SS141 Macro-Economics

Professor Patrick Yanez

Study Questions for Chapter 7 - Set 2

These questions are to facilitate your discussion groups and/or tutoring sessions. Answers are listed at the end of this file. Since our class time is limited to introducing new topics, we do not have time to review these questions in class; please use your discussion group and/or tutoring session to review these questions.

1. A) B) C) D) 2. A) B) C) D) 3. A) B) C) D)

An economy is enlarging its stock of capital goods: when net investment exceeds gross investment. when gross investment exceeds replacement investment. whenever gross investment is positive. when replacement investment exceeds gross investment. A nation's stock of capital goods will decline when: gross investment exceeds net investment. net investment is positive, but less than gross investment. depreciation exceeds gross investment. gross investment exceeds depreciation. In an economy experiencing a declining production capacity: the nation's stock of capital goods is expanding. net exports are necessarily zero. depreciation exceeds gross investment. NDP exceeds GDP.

4. If in some year gross investment was $120 billion and net investment was $65 billion, then in that year the country's capital stock: A) may have either increased or decreased. B) increased by $65 billion. C) increased by $55 billion. D) decreased by $55 billion. 5. A) B) C) D) 6. A) B) C) D) Consumption of fixed capital (depreciation) can be determined by: adding indirect business taxes to NDP. subtracting NDP from GDP. subtracting net investment from GDP. adding net investment to gross investment. GDP excludes: the market value of unpaid work in the home. the production of services. the production of nondurable goods. positive changes in inventories.

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Use the following to answer questions 7-11: Answer the next question(s) on the basis of the following data. All figures are in billions of dollars.
Personal taxes Social security contributions Indirect business taxes Corporate income taxes Transfer payments U.S. exports Undistributed corporate profits Government purchases Gross private domestic investment U.S. imports Personal consumption expenditures Consumption of fixed capital Net foreign factor income earned in the U.S. $ 40 15 20 40 22 24 35 90 75 22 250 25 10

7. A) B) C) D) E)

Refer to the above data. GDP is: $390. $417. $422. $492. $512.

8. A) B) C) D)

Refer to the above data. NDP is: $370. $402. $392. $467.

9. A) B) C) D)

Refer to the above data. NI is: $364. $372. $447. $362.

10. A) B) C) D)

Refer to the above data. PI is: $294. $346. $408. $437.

11. A) B) C) D)

Refer to the above data. DI is: $284. $329. $254. $402.

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Use the following to answer questions 12-15: Answer the next question(s) on the basis of the following data. All figures are in billions of dollars.
Gross investment National income Net exports Personal income Personal consumption expenditures Saving Government purchases Net domestic product $ 18 100 2 85 70 5 20 105

12. A) B) C) D)

The gross domestic product for the above economy is: $100. $95. $110. $107.

13. A) B) C) D)

Refer to the above data. Consumption of fixed capital is: $5. $10. $20. $30.

14. A) B) C) D)

Refer to the above data. Disposable income is: $83. $73. $75. $77.

15. Refer to the above data. From this information we can conclude that the sum of indirect business taxes and net foreign factor income is. A) $5 billion. B) zero. C) $1 billion. D) $15 billion.

16. A) B) C) D)

"Value added" refers to: any increase in GDP that has been adjusted for adverse environmental effects. the excess of gross investment over net investment. the difference between the value of a firm's output and the value of the inputs it has purchased from others. the portion of any increase in GDP that is caused by inflation as opposed to an increase in real output.

17. Assume a manufacturer of stereo speakers purchases $40 worth of components for each speaker. The completed speaker sells for $70. The value added by the manufacturer for each speaker is: A) $110. B) $30. C) $40. D) $70.

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18. Setup Corporation buys $100,000 of sand, rock, and cement to produce redi-mix concrete. It sells 10,000 cubic yards of concrete at $30 a cubic yard. The value added by Setup Corporation is: A) $300,000. B) $100,000. C) $200,000. D) zero dollars. 19. A) B) C) D) 20. A) B) C) D) 21. A) B) C) D) 22. A) B) C) D) 23. A) B) C) D) 24. A) B) C) D) 25. A) B) C) D) 26. A) B) C) D) By summing the values added at each stage in the production of some good we obtain: the price of that good. the total income generated by that good's production. the total cost (including profits) of that product. all of the above. Value added can be determined by: summing the profits of all enterprises in the economy. subtracting the purchase of intermediate products from the value of the sales of final products. calculating the year-to-year changes in real GDP. deflating nominal GDP. Which of the following best defines national income? income received by households less personal taxes the before-tax income received by households all incomes earned by U.S. resource suppliers for their current contributions to production the market value of the annual output net of consumption of fixed capital The total amount of income earned by U.S. resource suppliers in a year is measured by: gross domestic product. national income. personal income. disposable income. The largest component of national income is: compensation of employees. rents. interest. corporate profits. The total income earned in any year by U.S. resource suppliers is measured by: DI. NI. PI. GDP. National income measures: nominal GDP after it has been inflated or deflated for changes in the value of the dollar. the after-tax income of resource suppliers. the market value or cost of the resources used in the production of the national output. the amount of wage, rent, interest, and profits income actually received by households. Personal income is most likely to exceed national income: when gross and net investment are equal. during a period of recession or depression. when gross investment exceeds net investment. during a period of extended inflation.

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27. If personal income exceedes national income in a particular year, we can conclude that: A) transfer payments exceeded the sum of social security contributions, corporate income taxes, and indirect business taxes. B) the sum of social security contributions, corporate income taxes, and undistributed corporate profits exceeded transfer payments. C) consumption of fixed capital and indirect business taxes exceeded personal taxes. D) transfer payments exceeded the sum of social security contributions, corporate income taxes, and undistributed corporate profits. 28. A) B) C) D) 29. A) B) C) D) 30. A) B) C) D) 31. A) B) C) D) 32. A) B) C) D) Which of the following best defines disposable income? income received by households less personal taxes the before-tax income received by households all income earned by resource suppliers for their current contributions to production the market value of the annual output net of consumption of fixed capital Which of the following is the largest dollar amount in the United States? disposable income personal income gross domestic product national income Which of the following is the smallest dollar amount in the United States? disposable income personal income gross domestic product national income Transfer payments are included in: NI. PI. GDP. NDP. The amount of after-tax income received by households is measured by: discretionary income. national income. disposable income. personal income.

33. In a typical year which of the following measures of aggregate output and income is likely to be the smallest? A) gross domestic product B) national income C) disposable income D) personal income 34. A) B) C) D) Nominal GDP is: the sum of all monetary transactions that occur in the economy in a year. the sum of all monetary transactions involving final goods and services that occur in the economy in a year. the amount of production that occurs when the economy is operating at full employment. money GDP adjusted for inflation.

35. The term "real GDP" refers to: A) the value of the domestic output after adjustments have been made for environmental pollution and changes

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in the distribution of income. B) GDP data that embody changes in the price level, but not changes in physical output. C) GDP data that reflect changes in both physical output and the price level. D) GDP data that have been adjusted for changes in the price level. 36. A) B) C) D) 37. A) B) C) D) 38. A) B) C) Real GDP measures: current output at current prices. current output at base year prices. base year output at current prices. base year output at current exchange rates. Nominal GDP is adjusted for price changes through the use of: the Consumer Price Index (CPI). the Producer Price Index (PPI). the GDP price index. exchange rates.

A price index is: a comparison of the price of a market basket from a fixed point of reference. a comparison of real GDP in one period relative to another. the cost of a market basket of goods and services in a base period divided by the cost of the same market basket in another period. D) a ratio of real GDP to nominal GDP. The GDP price index: includes fewer goods and services than the consumer price index. is identical to the consumer price index. is another term for the producer price index. includes all goods comprising the nation's domestic output. If real GDP falls from one period to another, we can conclude that: deflation occurred. inflation occurred. nominal GDP fell. none of the above necessarily occurred.

39. A) B) C) D) 40. A) B) C) D)

41. In comparing GDP data over a period of years, a difference between nominal and real GDP may arise because: A) of changes in trade deficits and surpluses. B) the length of the workweek has declined historically. C) the price level may change over time. D) depreciation may be greater or smaller than gross investment. 42. A) B) C) D) 43. A) B) C) D) In an economy experiencing persistent deflation: potential GDP will necessarily exceed actual GDP. changes in nominal GDP may either overstate or understate changes in real GDP. changes in nominal GDP understate changes in real GDP. changes in nominal GDP overstate changes in real GDP. In determining real GDP economists adjust the nominal GDP by using the: national productivity index. wholesale (producers') price index. GDP price index. consumer price index.

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44. A) B) C) D)

The fact that nominal GDP has risen faster than real GDP: suggests that the base year of the GDP price index has been shifted. tells us nothing about what has happened to the price level. suggests that the general price level has fallen. suggests that the general price level has risen.

45. The consumer price index (CPI): A) is an average of the prices of all consumer goods purchased each year. B) measures changes in the prices of a market basket of some 300 goods and services purchased by urban consumers. C) measures prices of goods, but not services. D) is also known as the GDP price index. 46. A) B) C) D) 47. A) B) C) D) The consumer price index: uses a fixed market basket for all years in the series. is also called the GDP price index. measures changes in the prices of a market basket of some 50,000 goods and services. is adjusted monthly for changes in consumer spending patterns. If the CPI was 160 in 2001 and 40 in 1980, the cost of living was: 4 times higher in 2001 than in 1980. 25 percent higher in 2001 than in 1980. constant over the period. 4 times lower in 2001 than in 1980.

48. The GDP tends to: A) overstate economic welfare because it does not include certain nonmarket activities such as the productive work of housewives. B) understate economic welfare because it includes expenditures undertaken to offset or correct pollution. C) understate economic welfare because it does not take into account increases in leisure. D) overstate economic welfare because it does not reflect improvements in product quality. 49. A) B) C) D) 50. A) B) C) D) 51. A) B) C) D) The growth of GDP may understate changes in the economy's economic well-being over time if the: distribution of income becomes increasingly unequal. quality of products and services improves. environment deteriorates because of pollution. amount of leisure decreases. GDP data are criticized as being inaccurate measures of economic welfare because: they do not take into account changes in the amount of leisure. they do not take into account changes in product quality. they do not take into account the adverse effects of economic activity on the environment. of all of the above considerations. Environmental pollution is accounted for in: GDP. PI. DI. none of the above.

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52. Assume that the size of the underground economy increases both absolutely and relatively over time. As a result: A) real GDP will rise more rapidly than nominal GDP. B) GDP will tend to increasingly understate the level of output through time. C) GDP will tend to increasingly overstate the level of output through time. D) the accuracy of GDP will be unaffected through time.

53. A) B) C) D)

(Last Word) The U.S. government agency responsible for compiling the national income accounts is the: Census Bureau. Bureau of Labor Statistics (BLS). Commerce Department's Bureau of Economic Analysis (BEA). Government Accounting Office (GAO).

54. A) B) C) D)

(Last Word) Which of the following is a source of data for the consumption component of the U.S. GDP? the Census Bureau's Retail Trade Survey the Census Bureau's Survey of Government Finance the Conference Board's Index of Leading Indicators the Bureau of Labor Statistics Consumer Price Index

55. A) B) C) D)

(Last Word) Which of the following is a source of data for the investment component of U.S. GDP? the Census Bureau's Retail Trade Survey the Census Bureau's Housing Starts Survey and Housing Sales Survey. the Conference Board's Survey of Consumer Sentiment the Bureau of Labor Statistics Consumer Price Index

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Answer Key 1. B 2. C 3. C 4. B 5. B 6. A 7. B 8. C 9. D 10. A 11. C 12. C 13. A 14. C 15. A 16. C 17. B 18. C 19. D 20. B 21. C 22. B 23. A 24. B 25. C 26. B 27. D 28. A 29. C 30. A 31. B 32. C 33. C 34. B 35. D 36. B 37. C 38. A 39. D 40. D 41. C 42. C 43. C 44. D 45. B 46. A 47. A 48. C 49. B 50. D 51. D 52. B 53. C 54. A 55. B

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