanation: The production possibilities are the possible combinations of goods and services

that our economy can produce if we use our resources efficiently.

Difficulty: 1 Easy

Topic: Measures of Output

Learning Objective: 05-01 What GDP measures—and what it doesn’t.

Bloom’s: Remember

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

56) An economy’s production possibilities curve indicates

A) The rate of economic growth.

B) The prices of any two goods.

C) The rate of investment.

D) How much the economy can produce.

Answer: D

Explanation: When our resources are used efficiently, what we are capable of producing is

defined as the economy’s production possibilities.

Difficulty: 1 Easy

Topic: Measures of Output

Learning Objective: 05-01 What GDP measures—and what it doesn’t.

Bloom’s: Remember

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

No reproduction or distribution without the prior written consent of McGraw-Hill Education.57) The wearing out of plants and equipment is known as

A) Maintenance Costs.

B) Depreciation.

C) Inflation.

D) Chain-weighted adjustment.

Answer: B

Explanation: Since capital has a finite life, a portion of the capital stock wears out each year in

producing goods and services and must be replaced to maintain our production capabilities.

Difficulty: 1 Easy

Topic: Measures of Output

Learning Objective: 05-04 The major submeasures of output and income.

Bloom’s: Remember

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

58) Depreciation represents

A) The consumption of capital in the production process.

B) A loss of productive capability as a result of the inefficient use of resources.

C) Wasted capital.

D) Gross investment plus net investment.

Answer: A

Explanation: Every year, some capital wears out and must be replaced in order to maintain our

current production capabilities.

Difficulty: 1 Easy

Topic: Measures of Output

Learning Objective: 05-01 What GDP measures—and what it doesn’t.

Bloom’s: Remember

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

59) Net domestic product (NDP) is determined by

A) Subtracting depreciation from GDP.

B) Adding consumption, investment, government expenditures, and net exports.

C) Adding appreciation to GDP.

D) Subtracting consumption from GDP.

Answer: A

Explanation: NDP indicates how much the economy is producing after adjusting for all capital

that is wearing out.

Difficulty: 1 Easy

Topic: Measures of Output

Learning Objective: 05-04 The major submeasures of output and income.

Bloom’s: Remember

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

No reproduction or distribution without the prior written consent of McGraw-Hill Education.60) Net domestic product is

A) Equal to GDP minus indirect business taxes.

B) The total market value of all goods produced in the period.

C) Equal to national income minus depreciation.

D) The market value of all final goods and services produced in the economy after adjusting for

depreciation.

Answer: D

Explanation: Depreciation reduces the capital stock in the nation.

Difficulty: 1 Easy

Topic: Measures of Output

Learning Objective: 05-04 The major submeasures of output and income.

Bloom’s: Remember

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

61) The account that gives the most accurate understanding of the economy’s potential for

growth over the long term is

A) GDP.

B) NDP.

C) NI.

D) GNP.

Answer: B

Explanation: NDP is the amount of output we could consume without reducing our stock of

capital and next year’s production possibilities.

Difficulty: 1 Easy

Topic: Measures of Output

Learning Objective: 05-04 The major submeasures of output and income.

Bloom’s: Remember

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

No reproduction or distribution without the prior written consent of McGraw-Hill Education.62) The national income aggregate calculated by subtracting depreciation from GDP is known as

A) Net investment.

B) Net domestic product.

C) Gross investment.

D) Value added.

Answer: B

Explanation: NDP indicates how much the economy is producing after adjusting for all capital

that is wearing out.

Difficulty: 1 Easy

Topic: Measures of Output

Learning Objective: 05-04 The major submeasures of output and income.

Bloom’s: Remember

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

63) Gross investment is the

A) Total investment expenditure in a given time period.

B) Consumption of capital in the production process.

C) Wearing out of plant and equipment.

D) Alternative combinations of final goods and services that can be produced with all available

resources and technology.

Answer: A

Explanation: Businesses invest in the economy by increasing the amount of physical capital.

Difficulty: 1 Easy

Topic: The Uses of Output

Learning Objective: 05-04 The major submeasures of output and income.

Bloom’s: Remember

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

No reproduction or distribution without the prior written consent of McGraw-Hill Education.64) An economy’s production possibilities are most likely to expand if

A) Net investment is negative.

B) Net investment is zero.

C) Gross investment is greater than depreciation.

D) Depreciation is greater than gross investment.

Answer: C

Explanation: Depreciation represents capital that is worn out; if it is replaced through

investment, and there is additional investment above that, then our production possibilities will

increase.

Difficulty: 2 Medium

Topic: Measures of Output

Learning Objective: 05-04 The major submeasures of output and income.

Bloom’s: Understand

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

65) A nation’s production possibilities curve should, ceteris paribus, shift

A) Inward if gross investment exceeds depreciation.

B) Inward if net investment is zero.

C) Outward if net investment is positive.

D) Outward if gross investment is positive.

Answer: C

Explanation: As long as our gross investment is more than enough to replace worn-out capital

and build new capital (net investment), our production possibilities will increase.

Difficulty: 3 Hard

Topic: Measures of Output

Learning Objective: 05-04 The major submeasures of output and income.

Bloom’s: Apply

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

No reproduction or distribution without the prior written consent of McGraw-Hill Education.66) The stock of capital in the United States can grow only if

A) Depreciation is positive.

B) Gross investment minus depreciation is positive.

C) GDP minus depreciation is negative.

D) The production possibilities curve shifts inward toward the origin.

Answer: B

Explanation: The capital stock is reduced each year due to depreciation. As long as our

investment is enough to replace worn-out capital and build new capital, our production

possibilities will increase.

Difficulty: 2 Medium

Topic: Measures of Output

Learning Objective: 05-04 The major submeasures of output and income.

Bloom’s: Understand

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

67) If depreciation is smaller than gross investment,

A) Net investment exceeds depreciation.

B) Gross investment is negative.

C) Net investment is positive.

D) The nation’s capital stock is getting smaller.

Answer: C

Explanation: Gross investment is positive as long as some new plants and equipment are being

produced. But the stock of capital-the total collection of plants and equipment-won’t grow unless

gross investment exceeds depreciation. That is, the flow of new capital must exceed depreciation,

or our stock of capital will decline.

Difficulty: 2 Medium

Topic: Measures of Output

Learning Objective: 05-04 The major submeasures of output and income.

Bloom’s: Understand

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

No reproduction or distribution without the prior written consent of McGraw-Hill Education.68) If depreciation exceeds gross investment,

A) Net investment exceeds depreciation.

B) The nations capital stock is increasing.

C) The difference between GDP and NDP is smaller than gross investment.

D) The nation’s capital stock is decreasing.

Answer: D

Explanation: Gross investment is positive as long as some new plants and equipment are being

produced. But the stock of capital-the total collection of plants and equipment-won’t grow unless

gross investment exceeds depreciation. That is, the flow of new capital must exceed depreciation,

or our stock of capital will decline.

Difficulty: 2 Medium

Topic: Measures of Output

Learning Objective: 05-04 The major submeasures of output and income.

Bloom’s: Understand

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

69) The addition to the economy’s capital stock can be found by

A) Subtracting NDP from GDP.

B) Subtracting depreciation from GDP.

C) Subtracting depreciation from gross investment.

D) Subtracting net income from gross investment.

Answer: C

Explanation: Only if gross investment is larger than depreciation will the capital stock grow.

Difficulty: 1 Easy

Topic: Measures of Output

Learning Objective: 05-04 The major submeasures of output and income.

Bloom’s: Remember

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

No reproduction or distribution without the prior written consent of McGraw-Hill Education.70) A nation’s capital stock will decline, ceteris paribus, in all of the following situations except

A) The population increases faster than the capital stock.

B) Net investment is negative.

C) Depreciation exceeds gross investment.

D) None of the choices are correct.

Answer: A

Explanation: The population and the capital stock are two separate variables; there is no explicit

connection between them.

Difficulty: 3 Hard

Topic: Measures of Output

Learning Objective: 05-04 The major submeasures of output and income.

Bloom’s: Apply

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

71) If for a given year gross investment is $300 billion and depreciation is $75 billion, then, for

that year, the capital stock ________ and net investment was ________.

A) Increased by $250 billion; $225 billion

B) Increased by $225 billion; $225 billion

C) Decreased by $225 billion; $300 billion

D) Decreased by $300 billion; $300 billion

Answer: B

Explanation: The capital stock will grow when gross investment is greater than depreciation; net

investment equals gross investment minus depreciation.

Difficulty: 3 Hard

Topic: Measures of Output

Learning Objective: 05-04 The major submeasures of output and income.

Bloom’s: Apply

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

No reproduction or distribution without the prior written consent of McGraw-Hill Education.72) Which of the following typically purchases the most goods and services in the U.S.

economy?

A) Foreigners.

B) Households.

C) Federal, state and local governments combined.

D) Businesses.

Answer: B

Explanation: Consumer spending in the United States is by far the largest share of total

spending.

Difficulty: 2 Medium

Topic: The Uses of Output

Learning Objective: 05-04 The major submeasures of output and income.

Bloom’s: Understand

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

73) When calculating GDP, consumption makes up approximately

A) One-fifth of total output.

B) One-half of total output.

C) Two-thirds of total output.

D) One-third of total output.

Answer: C

Explanation: Consumption is very important to the U.S. economy.

Difficulty: 2 Medium

Topic: The Uses of Output

Learning Objective: 05-04 The major submeasures of output and income.

Bloom’s: Understand

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

74) Which of the following expenditures are included in consumption?

A) Police services.

B) Personal medical services.

C) Public highways.

D) Public parks.

Answer: B

Explanation: Consumption is spending by households directly on goods and services.

Difficulty: 2 Medium

Topic: The Uses of Output

Learning Objective: 05-04 The major submeasures of output and income.

Bloom’s: Understand

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

No reproduction or distribution without the prior written consent of McGraw-Hill Education.75) The economic definition of investment includes all of the following except

A) Residential construction.

B) Net changes in business inventory.

C) Spending for plants and capital equipment.

D) A retirement portfolio of stocks and bonds.

Answer: D

Explanation: In economics, the term ‘investment’ does not describe how one chooses to allocate

one’s wealth among asset classes.

Difficulty: 1 Easy

Topic: The Uses of Output

Learning Objective: 05-04 The major submeasures of output and income.

Bloom’s: Remember

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

76) Which of the following is investment, according to an economist?

A) The purchase of U.S. savings bonds.

B) A collection of rare coins.

C) An increase in business inventories.

D) The purchase of a new family car.

Answer: C

Explanation: Purchases of consumer durables and the allocation of one’s personal wealth are not

considered investment, according to an economist.

Difficulty: 3 Hard

Topic: The Uses of Output

Learning Objective: 05-04 The major submeasures of output and income.

Bloom’s: Apply

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

No reproduction or distribution without the prior written consent of McGraw-Hill Education.77) An increase in business inventories during a time period, ceteris paribus, will

A) Decrease GDP during that period.

B) Increase GDP during that period.

C) Not affect GDP during that period but will increase GDP in later periods when the inventory

is sold.

D) Never affect GDP because changes in inventories are not included in the calculation of GDP.

Answer: B

Explanation: Business inventories represent production that remains unsold and are included in

investments.

Difficulty: 2 Medium

Topic: The Uses of Output

Learning Objective: 05-04 The major submeasures of output and income.

Bloom’s: Understand

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

78) Which of the following types of government spending is included in the calculation of GDP?

A) Federal spending only.

B) Federal, state, and local government spending for any purpose.

C) Federal, state, and local government spending on goods and services only.

D) Federal, state, and local spending on transfer payments only.

Answer: C

Explanation: Government spending at all levels represents an important contribution to GDP.

Only government spending on goods and services is included; transfer payments would not be

included.

Difficulty: 2 Medium

Topic: The Uses of Output

Learning Objective: 05-04 The major submeasures of output and income.

Bloom’s: Understand

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

No reproduction or distribution without the prior written consent of McGraw-Hill Education.79) When we calculate GDP, government spending on goods and services makes up

approximately

A) One-fifth of total output.

B) One-half of total output.

C) One-tenth of total output.

D) One-third of total output.

Answer: A

Explanation: Even in a market economy, the government can have a sizable influence on GDP.

Difficulty: 2 Medium

Topic: The Uses of Output

Learning Objective: 05-04 The major submeasures of output and income.

Bloom’s: Understand

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

80) Exports are

A) Goods and services sold to international buyers.

B) Not included in GDP.

C) Goods and services produced by the public sector.

D) Goods and services purchased from foreign sources.

Answer: A

Explanation: Exports count toward U.S. GDP because they are produced within the borders of

the United States.

Difficulty: 1 Easy

Topic: The Uses of Output

Learning Objective: 05-04 The major submeasures of output and income.

Bloom’s: Remember

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

81) Goods and services purchased from international sources are

A) Gross investment.

B) Imports.

C) Exports.

D) Net exports.

Answer: B

Explanation: Imports do not count toward U.S. GDP because they are produced outside the

borders of the United States.

Difficulty: 1 Easy

Topic: The Uses of Output

Learning Objective: 05-04 The major submeasures of output and income.

Bloom’s: Remember

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

No reproduction or distribution without the prior written consent of McGraw-Hill Education.82) Ceteris paribus, if imports increase in any given year,

A) Exports will increase.

B) GDP will increase.

C) GDP will decrease.

D) NDP will increase.

Answer: C

Explanation: If imports rise, the GDP falls because more spending on consumption is geared

toward nondomestic goods. GDP=C+I+G+(X-M), where M=imports

Difficulty: 1 Easy

Topic: The Uses of Output

Learning Objective: 05-04 The major submeasures of output and income.

Bloom’s: Remember

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

83) In the U.S. GDP, imports

A) Include smuggled goods.

B) Include black-market goods.

C) Are the total of U.S. goods sent abroad.

D) Are goods purchased from foreign sources.

Answer: D

Explanation: Imports do not count toward U.S. GDP because they are produced abroad.

Difficulty: 1 Easy

Topic: The Uses of Output

Learning Objective: 05-04 The major submeasures of output and income.

Bloom’s: Remember

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

84) Net exports are

A) Goods sold to foreigners.

B) Not included in GDP.

C) The value of exports minus the value of imports.

D) Exports that ultimately are imported back into the United States.

Answer: C

Explanation: Net exports, when positive, increase GDP, but decrease GDP when negative.

Difficulty: 1 Easy

Topic: The Uses of Output

Learning Objective: 05-04 The major submeasures of output and income.

Bloom’s: Remember

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

No reproduction or distribution without the prior written consent of McGraw-Hill Education.85) When we calculate GDP, imports are

A) Subtracted from total spending because they are part of another country’s GDP.

B) Added to exports because both represent purchases of final goods.

C) Subtracted from exports to obtain gross exports.

D) Subtracted from exports and included in gross investment.

Answer: A

Explanation: Imports cannot count toward domestic GDP because they are by definition

produced abroad.

Difficulty: 2 Medium

Topic: The Uses of Output

Learning Objective: 05-04 The major submeasures of output and income.

Bloom’s: Understand

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

No reproduction or distribution without the prior written consent of McGraw-Hill Education.86)

According to the economy in Figure 5.3, net exports

A) Made a positive contribution to GDP from 1990 to 2000.

B) Were a positive number from 1970 to 1990.

C) Increased the size of GDP from 1970 to 1990.

D) Remained constant from 1990 to 2000.

Answer: A

Explanation: Net exports increase our GDP when they are positive because it means that we’re

producing (and selling) more goods to the rest of the world than they’re buying from us. (net

exports = exports – imports)

Difficulty: 3 Hard

Topic: The Uses of Output

Learning Objective: 05-04 The major submeasures of output and income.

Bloom’s: Apply

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

No reproduction or distribution without the prior written consent of McGraw-Hill Education.87)

According to the economy in Figure 5.3, net exports

A) Were a negative number from 1990 to 2000.

B) Were a negative number from 1970 to 1985.

C) Made a positive contribution to GDP from 1970 to 1985.

D) Did not impact GDP from 1990 to 2000 because exports were greater than imports.

Answer: B

Explanation: When imports exceed exports, net exports will be negative.

Difficulty: 3 Hard

Topic: The Uses of Output

Learning Objective: 05-04 The major submeasures of output and income.

Bloom’s: Apply

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

No reproduction or distribution without the prior written consent of McGraw-Hill Education.88) The components of GDP are

A) C + I + X – (G + M).

B) C + I + G + (X – M).

C) C + I – G + (X – M).

D) C + I + G – (X + M).

Answer: B

Explanation: Total spending of market participants, including consumption expenditures,

investment expenditures, government expenditures, and net exports will equal GDP.

Difficulty: 1 Easy

Topic: The Uses of Output

Learning Objective: 05-04 The major submeasures of output and income.

Bloom’s: Remember

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

89) Which of the following statements is true?

A) The production possibilities of the economy define the limits to real income.

B) Consumption equals investment.

C) Market incomes equal business expenditures.

D) Every dollar spent on goods and services becomes income for the government.

Answer: A

Explanation: Total income must equal total production. So income is limited by what we are

capable of producing.

Difficulty: 2 Medium

Topic: Measures of Income

Learning Objective: 05-03 Why aggregate income equals aggregate output.

Bloom’s: Understand

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

No reproduction or distribution without the prior written consent of McGraw-Hill Education.90) Which of the following is a component included in the measure of GDP, according to the

income approach?

A) Interest.

B) Investment.

C) Personal savings.

D) Consumption expenditures.

Answer: A

Explanation: All income paid to the four factors of production is used to calculate GDP by using

the income approach. This includes wages, rent, interest, and profit.

Difficulty: 1 Easy

Topic: Measures of Income

Learning Objective: 05-04 The major submeasures of output and income.

Bloom’s: Remember

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

91) National income is a measure of

A) How well the economy is doing on a gross basis.

B) The income earned by the factors of production in producing GDP.

C) The income received by the factors of production plus depreciation.

D) The country’s future productive capacity.

Answer: B

Explanation: National income is the flip side of national production and is calculated by: GDP

less depreciation plus net foreign factor income.

Difficulty: 1 Easy

Topic: Measures of Income

Learning Objective: 05-04 The major submeasures of output and income.

Bloom’s: Remember

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

No reproduction or distribution without the prior written consent of McGraw-Hill Education.92) “Income received by households before payment of personal taxes” is known as

A) Disposable income.

B) Net domestic product.

C) Saving.

D) Personal income.

Answer: D

Explanation: All income is earned by the households because they own all the factors of

production.

Difficulty: 1 Easy

Topic: Measures of Income

Learning Objective: 05-04 The major submeasures of output and income.

Bloom’s: Remember

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

93) Transfer payments are part of personal income but not national income because

A) They are a payment for which no goods or services are exchanged.

B) Personal income is an earnings concept.

C) National income is a receipts concept.

D) They represent a payment to factors of production.

Answer: A

Explanation: National income is an efficiency concept with market exchange and thereby does

not include transfer payments. Transfer payments are government actions to influence inequity.

Transfer payments are added to national income to get personal income.

Difficulty: 1 Easy

Topic: Measures of Income

Learning Objective: 05-04 The major submeasures of output and income.

Bloom’s: Remember

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

No reproduction or distribution without the prior written consent of McGraw-Hill Education.94) Social Security payments to retired persons are included in

A) Both GDP and personal income.

B) Personal income and disposable income.

C) National income but not personal income.

D) National income and subtracted to get personal income.

Answer: B

Explanation: Transfer payments count toward personal income but do not represent income

from productive activities.

Difficulty: 2 Medium

Topic: Measures of Income

Learning Objective: 05-04 The major submeasures of output and income.

Bloom’s: Understand

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

95) Which of the following best measures the household sector’s contribution to the support of

the public sector?

A) GDP minus depreciation.

B) The difference between personal income and disposable income.

C) Government transfer payments.

D) Corporate profits taxes plus undistributed corporate profits.

Answer: B

Explanation: Taxes are the contribution to the government by households, as represented by

personal income minus disposable income.

Difficulty: 3 Hard

Topic: Measures of Income

Learning Objective: 05-04 The major submeasures of output and income.

Bloom’s: Apply

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

No reproduction or distribution without the prior written consent of McGraw-Hill Education.96) Disposable income is

A) After-tax income of households; personal income less personal taxes.

B) The amount the household sector earns in producing the GDP.

C) The amount households have left to spend after savings are subtracted.

D) Personal income plus income taxes.

Answer: A

Explanation: Disposable income is after-tax income of households. Personal income is not fully

available to households because taxes must be subtracted before the household can spend or

save.

Difficulty: 1 Easy

Topic: Measures of Income

Learning Objective: 05-04 The major submeasures of output and income.

Bloom’s: Remember

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

97) The measure of what households receive after personal income tax is deducted is

A) Gross domestic product.

B) Personal income.

C) National income.

D) Disposable income.

Answer: D

Explanation: Disposable income is equal to personal income less taxes paid.

Difficulty: 1 Easy

Topic: Measures of Income

Learning Objective: 05-04 The major submeasures of output and income.

Bloom’s: Remember

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

98) Disposable income is equal to

A) Personal taxes + personal income.

B) Personal taxes – personal income.

C) Consumption – saving.

D) Consumption + saving.

Answer: D

Explanation: The only two general uses of disposable income are saving and consumption.

Difficulty: 1 Easy

Topic: Measures of Income

Learning Objective: 05-04 The major submeasures of output and income.

Bloom’s: Remember

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

No reproduction or distribution without the prior written consent of McGraw-Hill Education.99) In national income accounting, the two uses of disposable income are

A) Saving and consumption.

B) Saving and investment.

C) Consumption and investment.

D) Personal income and personal taxes.

Answer: A

Explanation: Consumption and saving are the two choices of how to use disposable income.

Difficulty: 2 Medium

Topic: Measures of Income

Learning Objective: 05-04 The major submeasures of output and income.

Bloom’s: Understand

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

100) The part of disposable income not spent on current consumption is

A) Saving.

B) Dissaving.

C) Investment.

D) Social Security taxes.

Answer: A

Explanation: Saving is equal to disposable income less consumption.

Difficulty: 1 Easy

Topic: Measures of Income

Learning Objective: 05-04 The major submeasures of output and income.

Bloom’s: Remember

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

101) The measure of the part of disposable income that is not consumed is

A) GDP.

B) Net investment.

C) Savings.

D) Depreciation.

Answer: C

Explanation: Disposable income less consumption is equal to saving.

Difficulty: 1 Easy

Topic: Measures of Income

Learning Objective: 05-04 The major submeasures of output and income.

Bloom’s: Remember

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

No reproduction or distribution without the prior written consent of McGraw-Hill Education.102) Table 5.1

National Income Accounts (dollar figures are in billions)

Expenditures for consumer goods and services $4,565

Exports $740

Government purchases of goods and services $1,465

Social Security taxes $510

Net investment $225

Indirect business taxes $520

Imports $825

Gross investment $865

Corporate income taxes $185

Personal income taxes $750

Corporate retained earnings $45

Net foreign factor income $20

Government transfer payments to households $690

Net interest payments to households $0

On the basis of Table 5.1, gross domestic product is

A) $6,980 billion.

B) $7,635 billion.

C) $6,810 billion.

D) $7,720 billion.

Answer: C

Explanation: GDP can be obtained by adding C + I + G + (X – M). $4,565 + $865 + $1,465 +

($740 – $825).

Difficulty: 3 Hard

Topic: Measures of Income

Learning Objective: 05-04 The major submeasures of output and income.

Bloom’s: Analyze

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

No reproduction or distribution without the prior written consent of McGraw-Hill Education.103) Table 5.1

National Income Accounts (dollar figures are in billions)

Expenditures for consumer goods and services $4,565

Exports $740

Government purchases of goods and services $1,465

Social Security taxes $510

Net investment $225

Indirect business taxes $520

Imports $825

Gross investment $865

Corporate income taxes $185

Personal income taxes $750

Corporate retained earnings $45

Net foreign factor income $20

Government transfer payments to households $690

Net interest payments to households $0

On the basis of Table 5.1, gross domestic product is

A) $6,340 billion.

B) $6,170 billion.

C) $6,995 billion.

D) $7,080 billion.

Answer: B

Explanation: NDP is equal to GDP less depreciation. $4,565 + $225 + $1,465 + ($740 – $825).

Difficulty: 3 Hard

Topic: Measures of Income

Learning Objective: 05-04 The major submeasures of output and income.

Bloom’s: Analyze

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

No reproduction or distribution without the prior written consent of McGraw-Hill Education.104) Table 5.1

National Income Accounts (dollar figures are in billions)

Expenditures for consumer goods and services $4,565

Exports $740

Government purchases of goods and services $1,465

Social Security taxes $510

Net investment $225

Indirect business taxes $520

Imports $825

Gross investment $865

Corporate income taxes $185

Personal income taxes $750

Corporate retained earnings $45

Net foreign factor income $20

Government transfer payments to households $690

Net interest payments to households $0

On the basis of Table 5.1, personal saving is

A) $5,620 billion.

B) $5,790 billion.

C) $6,530 billion.

D) $6,445 billion.

Answer: A

Explanation: Personal income equates to the GDP ($4,565 + $865 + $1,465 + ($740 – $825))

minus depreciation ($640) plus transfer payments and net foreign factor income and net interest

payments to households ($690 + $20 + $0). This result is subtracted by indirect business taxes

and Social Security taxes, corporate income taxes, and corporate retained earnings ($520 + $510

+ $185 + $45).

Difficulty: 3 Hard

Topic: Measures of Income

Learning Objective: 05-04 The major submeasures of output and income.

Bloom’s: Analyze

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

No reproduction or distribution without the prior written consent of McGraw-Hill Education.105) Table 5.1

National Income Accounts (dollar figures are in billions)

Expenditures for consumer goods and services $4,565

Exports $740

Government purchases of goods and services $1,465

Social Security taxes $510

Net investment $225

Indirect business taxes $520

Imports $825

Gross investment $865

Corporate income taxes $185

Personal income taxes $750

Corporate retained earnings $45

Net foreign factor income $20

Government transfer payments to households $690

Net interest payments to households $0

On the basis of Table 5.1, personal saving is

A) $1,215 billion.

B) $305 billion.

C) $205 billion.

D) $1,130 billion.

Answer: B

Explanation: Personal saving is equal to disposable income less consumption. Personal income

equates to the GDP ($4,565 + $865 + $1,465 + ($740 – $825)) minus depreciation ($640) plus

transfer payments and net foreign factor income and net interest payments to households ($690 +

$20 + $0). This result is subtracted by indirect business taxes and Social Security taxes,

corporate income taxes, and corporate retained earnings ($520 + $510 + $185 + $45). Having

arrived at Personal Income ($5,620), reduce by Personal Income Tax ($750) to get Disposable

Income ($4,870). From Disposable Income deduct Consumption ($4,565) to get Savings ($305).

Difficulty: 3 Hard

Topic: Measures of Income

Learning Objective: 05-04 The major submeasures of output and income.

Bloom’s: Analyze

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

No reproduction or distribution without the prior written consent of McGraw-Hill Education.106) Table 5.1

National Income Accounts (dollar figures are in billions)

Expenditures for consumer goods and services $4,565

Exports $740

Government purchases of goods and services $1,465

Social Security taxes $510

Net investment $225

Indirect business taxes $520

Imports $825

Gross investment $865

Corporate income taxes $185

Personal income taxes $750

Corporate retained earnings $45

Net foreign factor income $20

Government transfer payments to households $690

Net interest payments to households $0

On the basis of Table 5.1, depreciation is

A) $640 billion.

B) $50 billion.

C) $85 billion.

D) $690 billion.

Answer: A

Explanation: Depreciation is equal to gross investment minus net investment ($865 – $225).

Difficulty: 3 Hard

Topic: Measures of Income

Learning Objective: 05-04 The major submeasures of output and income.

Bloom’s: Analyze

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

No reproduction or distribution without the prior written consent of McGraw-Hill Education.107) Table 5.1

National Income Accounts (dollar figures are in billions)

Expenditures for consumer goods and services $4,565

Exports $740

Government purchases of goods and services $1,465

Social Security taxes $510

Net investment $225

Indirect business taxes $520

Imports $825

Gross investment $865

Corporate income taxes $185

Personal income taxes $750

Corporate retained earnings $45

Net foreign factor income $20

Government transfer payments to households $690

Net interest payments to households $0

On the basis of Table 5.1, net exports are

A) $740 billion.

B) $825 billion.

C) -$85 billion.

D) $85 billion.

Answer: C

Explanation: Net exports are equal to exports minus imports ($740 – $825).

Difficulty: 3 Hard

Topic: Measures of Income

Learning Objective: 05-04 The major submeasures of output and income.

Bloom’s: Analyze

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

No reproduction or distribution without the prior written consent of McGraw-Hill Education.108) Table 5.2

National Income Accounts (dollar figures are in billions)

Expenditures for consumer goods and services $2,850

Exports $300

Government purchases of goods and services $810

Social Security taxes $295

Net investment $510

Indirect business taxes $445

Imports $450

Gross investment $700

Corporate income taxes $190

Personal income taxes $875

Corporate retained earnings $210

Net foreign factor income $0

Government transfer payments to households $780

Net interest payments to households $20

On the basis of Table 5.2, GDP is

A) $2,090 billion.

B) $4,210 billion.

C) $4,400 billion.

D) $4,020 billion.

Answer: B

Explanation: GDP is the sum of consumption, investment, government expenditures, and net

exports, which is $2,850 + $700 + $810 + ($300 – $450) = $4,210.

Difficulty: 3 Hard

Topic: Measures of Income

Learning Objective: 05-04 The major submeasures of output and income.

Bloom’s: Analyze

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

No reproduction or distribution without the prior written consent of McGraw-Hill Education.109) Table 5.2

National Income Accounts (dollar figures are in billions)

Expenditures for consumer goods and services $2,850

Exports $300

Government purchases of goods and services $810

Social Security taxes $295

Net investment $510

Indirect business taxes $445

Imports $450

Gross investment $700

Corporate income taxes $190

Personal income taxes $875

Corporate retained earnings $210

Net foreign factor income $0

Government transfer payments to households $780

Net interest payments to households $20

On the basis of Table 5.2, national income is

A) $4,020 billion.

B) $3,785 billion.

C) $2,475 billion.

D) $3,595 billion.

Answer: A

Explanation: National income is GDP less depreciation plus net foreign income, which is $4,210

– $190 + $0 = $4,020.

Difficulty: 3 Hard

Topic: Measures of Income

Learning Objective: 05-04 The major submeasures of output and income.

Bloom’s: Analyze

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

No reproduction or distribution without the prior written consent of McGraw-Hill Education.110) Table 5.2

National Income Accounts (dollar figures are in billions)

Expenditures for consumer goods and services $2,850

Exports $300

Government purchases of goods and services $810

Social Security taxes $295

Net investment $510

Indirect business taxes $445

Imports $450

Gross investment $700

Corporate income taxes $190

Personal income taxes $875

Corporate retained earnings $210

Net foreign factor income $0

Government transfer payments to households $780

Net interest payments to households $20

On the basis of Table 5.2, disposable income is

A) $3,490 billion.

B) $2,805 billion.

C) $4,480 billion.

D) $3,680 billion.

Answer: B

Explanation: Disposable income is personal income less personal taxes, which is $3,680 – $875

= $2,805.

Difficulty: 3 Hard

Topic: Measures of Income

Learning Objective: 05-04 The major submeasures of output and income.

Bloom’s: Analyze

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

No reproduction or distribution without the prior written consent of McGraw-Hill Education.111) Table 5.2

National Income Accounts (dollar figures are in billions)

Expenditures for consumer goods and services $2,850

Exports $300

Government purchases of goods and services $810

Social Security taxes $295

Net investment $510

Indirect business taxes $445

Imports $450

Gross investment $700

Corporate income taxes $190

Personal income taxes $875

Corporate retained earnings $210

Net foreign factor income $0

Government transfer payments to households $780

Net interest payments to households $20

On the basis of Table 5.2, depreciation is

A) $425 billion.

B) $125 billion.

C) -$125 billion.

D) $190 billion.

Answer: D

Explanation: Gross investment minus net investment equals depreciation ($700 – $510 = $190).

Difficulty: 3 Hard

Topic: Measures of Income

Learning Objective: 05-04 The major submeasures of output and income.

Bloom’s: Analyze

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

No reproduction or distribution without the prior written consent of McGraw-Hill Education.112) Table 5.3

National Income Accounts (dollar figures are in billions)

Expenditures for consumer goods and services $8,200

Exports $1,700

Government purchases of goods and services $2,500

Social Security taxes $1,900

Net investment $1,400

Indirect business taxes $1,400

Imports $1,900

Gross investment $1,800

Corporate income taxes $600

Personal income taxes $1,500

Corporate retained earnings $130

Net foreign factor income $100

Government transfer payments to households $1600

Net interest payments to households $500

On the basis of Table 5.3, the value of the income aggregate that is defined as “the total market

value of all final goods and services produced in a given time period” (also known as the GDP)

A) $10,700 billion.

B) $12,400 billion.

C) $11,900 billion.

D) $12,300 billion.

Answer: D

Explanation: A dollar of spending represents a dollar of income, so total income is equal to total

spending.

Difficulty: 1 Easy

Topic: Measures of Income

Learning Objective: 05-04 The major submeasures of output and income.

Bloom’s: Remember

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

No reproduction or distribution without the prior written consent of McGraw-Hill Education.113) Table 5.3

National Income Accounts (dollar figures are in billions)

Expenditures for consumer goods and services $8,200

Exports $1,700

Government purchases of goods and services $2,500

Social Security taxes $1,900

Net investment $1,400

Indirect business taxes $1,400

Imports $1,900

Gross investment $1,800

Corporate income taxes $600

Personal income taxes $1,500

Corporate retained earnings $130

Net foreign factor income $100

Government transfer payments to households $1600

Net interest payments to households $500

On the basis of Table 5.3, the value of the income aggregate that is defined as “the amount of

output we could consume without reducing our stock of capital” (also known as the net domestic

product) is

A) $10,700 billion.

B) $12,400 billion.

C) $12,300 billion.

D) $11,900 billion.

Answer: D

Explanation: The capital stock is reduced by $400 each year due to depreciation. This represents

the difference between gross investment and net investment.

Difficulty: 1 Easy

Topic: Measures of Income

Learning Objective: 05-04 The major submeasures of output and income.

Bloom’s: Remember

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

No reproduction or distribution without the prior written consent of McGraw-Hill Education.114) Table 5.3

National Income Accounts (dollar figures are in billions)

Expenditures for consumer goods and services $8,200

Exports $1,700

Government purchases of goods and services $2,500

Social Security taxes $1,900

Net investment $1,400

Indirect business taxes $1,400

Imports $1,900

Gross investment $1,800

Corporate income taxes $600

Personal income taxes $1,500

Corporate retained earnings $130

Net foreign factor income $100

Government transfer payments to households $1600

Net interest payments to households $500

On the basis of Table 5.3, the value of the income aggregate that is defined as “total income

earned by current factors of production” (also known as national income) is

A) $10,700 billion.

B) $12,300 billion.

C) $11,900 billion.

D) $12,000 billion.

Answer: D

Explanation: National income equals NDP plus net foreign income.

Difficulty: 1 Easy

Topic: Measures of Income

Learning Objective: 05-04 The major submeasures of output and income.

Bloom’s: Remember

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

No reproduction or distribution without the prior written consent of McGraw-Hill Education.115) Table 5.3

National Income Accounts (dollar figures are in billions)

Expenditures for consumer goods and services $8,200

Exports $1,700

Government purchases of goods and services $2,500

Social Security taxes $1,900

Net investment $1,400

Indirect business taxes $1,400

Imports $1,900

Gross investment $1,800

Corporate income taxes $600

Personal income taxes $1,500

Corporate retained earnings $130

Net foreign factor income $100

Government transfer payments to households $1600

Net interest payments to households $500

On the basis of Table 5.3, the value of the income aggregate that is defined as “income received

by households before payment of personal taxes” (also known as personal income) is

A) $5,870 billion.

B) $10,070 billion.

C) $9,570 billion.

D) $10,600 billion.

Answer: B

Explanation: Personal income is equal to net income less indirect business taxes, corporate

taxes, retained earnings, and Social Security taxes, plus transfer payments and net interest.

Difficulty: 1 Easy

Topic: Measures of Income

Learning Objective: 05-04 The major submeasures of output and income.

Bloom’s: Remember

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

No reproduction or distribution without the prior written consent of McGraw-Hill Education.116) Table 5.3

National Income Accounts (dollar figures are in billions)

Expenditures for consumer goods and services $8,200

Exports $1,700

Government purchases of goods and services $2,500

Social Security taxes $1,900

Net investment $1,400

Indirect business taxes $1,400

Imports $1,900

Gross investment $1,800

Corporate income taxes $600

Personal income taxes $1,500

Corporate retained earnings $130

Net foreign factor income $100

Government transfer payments to households $1600

Net interest payments to households $500

On the basis of Table 5.3, the value of the income aggregate that is defined as “after-tax income

of consumers” (also known as disposable income) is

A) $8,570 billion.

B) $10,070 billion.

C) $11,570 billion.

D) $10,600 billion.

Answer: A

Explanation: Personal income less taxes is disposable income.

Difficulty: 1 Easy

Topic: Measures of Income

Learning Objective: 05-04 The major submeasures of output and income.

Bloom’s: Remember

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

No reproduction or distribution without the prior written consent of McGraw-Hill Education.117) Table 5.3

National Income Accounts (dollar figures are in billions)

Expenditures for consumer goods and services $8,200

Exports $1,700

Government purchases of goods and services $2,500

Social Security taxes $1,900

Net investment $1,400

Indirect business taxes $1,400

Imports $1,900

Gross investment $1,800

Corporate income taxes $600

Personal income taxes $1,500

Corporate retained earnings $130

Net foreign factor income $100

Government transfer payments to households $1600

Net interest payments to households $500

On the basis of Table 5.3, the value of the income aggregate that is defined as “the part of

disposable income not spent on current consumption” (also known as savings) is

A) -$500 billion.

B) $500 billion.

C) $370 billion.

D) $8,570 billion.

Answer: C

Explanation: The part of disposable income received but not spent by households is savings.

Difficulty: 1 Easy

Topic: Measures of Income

Learning Objective: 05-04 The major submeasures of output and income.

Bloom’s: Remember

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

No reproduction or distribution without the prior written consent of McGraw-Hill Education.118) Table 5.3

National Income Accounts (dollar figures are in billions)

Expenditures for consumer goods and services $8,200

Exports $1,700

Government purchases of goods and services $2,500

Social Security taxes $1,900

Net investment $1,400

Indirect business taxes $1,400

Imports $1,900

Gross investment $1,800

Corporate income taxes $600

Personal income taxes $1,500

Corporate retained earnings $130

Net foreign factor income $100

Government transfer payments to households $1600

Net interest payments to households $500

On the basis of Table 5.3, the net addition to the capital stock is

A) $1,000 billion.

B) $400 billion.

C) $1,400 billion.

D) $370 billion.

Answer: C

Explanation: Net investment represents the addition to capital after depreciation has been

accounted for.

Difficulty: 1 Easy

Topic: Measures of Income

Learning Objective: 05-04 The major submeasures of output and income.

Bloom’s: Remember

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

No reproduction or distribution without the prior written consent of McGraw-Hill Education.119) The value of total output must equal the value of total income in an economy for all of the

following reasons except

A) One person’s expenditures on goods and services is another person’s income.

B) Income earned is spent on goods and services, which creates additional production.

C) For the circular nature of spending and income in the economy.

D) Government expenditures must equal government revenues.

Answer: D

Explanation: The government does not necessarily have to run a balanced budget for income to

equal expenditures.

Difficulty: 2 Medium

Topic: The Flow of Income

Learning Objective: 05-03 Why aggregate income equals aggregate output.

Bloom’s: Understand

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

120) Businesses return purchasing power to the circular flow in the form of

A) Retained earnings.

B) Depreciation.

C) Business investment.

D) Profit.

Answer: C

Explanation: Business investment increases the productive capacity of the economy by

purchasing the factors of production in the factor market.

Difficulty: 2 Medium

Topic: The Flow of Income

Learning Objective: 05-03 Why aggregate income equals aggregate output.

Bloom’s: Understand

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

No reproduction or distribution without the prior written consent of McGraw-Hill Education.121) The social well-being of a country

A) Is best measured by per capita GDP.

B) Always increases when real GDP increases.

C) Decreases when real GDP decreases.

D) Is measured by more than changes in real GDP.

Answer: D

Explanation: Real GDP is only about numbers; society is also concerned with many other issues

such as education levels and access to health care.

Difficulty: 2 Medium

Topic: The Flow of Income

Learning Objective: 05-01 What GDP measures—and what it doesn’t.

Bloom’s: Understand

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

122) One In the News article titled “$2 Trillion in “Underground” Economy” reports that the

underground economy is roughly 12 percent of total output. This is an example of

A) An intermediate good.

B) Unreported Income.

C) Market activity.

D) Value added.

Answer: B

Explanation: Anything not officially reported as income will not be counted in GDP.

Difficulty: 3 Hard

Topic: Measures of Output

Learning Objective: 05-01 What GDP measures—and what it doesn’t.

Bloom’s: Apply

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

123) One In the News article states that the underground economy includes transactions that are

untaxed or unaccounted for in GDP. According to this article, the underground economy

A) Involves a small percentage of households.

B) Includes only illegal transactions.

C) Is captured in GDP.

D) Impacts the amount of tax dollars collected by the IRS.

Answer: D

Explanation: Failing to report income from legal sources occurs due to tax avoidance.

Difficulty: 3 Hard

Topic: Measures of Output

Learning Objective: 05-01 What GDP measures—and what it doesn’t.

Bloom’s: Apply

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

No reproduction or distribution without the prior written consent of McGraw-Hill Education.124) If a nation has a population of 100 million, a labor force of 60 million, and GDP of $200

billion, then GDP per capita must be

A) $2,000.00.

B) $3,333.33.

C) $200.00.

D) $333.33.

Answer: A

Explanation: The GDP divided by the population equals the GDP per capita.

Difficulty: 3 Hard

Topic: Measures of Output

Learning Objective: 05-01 What GDP measures—and what it doesn’t.

Bloom’s: Apply

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

125) The increase in the market value of a good at a particular stage of production is known as

A) Profit.

B) Value added.

C) Cost based accounting.

D) The input price.

Answer: B

Explanation: The value added is equal to the sales price minus the cost of intermediate goods.

Difficulty: 2 Medium

Topic: Measures of Output

Learning Objective: 05-01 What GDP measures—and what it doesn’t.

Bloom’s: Understand

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

126) To measure an economy’s output adjusted for changes in the price level, one would use

A) GDP per capita.

B) Value added.

C) Real GDP.

D) Nominal GDP.

Answer: C

Explanation: Real GDP takes into account changes in the price level.

Difficulty: 2 Medium

Topic: Measures of Output

Learning Objective: 05-02 The difference between real and nominal GDP.

Bloom’s: Understand

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

No reproduction or distribution without the prior written consent of McGraw-Hill Education.127) Goods produced for the purpose of producing other goods are known as

A) Services.

B) Exports.

C) Consumption goods.

D) Investment goods.

Answer: D

Explanation: Investment goods build up a nation’s ability to produce goods through an increase

in the capital stock.

Difficulty: 2 Medium

Topic: Measures of Output

Learning Objective: 05-01 What GDP measures—and what it doesn’t.

Bloom’s: Understand

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

128) A major diversion that is not of the income flow to the private sector is

A) Indirect business taxes.

B) Investment.

C) Wages.

D) None of the choices are correct.

Answer: A

Explanation: Indirect business taxes do not represent a payment to any of the factors of

production.

Difficulty: 2 Medium

Topic: The Flow of Income

Learning Objective: 05-03 Why aggregate income equals aggregate output.

Bloom’s: Understand

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

129) If the price level is increasing at 4% and output is increasing at 5%, then

A) Real GDP is increasing faster than nominal GDP.

B) Nominal GDP is increasing faster than real GDP.

C) Nominal GDP is increasing at 20%.

D) None of the choices are correct.

Answer: B

Explanation: Since both price and output are increasing, both will increase nominal GDP. Since

prices are fixed when we measure real GDP, only increases in output affect real GDP.

Difficulty: 3 Hard

Topic: Measures of Output

Learning Objective: 05-02 The difference between real and nominal GDP.

Bloom’s: Apply

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

No reproduction or distribution without the prior written consent of McGraw-Hill Education.130) The measure of GDP is

A) Geographically focused.

B) Globally focused.

C) Vertically focused.

D) Horizontally focused.

Answer: A

Explanation: The GDP includes all final output within a nation’s borders regardless of whose

factors of production are used to produce it.

Difficulty: 2 Medium

Topic: Measures of Output

Learning Objective: 05-01 What GDP measures—and what it doesn’t.

Bloom’s: Understand

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

131) To calculate real GDP, we

A) Measure in the prices of goods and services of that period.

B) Estimate future prices of goods and services.

C) Adjust the market value of goods and services for changing prices.

D) None of the choices are correct.

Answer: C

Explanation: Real GDP is the value of output measured in constant prices.

Difficulty: 2 Medium

Topic: Measures of Output

Learning Objective: 05-02 The difference between real and nominal GDP.

Bloom’s: Understand

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

132) GDP is the total market value of all final goods and services produced in a given time

period within a nation’s borders.

Answer: TRUE

Explanation: GDP tracks production and is an important barometer of the economy’s strength.

Difficulty: 1 Easy

Topic: Measures of Output

Learning Objective: 05-01 What GDP measures—and what it doesn’t.

Bloom’s: Remember

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

No reproduction or distribution without the prior written consent of McGraw-Hill Education.133) Comparisons of per capita GDP across international boundaries provide information on the

distribution of GDP within each country.

Answer: FALSE

Explanation: Per capita GDP is simply the average; it does not take into account the actual

distribution of income.

Difficulty: 2 Medium

Topic: Measures of Output

Learning Objective: 05-01 What GDP measures—and what it doesn’t.

Bloom’s: Understand

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

134) GDP is geographically focused, including all output produced within a nation’s borders.

Answer: TRUE

Explanation: GDP measures how well the economy is doing and so looks only at production

within the nation’s borders.

Difficulty: 1 Easy

Topic: Measures of Output

Learning Objective: 05-01 What GDP measures—and what it doesn’t.

Bloom’s: Remember

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

135) If a friend helps you with your homework, it will not be calculated in the GDP accounts.

But if you hire a tutor who reports the income, the services will be counted in GDP.

Answer: TRUE

Explanation: Nonmarket production does not get counted in official GDP figures.

Difficulty: 2 Medium

Topic: Measures of Output

Learning Objective: 05-01 What GDP measures—and what it doesn’t.

Bloom’s: Understand

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

No reproduction or distribution without the prior written consent of McGraw-Hill Education.136) GDP can be calculated by summing up the “value added” at every stage of production.

Answer: TRUE

Explanation: The value added is the amount by which the price goes up from the sale of an

intermediate or final good.

Difficulty: 1 Easy

Topic: Measures of Output

Learning Objective: 05-01 What GDP measures—and what it doesn’t.

Bloom’s: Remember

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

137) In the calculation of real GDP, the value of goods and services is measured in the current

prices for each year.

Answer: FALSE

Explanation: Nominal GDP measures production using current prices, whereas real GDP using

constant prices.

Difficulty: 1 Easy

Topic: Measures of Output

Learning Objective: 05-02 The difference between real and nominal GDP.

Bloom’s: Remember

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

138) Nominal GDP is not used to determine recessions because inflation can disguise the

occurrence of recessions.

Answer: TRUE

Explanation: Inflation can make it seem like production is rising when it is not.

Difficulty: 2 Medium

Topic: Measures of Output

Learning Objective: 05-02 The difference between real and nominal GDP.

Bloom’s: Understand

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

No reproduction or distribution without the prior written consent of McGraw-Hill Education.139) The base period is the time period used for comparative analysis for the calculation of real

GDP.

Answer: TRUE

Explanation: We can use the base period to express GDP in constant dollars.

Difficulty: 1 Easy

Topic: Measures of Output

Learning Objective: 05-02 The difference between real and nominal GDP.

Bloom’s: Remember

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

140) For the nation’s capital stock to grow, net investment must be positive.

Answer: TRUE

Explanation: Because some capital wears out each year due to depreciation, the capital stock

will grow only if the worn-out part is replaced and even more capital is added.

Difficulty: 2 Medium

Topic: Measures of Output

Learning Objective: 05-04 The major submeasures of output and income.

Bloom’s: Understand

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

141) Government spending in the national income accounts refers only to expenditures at the

federal level.

Answer: FALSE

Explanation: Government expenditures included in GDP involves local, state, and federal

spending as well.

Difficulty: 1 Easy

Topic: The Uses of Output

Learning Objective: 05-04 The major submeasures of output and income.

Bloom’s: Remember

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

No reproduction or distribution without the prior written consent of McGraw-Hill Education.142) When U.S. net exports are negative, the United States consumes more output than it

produces.

Answer: TRUE

Explanation: Negative net exports indicate we are importing more than we are exporting.

Difficulty: 2 Medium

Topic: The Uses of Output

Learning Objective: 05-04 The major submeasures of output and income.

Bloom’s: Understand

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

143) Disposable income is what households have to spend or to save.

Answer: TRUE

Explanation: Consumption plus saving is equal to disposable income-what is left after all taxes

have been paid.

Difficulty: 1 Easy

Topic: Measures of Income

Learning Objective: 05-04 The major submeasures of output and income.

Bloom’s: Remember

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

144) Savings equal the difference between personal income and consumption.

Answer: FALSE

Explanation: Savings equal the difference between disposable income and consumption.

Difficulty: 1 Easy

Topic: Measures of Income

Learning Objective: 05-04 The major submeasures of output and income.

Bloom’s: Remember

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

145) The dollar value of output for an economy must always equal the dollar value of income.

Answer: TRUE

Explanation: This must be true because each dollar of spending is ultimately assigned to one of

the four factors of production.

Difficulty: 2 Medium

Topic: The Flow of Income

Learning Objective: 05-03 Why aggregate income equals aggregate output.

Bloom’s: Understand

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

No reproduction or distribution without the prior written consent of McGraw-Hill Education.146) Without foreign trade, the dollars used to buy goods and services are included in the

circular flow as consumption, investment, and government spending.

Answer: TRUE

Explanation: As income is used to buy goods and services, the money spent is counted as

consumption, investment, and government spending in the circular flow.

Difficulty: 2 Medium

Topic: The Flow of Income

Learning Objective: 05-03 Why aggregate income equals aggregate output.

Bloom’s: Understand

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

147) What is the difference between GDP and GNP?

Answer: GDP is the market value of all final goods and services produced within a nation’s

borders even if foreign-owned factors of production are used in the process. GNP is the market

value of all final goods and services produced using domestic-owned factors of production,

regardless of where these factors are located. Some of the output from a General Motors plant

located in Mexico would be included in the U.S. GNP, but it would also be included in the

Mexican GDP.

Difficulty: 2 Medium

Topic: Measures of Output

Learning Objective: 05-01 What GDP measures—and what it doesn’t.

Bloom’s: Understand

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

148) Explain the difference between intermediate goods and final goods and give an example of

each.

Answer: Final goods are goods that are ready to be consumed. Intermediate goods are those sold

from producer to producer. They become an input into the production of a final good. An

example of a final good is a new car purchased by a consumer at a car dealership. An example of

an intermediate good is the tires that the car manufacturer purchased from the tire manufacturer

and placed on the car during assembly.

Difficulty: 2 Medium

Topic: Measures of Output

Learning Objective: 05-01 What GDP measures—and what it doesn’t.

Bloom’s: Understand

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

No reproduction or distribution without the prior written consent of McGraw-Hill Education.149) Are there any measurement problems that occur with the GDP calculation? Explain.

Answer: GDP measures the value of output that is exchanged in the marketplace. Some

production never reaches the market and thus is not included in the GDP calculation. (An

example would be someone who cleans her own swimming pool instead of hiring a professional

pool cleaning service.) There are also unreported activities that are not included in GDP, such as

a person who mows lawns and does not report the income.

Difficulty: 2 Medium

Topic: Measures of Income

Learning Objective: 05-01 What GDP measures—and what it doesn’t.

Bloom’s: Understand

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

150) Which is better for making comparisons over time, nominal GDP or real GDP, and why?

Answer: Nominal GDP is the market value of all final goods and services produced within a

given time period in the dollars of that period. Real GDP is the market value of all final goods

and services produced within a given time period, adjusted for inflation. Because real GDP does

not include price level changes, it allows more accurate comparison of production over time.

Nominal GDP is not good for making comparisons because it is impossible to determine if

output or only prices have changed.

Difficulty: 2 Medium

Topic: Measures of Output

Learning Objective: 05-02 The difference between real and nominal GDP.

Bloom’s: Understand

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

151) What are transfer payments, and how do they make their way into the GDP calculation?

Answer: Transfer payments are payments to individuals for which no good or service is

exchanged in that time period. When individuals receive transfer payments, they typically spend

the dollars in the form of consumption; so transfer payments enter GDP through consumption:

GDP = C + I + G + Net exports. Transfer payments themselves do not count as part of the GDP

calculation, however.

Difficulty: 2 Medium

Topic: Measures of Output

Learning Objective: 05-01 What GDP measures—and what it doesn’t.

Bloom’s: Understand

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

No reproduction or distribution without the prior written consent of McGraw-Hill Education.152) How are total output and total income related to each other, and why?

Answer: The value of total output must equal the value of total income. This is demonstrated by

the circular flow. In a closed economy, the income earned by households, businesses, and

government is spent in the marketplace in the form of consumption, investment, and government

expenditure. This spending creates additional GDP, and the circular flow continues.

Difficulty: 2 Medium

Topic: The Flow of Income

Learning Objective: 05-03 Why aggregate income equals aggregate output.

Bloom’s: Understand

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

No reproduction or distribution without the prior written consent of McGraw-Hill Education.

The Macro Economy Today Bradley Schiller 15e – Test Bank

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