ECON 1950 -Assignment / Practice Questions on Chapter 3 Please do more questions in the

text book

Section A

1) Under what circumstance will income in the circular flow diagram expand?
A) If financial intermediaries loan out an amount equal to savings.
B) If the household sector spends an amount less than the business sector pays out.
C) If payments by firms for the factors of production are less than the receipts of
those firms from sales to the household and government.
D) If exports increase more than imports increase.
E) If taxes rise and government transfer payments rise.

2). Which of the following is true of savings?

A) Savings occur for reasons similar to the reasons firms invest.
B) Savings take the form of money that is deposited with financial intermediaries.
C) Savings are defined as that portion of income which is not spent on consumption.
D) None of the above.

3) Which of the following statements refers to the complete circular flow of income diagram?
A) It has two leakages and two injections.
B) It indicates both government and private transfer payments.
C) It indicates "goods and services" and the "factors of production" flowing in the
same direction.
D) It has both financial and real flows.
E) All of the above.

4) What is the result if Professor Mumbler decorates his own home?

A) This activity is excluded from GDP because it is not productive work.
B) This activity is excluded from GDP because an intermediate good is involved.
C) This is a productive activity but is excluded from GDP because no market
transaction occurs.
D) This activity is included in GDP because it reflects production.
E) This activity is included in GDP only to the extent of Mumbler's opportunity costs.

5) What is the value of production?

A) It always equals total expenditures.
B) At equilibrium, it equals total expenditures.
C) It equals C + I + X.
D) It depends on the rate of savings.
E) It is determined by inventory changes.

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Use the following to answer questions 6 & 7:

6). Refer to the graph above to answer this question. What are flows (1) and (2)
respectively?
A) Consumption expenditures and factor payments.
B) Consumption expenditures and goods and services.
C) Factor payments and factors.
D) Factor payments and goods and services.
E) Goods and services and consumption expenditures.

7). Refer to the graph above to answer this question. What are flows (3) and (4)
respectively?
A) Goods and services and factor payments.
B) Goods and services and factors.
C) Consumption expenditures and goods and services.
D) Goods and services and consumption expenditures.
E) Factor payments and factors.

8) Which of the following summations is GDP equal to?

A) C + Ig + G + Xn. C) C + In + G + Xn.
B) C + Ig + G – Xn. D) C – In – G – Xn.

9) What can be concluded if, in a certain year, net investment is minus $5.8 billion?
A) That gross investment exceeds depreciation by $5.8 billion.
B) That the economy is expanding.
C) That depreciation exceeds gross investment by $5.8 billion.
D) That the economy produced no capital goods at all in the year in question.
E) That more capital goods were produced than were used up in production.

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10) Suppose that an economy's opening inventory was $45 billion and its closing
inventory was $60 billion. During the year its aggregate expenditures were $620
billion. What is the value of its production during the year?
A) $515 billion B) $605 billion. C) $635 billion. D) $725 billion.

11) Use the data to answer this question. What is the value of national income?

Personal Income 327

Undistributed corporate profits 59
Corporate profits tax 38
Other income not paid out 17
Government transfer payments 103

A) 304. B) 316. C) 338. D) 544.

12) How could reported GDP remain constant when production has risen?
A) If the price level rises.
B) If the increase in production was in the form of a non-market activity.
C) If underground production fell.
D) If inventories fall.

13) Which of the following is regarded as real capital?

A) A savings account. C) A dump truck.
B) A share of Bank of Montreal stock. D) A stock certificate.

14) All of the following, except one, adjustments to national income are necessary to
obtain personal income. Which is the exception?
A) Subtract undistributed profits. D) Subtract other income not paid out.
B) Subtract corporate-profit taxes. E) Add government transfer payments.
C) Subtract indirect taxes.

15) What is true about aggregate expenditures?

A) It always equals national income.
B) At equilibrium it is equal to national income.
C) It equals C+I+X.
D) It depends on the rate of savings.
E) It is determined by inventory changes.

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16). What does the term final goods and services mean?
A) Those goods and services which are unsold and which are therefore added to
inventories.
B) Those goods and services whose value has been adjusted for changes in the price
level.
C) Those goods and services purchased by the ultimate consumer.
D) The value of all finished products.
E) The value of all goods and services produced minus the value of government
services.

17). If the three injections are added to consumption spending and then imports are
subtracted, what is the result?
A) Equilibrium national income.
B) Aggregate expenditures.
C) The total personal income of all households.
D) The value of production.

18). What would be the effect if one half of the population did the housework for the other
half of the population, and vice versa, and each group paid the other for these services?
A) GDP would not be affected because the one set of transactions would cancel out
the other.
B) GDP would rise.
C) GDP would fall.
D) GDP would not be affected but the personal income of people would be.

19). What is included in consumption and investment spending respectively?

A) Spending on domestically produced goods and services and on real capital.
B) Spending on domestically produced and foreign-produced goods and services, and
on real capital.
C) Spending on domestically produced goods and services and on net foreign
investment income.
D) Spending on domestically produced goods and services and on the purchase of
stocks and bonds.

20). How does government spending on goods and services differ from government transfer
payments?
A) The former is done by the federal government and the latter by provincial
governments.
B) The former does not include investment spending but the latter does.
C) The former represents payments for services performed but the latter does not.
D) They are the same thing and therefore there is no difference.

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21). All of the following expect one are true in equilibrium. Which is the exception?
A) Total leakages equal total injections.
B) The value of production equals aggregate expenditures.
C) Y=AE.
D) The value of production equals consumer spending.

22). What do leakages from the circular flow diagram lead to?
A) An increase to wealth. D) A decrease in GDP.
B) An increase to GDP. E) An addition to loanable funds.
C) A decrease in wealth.

23). Under which circumstance will income in the circular flow diagram expand?
A) If exports increase. D) If taxes increase.
B) If savings expand. E) None of the above.
C) If government spending is reduced.

24). What is the difference between GDP and GNP?

A) GDP includes depreciation, whereas GNP does not.
B) GDP includes net exports, whereas GNP does not.
C) GDP measures production in Canada, whereas GNP measures production by
Canadians.
D) GDP includes imports, whereas GNP does not.

25). Suppose that an economy's opening inventory was $45 billion and its closing inventory
was $60 billion. During the year its aggregate expenditures were $620 billion. What is
the value of its production during the year?

A) $515 billion B) $605 billion. C) $635 billion. D) $725 billion.

Use the following to answer questions:

2002 2003 2004

Nominal GDP ($billion) 883 948
Real GDP ($billion) 748
GDP Deflator (1996 = 100) 120 126
Population (millions) 52.8 54
Real GDP per capita 14 330 14 890

26. Refer to the information above to answer this question. What is the value of real GDP
in 2004?
A) $638. B) $804. C) $1013. D) $1876. E) $6804.

27. Refer to the information above to answer this question. What is the value of real GDP
per capita in 2003?
A) $6336. B) $14 500. C) $14 962. D) $17 955. E) $21 545.

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Use the following, with Year 1 as the base year:

Year 1 Year 2
Quantity Price Quantity Price
Machines 20 $100 22 $105
Rice 100 $5 110 $6
Tractors 10 $500 11 $540

28. Refer to the information above to answer this question. What is the value of nominal
GDP in Year 2?
A) $605. B) $651 C) $7500. D) $8250. E) $8910.

29. Why are GDP data criticised as being inaccurate measures of economic welfare?
A) They do not measure changes in the distribution of income.
B) They do not measure changes in the amount of leisure.
C) They do not measure changes in product quality.
D) They do not measure the adverse effects of economic activity upon the
environment.
E) All of the above.

30. Which of the following is a final good or service?

A) Fuel bought by a trucking company.
B) Fertilizer purchased by a farmer in Alberta.
C) A haircut.
D) The tires purchased by General Motors from Goodyear.
E) The shampoo purchased by a hairdresser for use in the shop.

31. What does national income measure?

A) The value of a country's GDP expressed in "real" terms.
B) The after-tax income of all suppliers.
C) The amount of wages, rents, interest, and profits received by households.
D) The total tax revenue received by the government.

32. Which of the following is true in the factor market?

A) Businesses borrow funds from households.
B) Businesses sell resources to households.
C) Businesses buy consumer goods from households.
D) Businesses buy resources from households and from other businesses.

33. All of the following, except one, are injections. Which is the exception?
A) Investment. B) Taxes. C) Exports. D) Government purchases.

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34. Which of the following statements is relevant to the value of Canadian imports?
A) The imports figure is added to exports when calculating GDP because imports
represent spending by Canadians.
B) The imports figure is subtracted from exports when calculating GDP because
imports do not entail spending by Canadians.
C) The imports figure is subtracted from exports when calculating GDP because
imports do not involve production activity in Canada.
D) The imports figure is added when calculating GDP because imports do not
involve production activity in Canada.
E) The imports figure is added when calculating GDP, but subtracted when
calculating GNP.

35. What is consumption?

A) The amount by which the capital stock is used up each year.
B) The amount by which the stock of consumer durables is used up each year.
C) The expenditure by households on goods and services.
D) The expenditure by firms on goods and services.

36. What is a transfer payment?

A) The payment made to convert one currency into another.
B) The transmission of money from one country to another.
C) The transfer of taxes from the private sector to the government.
D) A one-way transaction in which payment is made but no good or service flows
back in return.

37. What is an injection?

A) Any spending that is dependent on the current level of income.
B) Any flow of money that comes directly from financial intermediaries.
C) The flow of money that comes directly from the central bank.
D) Any spending that is not dependent on the current level of income.

38. What is a transfer payment?

A) The payment made to convert one currency into another.
B) The transmission of money from one country to another.
C) The transfer of taxes from the private sector to the government.
D) A one-way transaction in which payment is made but no good or service flows
back in return.

39. What is income received within the circular flow which does not flow directly back to
the business sector?
A) Dissavings. C) An injection.
B) Either investment or exports. D) A leakage.

40. Which of the following statements is relevant to the value of Canadian imports?
A) The imports figure is added to exports when calculating GDP because imports

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 represent spending by Canadians.
B) The imports figure is subtracted from exports when calculating GDP because
imports do not entail spending by Canadians.
C) The imports figure is subtracted from exports when calculating GDP because
imports do not involve production activity in Canada.
D) The imports figure is added when calculating GDP because imports do not
involve production activity in Canada.
E) The imports figure is added when calculating GDP, but subtracted when
calculating GNP.

Answer Key – Section A

1D 8A 15 B 22 D 29 E 36 D
2C 9C 16 C 23 A 30 C 37 D
3D 10 C 17 B 24 C 31 C 38 D
4C 11 C 18 B 25 C 32 D 39 D
5B 12 B 19 B 26 B 33 B 40 C
6B 13 C 20 C 27 C 34 C
7E 14 C 21 D 28 E 35 C

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Section B Use the following to answer questions 1-5:

Below are some national income data (all figures in $ billions):

Table 1: National Income Statement

Indirect taxes (less subsidies) $30
Other income not paid out to persons 10
Direct (Personal Income) taxes 60
Corporation income taxes 35
Government transfer payments 25
Exports 30
Undistributed corporate profits 22
Government purchases of goods and services 100
Gross corporation profits 85
Imports 23
Consumption expenditures 200
Net investment 50
Net foreign factor income –5
Gross investment 75

1. Refer to the information above to answer this question. What is the figure for GDP?
A) $368. B) $382. C) $357. D) $377. E) $399.

2. What is the figure for GNP?

A) $352. B) $362. C) $377. D) $387. E) $394.

3. What is the figure for national income?

A) $352. B) $339. C) $347. D) $322. E) $332.

4. Refer to the information above to answer this question. What is the figure for personal
income?
A) $280. B) $290. C) $275. D) $285. E) $270.

5. Refer to the information above to answer this question. What is the figure for disposable
income?
A) $210. B) $225. C) $220. D) $230. E) $215.

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Use the following to answer questions 6-10: Below is a national income statement for the
economy:

Table 2: National Income Statement

Net exports $50
Government purchases of goods and services 148
Corporation income taxes 26
Consumption expenditures 350
Indirect taxes 40
Depreciation 53
Wages and salaries 382
Net income of farmers 10
Interest 37
Self-employed income 49
Gross investment 88
Government transfer payments 34
Undistributed corporate profits 22
Net foreign factor income -24
Corporation dividends 17

6. Refer to the national income statement above to answer this question. What is the gross
domestic product for this economy?
A) $584. B) $592. C) $609. D) $636. E) $623.

7. Refer to the national income statement above to answer this question. What is the figure
for net investment?
A) $35. B) $65 C) $38 D) $62

8. Refer to the national income statement above to answer this question. What is the figure
for national income?
A) $561. B) $573. C) $580. D) $530. E) $519.

9. Refer to the national income statement above to answer this question. What is the
figure for disposable income?

A) $484. B) $416 C) $502 D) $473 E) It cannot be determined from the data

given (because data for personal income tax is not provided)

10. Refer to the national income statement above to answer this question. What is the gross
national product for this economy?
A) $584. B) $592. C) $609. D) $636. E) $612.

Answer Key – Section B

1B 5C 9E

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 2C 6D 10 E
3D 7A
4A 8E

Section C - Additional Exercises

1. Distinguish between savings and investment.

Ans: Saving is that portion of income that isn't spent. It could take the form of cash or
an RRSP or stocks and bonds. Investment is spending (by firms and government)
on new capital goods. Both are flow concepts.

2. What are two things that are true when an economy is in equilibrium?

Ans: In equilibrium the value of total leakages equals the value of total injections. It
also means that aggregate expenditures are equal to total income.

3. Explain the difference between the stock of money and the flow of income.

Ans: The stock of money is an amount, which is measured at a particular moment in

time. For instance you have a certain amount of cash on your person at the
moment. Income, on the other hand, can only be measures over a period of time.
For instance if you earn an income of $200, it makes a big difference if this is
your weekly income, daily income or hourly income!

4. Are all productive activities not included in the measurement of GDP illegal?

Ans: There are many productive activities excluded from measured GDP because they
are non-market activities such as the value of housework, do-it-yourself
production as well as voluntary work. In addition, unreported activities from
which income is received – operating a day-care from your home, for instance – is
excluded. In this last case it's not the activity that is illegal; it's the non-reporting
that's illegal.

5. What is the difference between GDP and GNP? How are they related?
Ans: GDP or gross domestic product is the total market value of all final goods and
services produced in an economy in a one-year period. GNP or gross national
product is the aggregate final output of citizens and businesses of an economy in
a one-year period. These two measures are related to each other as follows: GNP
= GDP + net foreign factor income.

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6. Why might GDP per capita comparisons between countries be misleading? What do
economists do to avoid some of the problems?

Ans: Comparing per capita GDP between countries can be misleading for two main
reasons. First, prices and incomes vary from country to country. So, for example,
while a per capita GDP of $5000 might be considered quite low in the U.S., it is
likely to be quite high in many African countries where prices are much lower.
The other reason is because, in many countries, most economic activities occur
“off the books” and do not show up as part of the GDP per capita figures (such as
subsistence farming). When there is a lot of underground economic activities, the
reported GDP per capita figures significantly understate the true income per
capita.

Economists calculate per capita GDP adjusted for purchasing power parity, which
adjusts for the different relative prices among countries before making
comparisons.

7. Calculate how much GDP would change as a result of each of the following
transactions:
(a) The government purchases an airplane for $6 million.
(b) A citizen sells a used car for $6,000.
(c) A citizen sells a used car to a dealer for $6,000, who resells it to a consumer for
$7,500.
(d) A citizen sells a bond for $1,000 that they bought last year for $600.
(e) The government issues a welfare cheque for $1,250 (ignore the administrative costs
of issuing the check).

(a) $6 million. Government purchases are valued at cost.

Ans: (b) Zero. The sale of a used car by its owner involves no current output.
(c) $1,500. This is the value added by the dealer's marketing efforts.
(d) Zero. Value added refers to value added by the production of goods and
services, not changes in the value of financial assets.
(e) Zero. Transfer payments result in no value added.

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8. You are given the following data for the country of Cedar:

Exports 90 Government spending 126

Consumption 325 Imports 78
Gross investment 112 Net foreign factor income –8
Depreciation 75 Indirect taxes 64

a) What is the value of GDP?

b) What is the value of NNP (at market prices)?
c) What is the value of national income (net national product at
factor costs)?

Ans: a) $575
b) $492
c) $428

9. You are given the following data for the country of Poplar:

National income 765

Personal income taxes 215
Other income not paid out 36
Corporate profit taxes 64
Undistributed profits 42
Transfer payments 117

a) What is the value of personal income?

b) What is the value of disposable income?

Ans: a) 740
b) 525

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