CA CHAPTER 23

1. Which of the following questions is more likely to be studied by a microeconomist than a macroe-
conomist?
a. Why do prices in general rise by more in some countries than in others?
b. Why do wages differ across industries? (small scale)
c. Why do national production and income increase in some periods and not in others?
d. How rapidly is GDP currently increasing?

2. Which of the following topics are more likely to be studied by a macroeconomist than by a micro e-
conomist?
a. the effect of taxes on the prices of airline tickets, and the profitability of automobile-
manufacturing firms.
b. the price of beef, and wage differences between genders.
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.

1. Expenditures on a nation’s domestic production

a. are less than its domestic production.
b. are equal to its domestic production.
c. are greater than its domestic production.
d. could be less than, equal to, or greater than its domestic production.

2. Which of the following statements about GDP is correct?

a. GDP measures two things at once: the total income of everyone in the economy and the
total expenditure on the economy’s output of goods and services.
b. Money continuously flows from households to firms and then back to households, and
GDP measures this flow of money.
c. GDP is generally regarded as the best single measure of a society’s economic well-being.
d. All of the above are correct.

3. Because every transaction has a buyer and a seller,

a. GDP is more closely associated with an economy’s income than it is with an economy’s
expenditure.
b. every transaction contributes equally to an economy’s income and to its expenditure.
c. the number of firms must be equal to the number of households in a simple circular-flow
diagram.
d. firms’ profits are necessarily zero in a simple circular-flow diagram.

1
2

4. If an economy’s GDP rises, then it must be the case that the economy’s
a. income rises and saving falls.
b. income and saving both rise.
c. income rises and expenditure falls.
d. income and expenditure both rise.
 3

5. In a simple circular-flow diagram, total income and total expenditure are

a. never equal because total income always exceeds total expenditure.
b. seldom equal because of the ongoing changes in an economy’s unemployment rate.
c. equal only when the government purchases no goods or services.
d. always equal because every transaction has a buyer and a seller.
4

6. In the actual economy, households

a. spend all of their income.
b. divide their income among spending, taxes, and saving.
c. buy all goods and services produced in the economy.
d. Both (a) and (c) are correct.
 5

7. Total income from the domestic production of final goods and services equals
a. only household expenditures for these goods.
b. only household and business expenditures for these goods.
c. only household and government expenditures for these goods.
d. the expenditures for these goods whoever buys them.
6

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.
 7

9. According to the circular-flow diagram GDP

a. can be computed as either the revenue firms receive from the sales of goods and services
or the payments they make to factors of production.
b. can be computed as the revenue firms receive from the sales of goods and services but not
as the payments they make to factors of production.
c. can be computed as payments firms make to factors of production but not as revenues they
receive from the sales of goods and services.
d. cannot be computed as either the revenue firms receive or the payments they make to
factors of production.
8

CA 2
1.GDP is defined as the
a. value of all goods and services produced within a country in a given period of time.
b. value of all goods and services produced by the citizens of a country, regardless of where
they are living, in a given period of time.
c. value of all final goods and services produced within a country in a given period of
time.
d. value of all final goods and services produced by the citizens of a country, regardless of
where they are living, in a given period of time.
 9

2. In order to include many different goods and services in an aggregate measure, GDP is computed us-
ing, primarily,
a. values of goods and services based on surveys of consumers.
b. market prices.
c. quantities purchased by a typical urban household.
d. profits from producing goods and services.
10

3. Which of the following is included in GDP?

a. The market value of rental housing services, but not the market value of owner-occupied
housing services.
b. The market value of owner-occupied housing services, but not the market value of rental
housing services.
c. Both the market value of rental housing services and the market value of owner-
occupied housing services. The market value of the house is what you pay; if you are not
living in it, it has a rental value (I= 40000 and C= 500)
d. Neither the market value of owner-occupied housing services nor the market value of
rental housing services.
 11

4. GDP excludes most items that are produced and sold illegally and most items that are pro duced and
consumed at home because
a. the quality of these items is not high enough to contribute value to GDP.
b. measuring them is so difficult.
c. the government wants to discourage the production and consumption of these items.
d. these items are not reported on income tax forms.
12

5. Which of the following is not included in GDP?

a. Carrots grown in your garden and eaten by your family.
b. Carrots purchased at a farmer’s market and eaten by your family.
c. Carrots purchased at a grocery store and eaten by your family.
d. None of the above are included in GDP.
 13

6. Grapes are considered intermediate goods

a. whether the purchaser uses them to make wine to sell or eats them.
b. if the purchaser uses them to make wine to sell others but not if the purchaser eats them.
c. if the purchaser eats them, but not if the purchaser uses to them to make wine to sell.
d. None of the above is correct.
14

7. Adela bought flour and used it to bake bread she ate. ABC Bakery bought flour that it used to bake
bread that customers purchased. In which case will the flour be counted as a final good?
a. Adela’s purchase and ABC Bakery’s purchase.
b. ABC Bakery’s purchase but not Adela’s purchase.
c. Adela’s purchase but not ABC Bakery’s purchase.
d. Neither Adela’s purchase nor ABC Bakery’s purchase.
 15

8. A newspaper article informs you that most businesses reduced production in the last quarter but also
sold from their inventories during the last quarter. Based on this information GDP likely
a. increased.
b. decreased.
c. stayed the same.
d. may have increased, decreased, or stayed the same.
16

9. Transactions involving items produced in the past, such as the sale of a 5-year-old automobile by a
used car dealership or the purchase of an antique rocking chair by a person at a yard sale, are
a. included in current GDP because GDP measures the value of all goods and services sold
in the current year.
b. included in current GDP but valued at their original prices.
c. not included in current GDP because it is difficult to determine their value.
d. not included in current GDP because GDP only measures the value of goods and services
produced in the current year.
 17

10. Samira purchases a classic 1964 car she saw for sale on someone’s lawn. She then purchases some
new parts and spends 120 hours refurbishing the car which she keeps. Which of the following is in-
cluded in GDP?
a. The amount she paid to buy the car.
b. The amount she paid to buy new parts.
c. The value of her time repairing the car.
d. All of the above are included.
18

11. An American company operates a fast food restaurant in Paris, France. Which of the fol lowing state-
ments is accurate?
a. The value of the goods and services produced by the restaurant is included in both French
GDP and U.S. GDP.
b. The value added by American workers and equipment in France is included in U.S. GDP
and the value added by French workers and equipment is added to French GDP.
c. The value of the goods and services produced by the restaurant is included in French GDP,
but not in U.S. GDP.
d. The value of the goods and services produced by the restaurant is included in U.S. GDP,
but not in French GDP.
 19

12. The statistical discrepancy that regularly arises in national income accounting ref ers to the slight dif-
ference between
a. personal income and personal disposable income.
b. estimates of GDP and actual GDP.
c. the income and expenditure approaches to the calculation of GDP.
d. the quarterly and annual approaches to the calculation of GDP.
20

13. Kuwait GDP and Kuwait GNP are related as follows:

a. GNP = GDP + Value of exported goods - Value of imported goods.
b. GNP = GDP - Value of exported goods + Value of imported goods.
c. GNP = GDP + Income earned by foreigners in the Kuwait. - Income earned by Kuwait’s
citizens abroad.
d. GNP = GDP - Income earned by foreigners in the Kuwait + Income earned by Kuwait’s
citizens abroad.
 21

14. Foreign citizens earn more income in Egypt than Egyptian citizens earn in foreign count ries.
a. Egypt’s net factor payments from abroad are positive, and its GDP is larger than its GNP.
b. Egypt’s net factor payments from abroad are positive, and its GNP is larger than its GDP.
c. Egypt’s net factor payments from abroad are negative, and its GDP is larger than its GNP.
d. Egypt’s net factor payments from abroad are negative, and its GNP is larger than its GDP.
22

15. How is net national product (NNP) calculated?

a. Saving is subtracted from the total income of a nation’s citizens.
b. Saving is added to the total income of a nation’s citizens
c. Depreciation losses are subtracted from the total income of a nation’s citizens.
(NNP=GNP-depreciation)
d. Depreciation losses are added to the total income of a nation’s citizens.
 23

CA 3

1. In the equation Y = C + I + G + NX,

a. Y represents the economy’s total expenditure. (output = 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.
24

2. An identity is an equation that

a. describes an equilibrium.
b. pertains to macroeconomics, not to microeconomics.
c. must be true because of how the variables in the equation are defined.
d. involves final goods, not intermediate goods.
 25

4. Which of the following is an example of a durable good?

a. A refrigerator.
b. A quart of motor oil.
c. A business suit.
d. A can of soup.
26

5. For the purpose of calculating GDP, investment is spending on

a. stocks, bonds, and other financial assets.
b. real estate and financial assets such as stocks and bonds.
c. capital equipment, inventories, and structures, including household purchases of new
housing.
d. capital equipment, inventories, and structures, excluding household purchases of new
housing.
 27

6. Which of the following examples of household spending is categorized as investment rather than
consumption?
a. Expenditures on durable goods such as automobiles and refrigerators.
b. Expenditures on intangibles items such as medical care.
c. Expenditures on new housing.
d. All of the above are correct.
28

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

a. Spending on new business equipment such as power tools and spending on stocks and
bonds.
b. Spending on new business equipment such as power tools but not spending on stocks and
bonds.
c. Spending on stocks and bonds but not spending on new business equipment such as power
tools.
d. Neither spending on new business equipment such as power tools nor spending on stocks
and bonds.
 29

8. 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. intermediate goods, and so is not included in that year’s GDP.
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.
30

9. A transfer payment is
a. a payment for moving expenses a worker receives when he or she is transferred by an
employer to a new location.
b. a payment that is automatically transferred from your bank account to pay a bill or some
other obligation.
c. a form of government spending that is not made in exchange for a currently produced
good or service.
d. the benefit that a person receives from an expenditure by government minus the taxes that
were collected by government to fund that expenditure.
 31

10. Transfer payments are

a. included in GDP because they represent income to individuals.
b. included in GDP because they eventually will be spent on consumption.
c. not included in GDP because they are not payments for currently produced goods or
services.
d. not included in GDP because taxes will have to be raised to pay for them.
32

11. A German citizen buys an automobile produced in the United States by a Japanese company. As a re-
sult,
a. U.S. net exports increase, U.S. GDP is unaffected, Japanese GNP increases, German net
exports decrease, and German GNP and GDP are unaffected.
b. U.S. net exports and GDP increase, Japanese GNP increases, German net exports
decrease, German GNP is unaffected, and German GDP decreases.
c. U.S. net exports and GDP increase, Japanese GNP increases, German net exports
decrease, and German GNP and GDP are unaffected (because the car is produced in
the US and even if NX decrease since imports increase, consumption increases so it
cancels out).
d. U.S. net exports and GDP are unaffected, Japanese GNP increases, and German net
exports, GNP, and GDP decrease.
 33

12. When an Egyptian firm purchases a cement mixer from Slovakia,

a. Egyptian investment does not change, Egyptian net exports decrease, Egyptian GDP
decreases, Slovakian net exports increase, and Slovakian GDP increases.
b. Egyptian investment increases, Egyptian net exports decrease, Egyptian GDP is
unaffected, Slovakian net exports increase, and Slovakian GDP increases. (for Slovakia,
net export increases since exports increased)
c. Egyptian investment decreases, Egyptian net exports increase, Egyptian GDP is
unaffected, Slovakian net exports decrease, and Slovakian GDP decreases.
d. Egyptian investment increases, Egyptian net exports do not change, Egyptian GDP
increases, Slovakian net exports do not change, and Slovakian GDP is unaffected.
34

13. The U.S. Air Force pays a Turkish citizen $30,000 to work on a U.S. base in Turkey. As a result,
a. U.S. government purchases increase by $30,000; U.S. net exports decrease by $30,000;
and U.S. GDP is unaffected.
b. U.S. government purchases increase by $30,000; U.S. net exports are unaffected; and U.S.
GDP increases by $30,000.
c. U.S. government purchases, net exports, and GDP are unaffected.
d. U.S. government purchases are unaffected; U.S. net exports decrease by $30,000; and U.S.
GDP decreases by $30,000.
 35

Table 10-1
The table below contains data for country A for the year 2017.
Household purchases of durable goods C $1293
Household purchases of nondurable goods C $1717
Household purchases of services C $301
Household purchases of new housing I $704
Purchases of capital equipment I $310
Inventory changes I $374
Purchases of new structures I $611
Depreciation not included $117
Salaries of government workers G $1422
Government expenditures on public works G $553
Transfer payments not included $777
Foreign purchases of domestically produced goods X $88
Domestic purchases of foreign goods M $120
36

14. Refer to Table 10-1. What was country A’s GDP in 2017?
a. $6359.
b. $7136.
c. $7253.
d. $8147.
 37

15. Refer to Table 10-1. What were country A’s net exports in 2017?
a. -$32.
b. $32.
c. $88.
d. $120.
38

CA 4

1. If total spending (the current price and current output: ex you buy 2 baguettes) 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 goods 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. This is because if there will be lower price than
before then total spending will be less than before. It is natural that if quantity of output
produced is  less then the seller tries to sell it at higher prices if the demand is more. Thus
the last statement is false. Total spending will be more only if the price rises.
 39

2. 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.
40

3. Changes in real 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.
 41

4. Which of the following statements about nominal GDP and real GDP is correct?
a. Nominal GDP is a better gauge of economic well-being than real GDP.
b. Real GDP is a better gauge of economic well-being than nominal GDP. (because we see
the real change of the output)
c. Real GDP and nominal GDP are equally good measures of economic well-being.
d. Neither nominal nor real GDP provide a measure of economic well-being.
42

5. 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. (economic growth = real GDP)
 43

6. The GDP deflator for years subsequent to the base year measures the change in
a. nominal GDP from the base year that cannot be attributable to a change in real GDP.
GDP deflator measures change in price level when compared with the base year
market price.

b. real GDP from the base year that cannot be attributable to a change in nominal GDP.
c. nominal GDP from the base year that cannot be attributable to a change in prices.
d. real GDP from the base year that cannot be attributable to a change in prices.
44

7. If nominal GDP is $12 trillion and real GDP is $10 trillion, then the GDP deflator is
a. 83.33, and this indicates that the price level has decreased by 16.67 percent since the base
year.
b. 83.33, and this indicates that the price level has increased by 83.33 percent since the base
year.
c. 120, and this indicates that the price level has increased by 20 percent since the base year.
d. 120, and this indicates that the price level has increased by 120 percent since the base
year.
 45

8. A country reported nominal GDP of $100 billion in 2017 and $75 billion in 2016. It also reported a
GDP deflator of 125 in 2017 and 120 in 2016. Between 2016 and 2017,
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.
46

9. 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.
 47

10. Which of the following statements about recessions is true?

a. An old rule of thumb defining recession is two consecutive quarters of falling nominal
GDP.
b. Recessions occur at regular intervals and last standard amounts of time.
c. There is no ironclad rule for the declaration of recessions. (no fixed rule for recession)
d. Recessions are associated with low unemployment and high income.
48

1. GDP is used as the basic measure of a society's economic well-being. A better measure of the eco -
nomic well-being of individuals in society is
a. saving per person.
b. GDP per person. = GDP per capita
c. government expenditures per person.
d. investment per business firm.
 49

2. GDP is not a perfect measure of well-being; for example,

a. GDP excludes the value of volunteer work.
b. GDP does not address the distribution of income.
c. GDP does not address environmental quality.
d. All of the above are correct.
50

3. International data on GDP and socioeconomic variables

a. are inconclusive about the relationship between GDP and the economic well-being of
citizens.
b. suggest that poor nations actually might enjoy a higher standard of living than do rich
nations.
c. leave no doubt that a nation's GDP is closely associated with its citizens' standard of
living.
d. indicate that there are few real differences in living standards around the world, in spite of
the large differences in GDP between nations.
TRUE/FALSE

1. In years of economic contraction, firms throughout the economy increase their production of goods
and services, employment rises, and jobs are easy to find.

2. Macroeconomic statistics include GDP, the inflation rate, the unemployment rate, retail sales, and
the trade deficit.

3. The goal of macroeconomics is to explain the economic changes that affect many households, firms,
and markets simultaneously.

4. An economy’s income is the same as its expenditure because every transaction has a buyer and a
seller.

5. GDP is the market value of all final goods and services produced by a country’s citizens in a given
period of time.

6. GDP excludes the value of intermediate goods because their value is included in the value of final
goods.

7. Disposable personal income is the income that households and noncorporate businesses have left af-
ter satisfying all their obligations to the government.

8. Expenditures by households on education are included in the consumption component of GDP.

9. The investment component of GDP refers to financial investment in stocks and bonds.

10. The overall effect of accounting for purchases of foreign goods in GDP reduces GDP.

11. If total spending rises from one year to the next, then the economy must be producing a larger output
of goods and services.

12. The term real GDP refers to a country’s actual GDP as opposed to its estimated GDP.

13. Economists use the term inflation to describe a situation in which the economy’s overall production
level is rising.

14. The GDP deflator can be used to take inflation out of nominal GDP.

15. GDP does not make adjustments for leisure time, environmental quality, or volunteer work.