Chapter 23- Measuring a Nation's Income

Multiple Choice
Choose the best answer for each of the following questions and date the letter in your
answer
1. Macroeconomists study
A. the decisions of households and firms.
B. the interaction between households and firms
C. economy-wide phenomena
D. regulations on firms and unions
Answer: C

2. Which of the showing topics are more likely to be studied by macroeconomist than by the
the microeconomist?
A. the effect on taxes on the prices of airline tickets, the profitability of automobile-
manufacturing
firms, and employment trends in the food-service industry
B. the price of beef, wage differences between genets, and antitrust laws
C. how consumers maximize utility, and how prices are established in markets for
agricultural
products
D. the percentage of the labor force that is out of work, and differences in average income
from
country to country
Answer: D

3. The basic tools of supply and demand are

A. useful only in the analysis of economic behavior in individual markets.
B. useful in analyzing the overall economy, but not in analyzing individual markets
C. central to microeconomic analysis, but seldom used in macroeconomic analysis
D. central to macroeconomic analysis as well as to microeconomic analysis
Answer: B

4. Gross domestic product measures two things at once:

A. the total spending of everyone in the economy and the total saving or everyone in the
economy
B. the total income of everyone in the economy and the total expenditure on the economy's
output of goods and services
C. the value of the economy's output of goods and services for domestic citizens and the
value of the economy's output of goods and services for the rest of the world.
D. the total income of households in the economy and the total profit of firms in the
economy.
Answer: B

5. For an economy as a whole, income must equal expenditure because

A. the number of firms is equal to the number of households in an economy
B. international law requires that income equal expenditure.
C. every dollar of spending by some buyer is a dollar of income for some seller.
D. every dollar of saving by some consumer is a dollar of spending by some other consumer.
Answer: C

6. If an economy's GDP falls, then it must be the case that the economy's
A. income falls and saving rises
B. income and saving both fall.
C. income falls and expenditure rises.
D. income and expenditure both fall

Answer: D

7. In a simple circular flow diagram,

A. household spend all of their income.
B. all goods and services are bought by households
C. expenditures flow through the markets for goods and services, while income flows
through the markets for the factors of production
D. All of the above are correct

Answer: D

8. In the actual economy, goods and services are purchased by

A. households, but not firms or the government
B. households and firms, but not the government
C. households and the government, but not firms
D. households, firms and the government

Answer: D

9. Gross domestic product is defined as

A. the quantity of all final goods and services demanded within a country in a given period of
time
B. the quantity of all final goods and services supplied within a country in a given period of
time
C. the market value of all final goods and services produced within a country in a given
period of time
D. Both (A) and (B) are correct.
Answer: C

10. To compute GDP, we

A. add up the wages paid to all workers.
B. add up the cost of producing all finals goods and services
C. add up the market values of all final goods and service
D. take the difference between the market values of all final goods and services and the
costs of producing these final goods and services.

Answer: C
11. If the price of a DVD player is three times the price of a CD player, then a DVD player
contributes
A. more than three times as much to GDP as does a CD player
B. less than three times as much to GDP as does a CD player
C. exactly three times as much to GDP as does a CD player
D. to GDP but a CD player does not contribute to GDP

Answer: C

12.The value of the housing services provided by the economy’s owner-occupied houses is
A. included in the GDP, and the estimated rental values of the houses are used to place a
value on these housing services
B. included in the GDP, and the actual mortgage payments made on the houses are used to
estimate the value of these rental services
C. excluded from GDP since these services are not sold in any market
D. excluded from GDP since the value of these housing services cannot be estimated with
any degree of precision.

Answer: A

13. James owns two houses. He rents one house to the Johnson family for $10,000 per year. He
lives in the other house. If he were to rent the house in which he lives, he could earn S12.000 per
year in rent by doing so. How much do the services provided by the two houses contribute to
GDP?

A. $0
B. $10,000
C. $12,000
D. $22,000

Answer: D

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

A. caused measured GDP to fall

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

Answer: C

15. If Susan switches from going to Speedy Lube for an oil change to changing the oil in her car
herself, then GDP
A. necessarily rises
B. necessarily falls
C. will be unaffected because the same service is produced in either case
D. will be unaffected because car maintenance is not included in GDP

Answer: B
16. If a country previously-illegal activity, such as gambling prostitution, legal, then, other things
equal, GDP
A. necessarily decreases
B. necessarily increases
C. doesn't change because both legal and illegal production are included in GDP
D. doesn't change because these activities are never included in GDP

Answer: B

17. One bag of flour is sold for $1.00 to a bakery, which uses the flour to bake bread that is sold
for $3.00 to consumers. A second bag of flour is sold to a consumer in a grocery store for $2.00.
Taking these three transactions into account, what is the effect on GDP?

A. GDP increases by $2.00.

B. GDP increases by $3.00.
C. GDP increases by $5.00.
D. GDP increases by $6.00.

Answer: C

18. The total sales of all forms in the economy for a year
A. equals GDP for the year
B. is larger than GDP for the year
C. is smaller than GDP for the year
D. Any of the above is possible

Answer: B

19. Tyler and Camille both live in Dagupan City. Anew car dealer in Dagupan City bought a new
car from the manufacturer for P1,800,000 und sold it to Tyler for P2,200,000 Later that year,
Tyler sold the car to Camille for P1.700,000. By how much did these transactions contribute to
Philippine GDP for the year?

A. P1,800,000
B. P2,200,000
C. P3,900,000
D. P5,700,000
Answer: B

20. Toyota Motors is a Japanese-owned company that produces automobiles, all of its
automobiles are produced in American plants. In 2011, Toyota Motors produced $20 million
worth of automobiles, with $12 million in sales to Americans, $6 million in sales to Canadians,
and $2 million worth of automobiles added to Quality Motors' inventory. The transactions just
described contribute how much to U.S. GDP for 2011?

A. $12 million
B. $14 million
C. $20 million
D. $34 million

Answer: C
21. The government of Wrexington, a country which has adopted American GDP accounting
conventions, reported that GDP in quarter 3 was $12 billion at an annual rate. This means that
the market value of all final goods and services produced within Wrexington in quarter 3 was
A. $3 billion
B. $4 billion
C. $12 billion
D. $48 billion

Answer: A

22. In a certain small country, the unit of currency is the huck That country's government recently
announced that "GDP amounted to 400 million hucks in the quarter that just ended." Assuming
this country has adopted American GDP accounting conventions, this statement means that
GDP, after seasonal adjustment, actually amounted to

A. 100 million hucks in the quarter that just ended

B. 100 million hucks over the last four quarters, including the one that just ended
C. 400 million hucks in the quarter that just ended
D. 400 million bucks over the last four quarters, including the one that just ended

Answer: A

23. Which of the following is not correct?

A. GDP equals net national product plus losses from depreciation
B. For most countries, including the United States, GDP and GNP are nearly the same.
C. GDP and GNP typically move in opposite directions.
D. Personal income equals disposable personal income plus personal taxes plus certain
nontax payments

Answer: C

24. In the national income accounts, depreciation is called

A. “consumption of fixed capital."

B. "negative investment
C. "capital taxation."
D. "loss due to wear”

Answer: A

Table 23-1
The table below contains data for the country of Wrexington for the year 2010.

GDP $110
Income earned by citizens abroad $5
Income foreigners earn here $15
Losses from depreciation $4
Indirect business taxes $6
Business subsidies $2
Statistical discrepancy $0
Retained earnings $5
 Corporate income taxes $6
Social insurance contributions $10
Interest paid to households by government $5
Transfer payments to households from $15
government
Personal taxes $30
Nontax payments to government $5

25. Refer to Table 23-1. The market value of all final goods and services produced within
Wrexington in 2010 is

A. $100
B.$110
C.$115
D.$130

Answer: B

26. Refer to Table 23-1. Gross National Product for Wrexington in 2010 is
A. $100
B.$110
C.$115
D.$130

Answer: A

27. Refer to Table 23-1. Net National Product for Wrexington in 2010 Is
A. $96
B.$104
C.$106
D.$114

Answer: A

28. Refer to Table 23-1. National income for Wrexington in 2010 is

A. $88
B.$92
C.$100
D.$104

Answer: B

29. Refer to Table 23-1. Personal income for Wrexington in 2010 is

A. $51
B.$91
C.$93
D.$133

Answer: B
30. Refer to Table 23-1. Personal income for Wrexington in 2010 is
A. $56
B.$66
C.$116
D.$126

Answer: A

31. In the equation Y – C + I + G + NX,

A. Y represents the economy's total expenditure.
B. C represents household expenditures on services and durable goods
C. all of the variables are always positive numbers.
D. All of the above are correct.

Answer: A

32. GDP is equal to

A. the market value of all final goods and services produced within a country in a given
period of time.
B. Y
C. C + I + G + NX
D. All of the above are correct.

Answer: D

33. The consumption component of GDP includes spending on

A. durable goods and nondurable, but not spending on services

B. durable goods and services, but not spending on nondurable goods.
C. nondurable goods and services, but not spending on durable goods
D. durable goods, nondurable goods, and services

Answer: D

34. Consumption consists of spending by households on goods and services, with the
exception of

A. purchase of intangible services

B. purchases of durable goods
C. spending on new houses
D. spending on education

Answer: C

35. Which of the following is an example of a durable goods?

A. a refrigerator
B. a car
C. a business suit
D. a furnace
Answer: C

36. Which of the following is not an example of a nondurable goods?

A. loaf of bread
B. a pair of jeans
C. microwave
D. a pound of bacon

Answer: C

37. When economists refer to intangible items, they are referring to such things as

A. illegal goods, and the value of such items is included in GDP

B. illegal goods, and the value of such items is excluded in GDP
C. consulting services and dental care, and the value of such items is included from GDP
D. consulting services and dental care, and the value of such items is excluded from GDP

Answer: C

38. Household spending on education is included in

A. consumption, although it might be argued that it would fit better in investment.

B. investment, although it might be argued that it would it better in consumption
C. government spending, based on the fact that most higher-education students attend
publicly supported colleges and universities.
D. None of the above is correct; in general, household spending on services is not included
in any component of GDP

Answer: A

39. What word do economists use to refer to the purchase of goods that will be used in the
future to produce more goods and services?

A. Capital
B. Consumption
C. Investment
D. Costs

Answer: C

40. Which of the following is included in the investment component of GDP?

A. households' purchases of newly constructed homes

B. net additions to firms' inventories
C. firms purchases of capital equipment
D. All of the above are correct

Answer: D
41. The value of goods added to a firm's inventory in a certain year is treated as

A. consumption, since the goods will be sold to consumers in another period.

B. saving, since the goods are being saved until they are sold in another period.
C. investment, since GDP aims to measure the value of the economy's production that year.
D. spending on durable goods, since the goods could not be inventoried unless they were
durable.

Answer: C

42. A transfer payment is a payment made by

A. consumers, but not in exchange for a tangible product.

B. firms, but not in exchange for capital equipment
C. foreigners, but not in exchange for a domestically produced good or service
D. government, but not in exchange for a currently produced good or service

Answer: D

43. Which of the following represents a transfer payment?

A. You transfer P10,000 from your bank account to mutual fund

B. The government sends your grandfather his Social Security check
C. The bank transfers P100 in quarterly interest to your savings account
D. Your employer automatically transfers P1,000 each month from your wages to a non-
taxable medical spending account.

Answer: B

44. Social Security payments are

A. included in GDP because they represent payments for work performed in the past
B. included in GDP because they represent potential consumption
C. excluded from GDP because they are not private pensions.
D. excluded from GDP because they do not reflect the economy's production

Answer: D

45. Unemployment compensation is

A. part of GDP because it represents income.

B. part of GDP because the recipients must have worked in the past to qualify
C. not part of it because it is a transfer payment
D. not part of GDP because the payments reduce business profits

Answer: C

46. To encourage formation of small businesses, the government could provide subsidies;
these subsidies:

A. would be included in GDP because they are part of government purchases.

B. would be included in GDP because they are part of investment expenditures.
C. would not be included in GDP because they are transfer payments.
D. would not be included in GDP because the government raises taxes to pay for them.

Answer: C

47. If net export is a negative number for a particular year, then

A. the value of firms’ inventories declined over the course of the year.
B. consumption exceeded the sum of investment and government purchases during the year
C. the value of goods sold to foreigners exceeded the value of foreign goods purchased
during the year
D. the value of foreign goods purchased exceeded the value of goods sold to foreigners
during the year

Answer: D

48. When a Filipino household purchases a bottle of Italian wine for $100,

A. Philippines Consumption does not change, Philippines net exports decrease by $100, and
Philippines GDP decreases by $100.
B. Philippines consumption does not change, Philippines net exports increase by S100, and
Philippines GDP increases by $100.
C. Philippines consumption increases by $100, Philippines net exports decrease by S100,
and Philippines GDP does not change.
D. Philippines consumption increases by $100. Philippines net exports do not change, and
Philippines GDP increases by $100

Answer: C

49. In the economy of Wrexington in 2012, consumption was $3000, exports were $400,
GDP was $5,000. Imports were $600, and investment was $1,100. What were Wrexington's
government purchases in 2012?

A. $300
B. $500
C. $700
D. $1,100

Answer: D

50. In the economy of Wrexington in 2012, consumption was 60% of GDP, government
purchases were $212, Imports were $67 and 67% of the value of exports, investment was
one-half of the value of consumption. What was Wrexington’s GDP in 2012?

A. $1,455
B. $1,790
C. $2,450
D. $2,790

Answer: C
51. If total spending rises from one year to the next, then

A. the economy must be producing a larger output of goods and services.

B. goods and services must be selling at higher prices
C. either the economy must be producing a larger output of goods and services, or goods
and services must be selling at higher prices, or both
D. employment or productivity must be rising

Answer: C

52. If total spending rises from one year to the next, then which of the following could not be
true?

A. the economy is producing a smaller output of goods and services, and goods and
services are selling at higher prices
B. the economy is producing a larger output of goals and services, and goods and services
are selling at lower prices
C. the economy is producing a larger output of goods and services, and goods and services
are selling at higher prices
D. the economy is producing a smaller output of goods and services, and goods and
services are selling at lower prices

Answer: D

53. When studying changes in the economy over time, economists want a measure of the
total quantity of goods and services the economy is producing that is not affected by
changes in the prices of those goods and services. In other words, economists want to study

A. nominal GDP
B. real GDP
C. the GDP deflator
D.GNP

Answer: B

54. Real GDP is the yearly production of final goods and services valued at

A. current prices
B. constant prices,
C. expected future prices
D. the ratio of current price to constant prices

Answer: B

55. Changes in nominal GDP reflect

A. only changes in prices.

B. only changes in the amounts being produced
C. both changes in prices and changes in the amounts being produced
D. neither changes in prices nor changes in the amounts being produced
Answer: C

56. Changes in real GDP reflect

A. only changes in prices.

B. only changes in the amounts being produce
C. both changes in prices and changes in the amounts being produced
D. neither changes in prices changes in the amounts being produced

Answer: B

57. When economists talk about growth in the economy, they measure that growth as the

A. absolute change in nominal GDP from one period to another

B. percentage change in nominal GDP from one period to another
C. absolute change in real GDP from one period to another
D. percentage change in real GDP from one period to another

Answer: B

58. Changes in the GDP deflator reflect

A. only changes in prices.

B. only changes in the amounts being produced
C. both changes in prices and changes in the amounts being produced
D. neither changes in prices nor changes in the amounts being produced

Answer: A

59. The inflation rate in year 2 equals

GDP deflator∈ year 2−GDP deflator ∈ year 1

A. x 100
GDP deflator ∈Year 1

GDP deflator ∈ year 2−GDP deflator ∈ year 1

B. x 100
GDP deflator∈Year 2

GDP deflator ∈ year 1−GDP deflator ∈ year 2

C. x 100
GDP deflator∈Year 1

1GDP deflator ∈ year 1−GDP deflator ∈ year 2

D. x 100
GDP deflator ∈Year 2

Answer: A

60. If real GDP doubles and the GDP deflator doubles, then nominal GDP

A. remains constant
B. doubles
C. triples.
D. quadruples.

Answer: D

61. If nominal GDP doubles and the GDP deflator doubles, then rea GDP

A. remains constant
B. doubles
C. triples.
D. quadruples.

Answer: A

62. In the economy of Wrexington in 2012, real GDP was $5 trillion and the GDP deflator
was 200. What was Wrexington's nominal GDP in 2012?

A. $2.5 trillion
B. $10 trillion
C. $40 trillion
D. $100 trillion

Answer: B

63. A country reported a nominal GDP of $115 billion in 2012 and S125 billion in 2011. It
also reported a GDP deflator of 85 in 2012 and 100 in 2011. Between 2011 and 2012,

A. real output and the price level both rose

B. real output rose and the price level fell
C. real output fell and the price level rose
D. real output and the price level both fell

Answer: B

64. A recession has traditionally been defined as a period during which

A. nominal GDP declines for two consecutive quarters.

B. nominal GDP declines for four consecutive quarters.
C. real GDP declines for two consecutive quarters.
D. real GDP declines for four consecutive quarters

Answer: C

65. A recession is always associated with

A. the end of a war.

B. slowly growing real GDP
C. rising inflation
D. declining real GDP
Answer: D

66. GDP is used as the basic measure of a society's economic well-being. A better measure
of the economic well-being of individuals in society is

A. saving per person

B. GDP per person
C. government expenditures per person.
D. investment per business firm.

Answer: B

67. Suppose the government passes a law eliminating holidays and, as a result, the
production of goods and services increases because people work more days per year (and
thus enjoy less leisure per year). Based on this scenario which of the following statements is
correct?

A. GDP would definitely increase, despite the fact that GDP includes leisure.
B. GDP would definitely increase because GDP excludes leisure.
C. GDP could either increase or decrease because GDP includes leisure
D. GDP could either increase or decrease because GDP excludes leisure.

Answer: B

68. Suppose the government eliminates all environmental regulations and as a result, the
production of goods and services increases, but there is considerably more pollution. Based
on this scenario, which of the following statements is correct?

A. GDP would definitely increase, despite the fact that GDP includes environmental quality
B. GDP would definitely decrease because GDP includes environmental quality
C. GDP would definitely increase because GDP excludes environmental quality
D. GDP could either increase or decrease because GDP excludes environmental quality

Answer: C

69. During a presidential campaign, the incumbent who is an economist argues that she
should be re-elected because nominal GDP grew by 12 percent during her last 4-vear term
in his office. You know that population grew by 4 percent over the period and that the GDP
deflator increased by 6 percent during the past years. You should conclude that real GDP
per person

A. grew by more than 12 percent.

B. grew, but by less than 12 percent
C. was unchanged
D. decreased

Answer: B
70. International studies of the relationship between GDP per person and quality of life
measures such as life expectancy and literacy rates show that larger GDP per person is
associated with

A. longer life expectancy and a lower percentage of the population that is literate.
B. longer life expectancy and a higher percentage of the population that is literate.
C. very nearly the same life expectancy and a lower percentage of the population that is
literate.
D. very nearly the same life expectancy and a higher percentage of the population that is
literate.

Answer: B