Chapter 7 Practice Questions

1. Which of the following would be included in this year’s GDP?

a. the value of a used car, at its sale price
b. the value of a brand new domestic automobile, at its sale price
c. a sale of Microsoft stock from one individual to another (assume no sales commission
on the exchange)
d. the face value of a life insurance policy paid to a woman at the death of her husband
2. When the expenditure approach is used to measure GDP, the major components of GDP are
a. consumption, investment, indirect business taxes, and depreciation.
b. employee compensation, rents, interest, self-employment income, and corporate
profits.
c. employee compensation, corporate profits, depreciation, and indirect business taxes.
d. consumption, investment, government expenditures, and net exports.
3. If you wanted to measure whether the output of an economy was increasing or decreasing
across time periods, you would use the real GDP data rather than the nominal GDP data
because
a. exports are excluded from real GDP but not nominal.
b. real GDP incorporates the impact of federal budget deficits and surpluses; nominal
GDP does not.
c. real GDP reflects the impact of transfer payments on the economy, but nominal GDP
does not.
d. real GDP adjusts for changes in the general level of prices, but nominal GDP does not.
4. Which of the following is GDP designed to measure?
a. the total market value of final goods and services produced domestically during a
specific time period.
b. changes in the cost of purchasing the typical consumer market basket of goods from
one year to another
c. the total size of the domestic underground economy
d. the standard of living of the average citizen
5. The GDP deflator is designed to
a. adjust nominal GDP for changes in the unemployment rate.
b. adjust nominal GDP so as to include the problem of externalities.
c. adjust nominal GDP for changes in the price level.
d. calculate changes in the price of food and other consumer goods.
6. A real estate salesperson sells a house in 1999 that was built in 1990. How does this
transaction get counted in the GDP statistics?
a. The price of the house and the real estate salesperson's commission are both included
in 1999's GDP.
b. Neither the price of the house or the commission is included in 1999's GDP.
c. The real estate salesperson's commission, but not the price of the house, is included in
1999's GDP.
d. The price of the house would be included in both 1990's GDP and the GDP for 1999.
7. Which of the following would increase GDP?
a. taking a week off of work to do all of your own home repairs after a California
earthquake
b. purchasing 100 shares of McDonald's stock (assume no sales commission on the
exchange)
c. a $1,000 expenditure on roof repairs after a California earthquake
d. a $1,000 contribution to the Red Cross to assist the victims of a California earthquake

8. An American-owned McDonald's opens in Russia. How would the net revenue earned by
this restaurant affect the GDP and GNP of the United States?
a. It would increase GNP and GDP.
b. It would increase GNP and leave GDP unchanged.
c. It would increase GDP and leave GNP unchanged.
d. It would leave both GDP and GNP unchanged.
9. The primary value of real GDP is its ability to measure year to year changes in
a. real output.
b. income inequality.
c. real social welfare.
d. the general level of prices.
10. Which one of the following transactions would be included in GDP?
a. Ms. Kim pays $50 for a used picture frame at a neighborhood garage sale.
b. Mr. Doe donates $500 to his town’s junior college scholarship fund.
c. Ms. Bartolini pays $500 to fix the front end of her car damaged in a recent accident.
d. Ms. Smith pays $5,000 to purchase 100 shares of Microsoft stock (assume no sales
commission is made on the exchange.

ANSWER KEY 1 THROUGH 10

1. (b)
2. (d)
3. (d)
4. (a)
5. (c)
6. (c)
7. (c)
8. (b)
9. (a)
10. (c)