Understanding Economics International Edition, 14th Edition by Russell S. Sobel – Test Bank

Understanding Economics International Edition, 14th Edition by Russell S. Sobel – Test Bank

Macroeconomics Chapter 7 B—Taking the Nation’s Economic Pulse

MULTIPLE CHOICE

239. Which of the following transactions would be counted toward this year’s GDP?

a.

General Motors purchases 10,000,000 tires from Firestone.

b.

A 300-year-old painting is sold for $12 million.

c.

A street gang earns $2 million from selling illegal drugs.

d.

Your real estate agent earns $5,000 commission when you sell your 100-year-old house for $100,000.

ANS: D PTS: 1 DIF: Moderate NAT: BUSPROG: Analytic

STA: DISC: Measuring the Economy TOP: GDP-A Measure of Output

KEY: Bloom’s: Application MSC: Coursebook

240. The consumer price index (CPI) and the GDP deflator are designed to measure the degree to which

a.

there have been changes in the proportions of national income generated by (and thus earned by) the rich relative to the poor.

b.

the cost of purchasing a bundle of goods has changed over time.

c.

consumption patterns have changed with time.

d.

consumer prices have risen over and above increases in worker wages.

ANS: B PTS: 1 DIF: Moderate NAT: BUSPROG: Analytic

STA: DISC: Measuring the Economy

TOP: Adjusting for Price Changes and Deriving Real GDP KEY: Bloom’s: Comprehension

MSC: Coursebook

241. If you wanted to take 2000 nominal GDP and convert it to 1995 prices, you would take 2000 nominal GDP and

a.

multiply it by (GDP deflator₁₉₉₅ 4 GDP deflator₂₀₀₀).

b.

multiply it by (GDP deflator₂₀₀₀ 4 GDP deflator₁₉₉₅).

c.

divide it by GDP deflator₂₀₀₀.

d.

divide it by (GDP deflator₂₀₀₀ + GDP deflator₁₉₉₅).

ANS: A PTS: 1 DIF: Moderate NAT: BUSPROG: Analytic

STA: DISC: Measuring the Economy

TOP: Adjusting for Price Changes and Deriving Real GDP KEY: Bloom’s: Application

MSC: Coursebook

242. Which of the following would not be counted as part of this year’s GDP?

a.

the increase in the value of an antique automobile that was restored this year

b.

the value of a new automobile at its sale price

c.

the value of a used car at its sale price

d.

a family’s replacement of a worn-out washing machine with a new one

ANS: C PTS: 1 DIF: Moderate NAT: BUSPROG: Analytic

STA: DISC: Measuring the Economy TOP: GDP-A Measure of Output

KEY: Bloom’s: Application MSC: Coursebook

243. Jim, a U.S. citizen, gets a summer job working in Germany. His summer earnings

a.

would count as part of U.S. GDP and German GNP.

b.

would count as part of U.S. GNP and German GDP.

c.

would count as part of U.S. GDP but would have no effect on Germany’s GNP or GDP.

d.

would be double-counted, raising both U.S. GDP and German GDP.

ANS: B PTS: 1 DIF: Moderate NAT: BUSPROG: Analytic

STA: DISC: Measuring the Economy TOP: GDP-A Measure of Output

KEY: Bloom’s: Application MSC: Coursebook

Use the table below to answer the following question(s).

Table 7-14

Personal consumption expenditures

$900

Personal taxes

180

Government consumption and gross investment

300

Interest income

60

Exports

40

Imports

75

Depreciation

60

Gross investment

200

244. Refer to Table 7-14. What is this country’s net exports?

a.

35

b.

-35

c.

115

d.

-115

ANS: B PTS: 1 DIF: Moderate NAT: BUSPROG: Analytic

STA: DISC: Measuring the Economy TOP: GDP as a Measure of Both Output and Income

KEY: Bloom’s: Application MSC: Coursebook

245. Refer to Table 7-14. What is this country’s gross domestic product?

a.

1,225

b.

1,305

c.

1,365

d.

1,440

ANS: C PTS: 1 DIF: Moderate NAT: BUSPROG: Analytic

STA: DISC: Measuring the Economy TOP: GDP as a Measure of Both Output and Income

KEY: Bloom’s: Application MSC: Coursebook

246. Which of the following is not a problem or shortcoming of GDP?

a.

Goods produced in one period that are sold in the following period fail to get counted in any period.

b.

It tends to understate the growth of economic welfare because it does not fully and accurately account for improvements in the quality of products.

c.

GDP is not an accurate measure of welfare because it makes no adjustment for harmful side effects (such as pollution) or destructive acts of nature.

d.

GDP understates output because it fails to include nonmarket production such as that which takes place in the household or in illegal markets.

ANS: A PTS: 1 DIF: Moderate NAT: BUSPROG: Analytic

STA: DISC: Measuring the Economy TOP: Problems with GDP as a Measuring Rod

KEY: Bloom’s: Comprehension MSC: Coursebook

247. If you were required to write a paper for your history class (or a report for your job) in which you were using dollar valued data across different years, you would

a.

use a price index to remove the effects of inflation to have reliable data measuring changes in the real value of things.

b.

never attempt to correct for inflation because inflation is a key indicator of economic activity.

c.

tell your teacher or boss that you never learned how to correct data for inflation.

d.

assume that prices did not change during the period you are studying.

ANS: A PTS: 1 DIF: Moderate NAT: BUSPROG: Analytic

STA: DISC: Measuring the Economy

TOP: Adjusting for Price Changes and Deriving Real GDP KEY: Bloom’s: Application

MSC: Coursebook

248. Suppose that nominal GDP increased by 3 percent, but the real GDP increased by only 1 percent during that same period. Which of the following best explains the phenomenon?

a.

Prices increased by approximately 1 percent.

b.

Prices increased by approximately 2 percent.

c.

Prices increased by approximately 3 percent.

d.

Prices increased by approximately 4 percent.

ANS: B PTS: 1 DIF: Moderate NAT: BUSPROG: Analytic

STA: DISC: Measuring the Economy

TOP: Adjusting for Price Changes and Deriving Real GDP KEY: Bloom’s: Application

MSC: Coursebook

249. If tax rates were raised substantially, we would expect which of the following scenarios to result?

a.

Measured GDP would fall relative to the actual amount of true economic activity.

b.

Measured GDP would come closer to reflecting the actual amount of true economic activity.

c.

GDP would increase by the amount of the new tax revenue because of the higher level of government spending it allows.

d.

Personal consumption expenditures would rise, while government spending would fall.

ANS: A PTS: 1 DIF: Moderate NAT: BUSPROG: Analytic

STA: DISC: Measuring the Economy TOP: Problems with GDP as a Measuring Rod

KEY: Bloom’s: Comprehension MSC: Coursebook

250. Which of the following would increase U.S. GDP?

a.

The city government of New York buys file cabinets directly from a Mexican company.

b.

A Mexican citizen buys stock in a U.S. company.

c.

A Japanese automobile company produces cars within the U.S.

d.

A U.S. automobile company produces cars in a foreign country.

ANS: C PTS: 1 DIF: Moderate NAT: BUSPROG: Analytic

STA: DISC: Measuring the Economy TOP: GDP-A Measure of Output

KEY: Bloom’s: Application MSC: Coursebook

251. You buy one hundred shares of IBM stock at $100 per share and pay $250 commission. How much will this transaction add to GDP?

a.

zero

b.

$250

c.

$10,000

d.

$10,250

ANS: B PTS: 1 DIF: Moderate NAT: BUSPROG: Analytic

STA: DISC: Measuring the Economy TOP: GDP-A Measure of Output

KEY: Bloom’s: Application MSC: Coursebook

252. If a used-car dealer purchases a used car for $1,000, restores it, and resells it for $1,500, the dealer contributes

a.

value added equal to $500, but nothing is added to GDP.

b.

value added equal to $500, and consequently $500 is added to GDP.

c.

nothing to production because only existing goods are involved.

d.

value added equal to $1,500, but only $500 is added to GDP.

ANS: B PTS: 1 DIF: Moderate NAT: BUSPROG: Analytic

STA: DISC: Measuring the Economy TOP: GDP-A Measure of Output

KEY: Bloom’s: Application MSC: Coursebook

253. Gross domestic product is the sum of

a.

the purchase price of all goods and services exchanged during the period.

b.

the purchase price of all final goods and services produced domestically during the period.

c.

the purchase price of all goods and services produced during the period minus depreciation of productive assets during the period.

d.

the purchase price of all final goods and services produced by a country’s citizens during the period.

ANS: B PTS: 1 DIF: Easy NAT: BUSPROG: Analytic

STA: DISC: Measuring the Economy TOP: GDP-A Measure of Output

KEY: Bloom’s: Knowledge MSC: Coursebook

254. If the base year for the GDP deflator is 1996, the value of the GDP deflator for 1996

a.

is 10.

b.

is 100.

c.

is 150.

d.

cannot be determined from the data given.

ANS: B PTS: 1 DIF: Moderate NAT: BUSPROG: Analytic

STA: DISC: GDP deflator

TOP: Adjusting for Price Changes and Deriving Real GDP KEY: Bloom’s: Application

MSC: Coursebook

255. If the base year for the GDP deflator is 2000 and the value of the GDP deflator in 2003 was 107, this indicates that the general level of prices

a.

declined between 2000 and 2003.

b.

was approximately 7 percent lower in 2003 than in 2000.

c.

was approximately 7 percent higher in 2003 than in 2000.

d.

was approximately 107 percent higher in 2003 than in 2000.

ANS: C PTS: 1 DIF: Moderate NAT: BUSPROG: Analytic

STA: DISC: Measuring the Economy

TOP: Adjusting for Price Changes and Deriving Real GDP KEY: Bloom’s: Application

MSC: Coursebook

256. Your grandfather tells you he earned $0.65 per hour at his job when he was a boy in 1929. Given that the CPI was 17.1 in 1929 and 215.3 in 2008, how much would you have had to make in 2008 to have the same real hourly wage as your grandfather?

a.

$0.65

b.

$5.14

c.

$8.18

d.

$11.12

ANS: C PTS: 1 DIF: Moderate NAT: BUSPROG: Analytic

STA: DISC: Measuring the Economy

TOP: Adjusting for Price Changes and Deriving Real GDP KEY: Bloom’s: Application

MSC: Coursebook

257. Assume that between 2000 and 2010 the money GDP of an economy increased from $3 trillion to $8 trillion and that the appropriate index of prices increased from 100 to 200. Which of the following expresses GDP for 2000 in terms of 2010 prices?

a.

$1 trillion

b.

$3 trillion

c.

$4 trillion

d.

$6 trillion

ANS: D PTS: 1 DIF: Moderate NAT: BUSPROG: Analytic

STA: DISC: Measuring the Economy

TOP: Adjusting for Price Changes and Deriving Real GDP KEY: Bloom’s: Application

MSC: Coursebook

258. Suppose that Mike earned $15,000 in 2008 and $15,600 in 2009. If the consumer price index was 100 in 2008 and 103 in 2009, by approximately what percent did Mike’s real salary increase?

a.

1 percent

b.

3 percent

c.

4 percent

d.

5 percent

ANS: A PTS: 1 DIF: Moderate NAT: BUSPROG: Analytic

STA: DISC: Measuring the Economy

TOP: Adjusting for Price Changes and Deriving Real GDP KEY: Bloom’s: Application

MSC: Coursebook

259. In a country where many families make their own clothes, GDP will be understated because the clothes making represents

a.

economic bads.

b.

leisure.

c.

the underground economy.

d.

nonmarket production.

ANS: D PTS: 1 DIF: Moderate NAT: BUSPROG: Analytic

STA: DISC: Measuring the Economy TOP: Problems with GDP as a Measuring Rod

KEY: Bloom’s: Application MSC: Coursebook

260. The primary value of GDP lies in its ability to

a.

reflect the welfare of a society relative to a previous period.

b.

compare the quality of a nation’s products between two periods widely separated in time.

c.

indicate short-term changes in the output rate of a nation.

d.

indicate how much leisure time the people of a nation have.

ANS: C PTS: 1 DIF: Moderate NAT: BUSPROG: Analytic

STA: DISC: Measuring the Economy

TOP: Adjusting for Price Changes and Deriving Real GDP KEY: Bloom’s: Comprehension

MSC: Coursebook

261. If the Consumer Price Index in 2008 was 150 and the CPI in 2009 was 165, the rate of inflation between 2008 and 2009 would be

a.

9.09 percent.

b.

10 percent.

c.

15 percent.

d.

110 percent.

ANS: B PTS: 1 DIF: Moderate NAT: BUSPROG: Analytic

STA: DISC: Measuring the Economy

TOP: Adjusting for Price Changes and Deriving Real GDP KEY: Bloom’s: Application

MSC: Coursebook

262. Accurate measurement of GDP is important to business decision-makers because this information will help them better determine the

a.

general happiness of a country’s citizens.

b.

course of the economy and the direction of demand for their products.

c.

economic well-being of a particular group within a country.

d.

amount of leisure time available and the quality of life in a country.

ANS: B PTS: 1 DIF: Moderate NAT: BUSPROG: Analytic

STA: DISC: Measuring the Economy TOP: GDP as a Measure of Both Output and Income

KEY: Bloom’s: Comprehension MSC: On-line Practice

263. Which of the following would increase U.S. GDP?

a.

Ford Motor Company begins to produce and sell cars in China.

b.

Mercedes-Benz begins to produce and sell cars in Mississippi.

c.

An American investor buys 100 shares of Ford stock.

d.

An American investor purchases 100 shares of Mercedes-Benz stock.

ANS: B PTS: 1 DIF: Moderate NAT: BUSPROG: Analytic

STA: DISC: Measuring the Economy TOP: GDP-A Measure of Output

KEY: Bloom’s: Application MSC: On-line Practice

264. As per capita GDP has risen in the United States and other countries,

a.

life expectancy and leisure time have also risen and infant mortality and illiteracy have gone down..

b.

life expectancy has risen but leisure time has gone down, while infant mortality and illiteracy have remained the same.

c.

various quality of life variables have been unaffected.

d.

most quality of life variables such as life expectancy and expenditures on leisure time activities have fallen.

ANS: A PTS: 1 DIF: Moderate NAT: BUSPROG: Analytic

STA: DISC: Measuring the Economy TOP: Differences in GDP Over Time

KEY: Bloom’s: Comprehension MSC: On-line Practice

265. National income is

a.

personal income of individuals minus the taxes they pay.

b.

gross national product minus depreciation.

c.

employee compensation, self-employment income, interest, rents, plus corporate profits.

d.

consumption, investment, government expenditures, and net exports.

ANS: C PTS: 1 DIF: Easy NAT: BUSPROG: Analytic

STA: DISC: Measuring the Economy TOP: GDP as a Measure of Both Output and Income

KEY: Bloom’s: Knowledge MSC: On-line Practice

266. Economists generally use GDP to measure a nation’s total output because it is

a.

equal to the sales value of all transactions conducted during a period and thus can be easily calculated.

b.

the best available measure of the true costs of producing consumer goods.

c.

unaffected by changes in the prices of products over time.

d.

a relatively reliable measure of the value of all final product goods and services produced during a specific time period.

ANS: D PTS: 1 DIF: Moderate NAT: BUSPROG: Analytic

STA: DISC: Measuring the Economy TOP: GDP as a Measure of Both Output and Income

KEY: Bloom’s: Comprehension MSC: On-line Practice

267. Per capita GDP is

a.

real GDP divided by the GDP deflator

b.

a measure of income per person

c.

a measure of resources available to each person

d.

an indicator of the overall production of a government

ANS: B PTS: 1 DIF: Easy NAT: BUSPROG: Analytic

STA: DISC: Measuring the Economy TOP: Differences in GDP Over Time

KEY: Bloom’s: Knowledge MSC: On-line Practice

268. Your father tells you he earned $3.00 per hour when he was 16 in 1977; you remember making $6.00 per hour when you were 16 in 1999. Given that the CPI was 36.7 in 1969 and 166.1 in 2007, which of the following is the 2007 real equivalent of your father’s hourly earnings when he was 16?

a.

$4.48

b.

$6.78

c.

$13.58

d.

$15.01

ANS: C PTS: 1 DIF: Moderate NAT: BUSPROG: Analytic

STA: DISC: Measuring the Economy

TOP: Adjusting for Price Changes and Deriving Real GDP KEY: Bloom’s: Application

MSC: On-line Practice

269. The dollar value of GDP increased approximately 4 percent during the year, but real GDP fell 2 percent. Which of the following best explains this data?

a.

The real capacity of the economy increased more rapidly than money output.

b.

In the international sector, there was a balance of trade deficit of approximately 2 percent of GDP.

c.

The inflation rate was approximately 6 percent during the year.

d.

The general level of prices rose approximately 2 percent.

ANS: C PTS: 1 DIF: Moderate NAT: BUSPROG: Analytic

STA: DISC: Measuring the Economy TOP: Differences in GDP Over Time

KEY: Bloom’s: Comprehension MSC: On-line Practice

270. Which of the following accurately indicates how the recent outbreaks of terrorism have influenced the GDP of western nations?

a.

Additional expenditures on security designed to protect individuals from terrorist attacks are subtracted from GDP.

b.

Additional expenditures on security designed to protect individuals from terrorist attacks are added to GDP as part of output.

c.

Since expenditures on the prevention of terrorism do not contribute to the well-being of individuals, they exert no impact on GDP.

d.

Since terrorism is merely a redistribution of output, expenditures on the prevention of terrorism do not contribute to GDP.

ANS: B PTS: 1 DIF: Moderate NAT: BUSPROG: Analytic

STA: DISC: Measuring the Economy TOP: Problems with GDP as a Measuring Rod

KEY: Bloom’s: Comprehension MSC: On-line Practice

271. If the GDP deflator in 2009 was 120 compared to a value of 100 during the 2004 base year, this would indicate that

a.

the inflation rate during 2009 was 20 percent.

b.

the general level of prices during 2009 was 20 percent higher than during 2004.

c.

the inflation rate during 2009 was 120 percent.

d.

real GDP was 20 percent higher in 2009 than 2004.

ANS: B PTS: 1 DIF: Moderate NAT: BUSPROG: Analytic

STA: DISC: Measuring the Economy

TOP: Adjusting for Price Changes and Deriving Real GDP KEY: Bloom’s: Application

MSC: On-line Practice

272. Use the table below to choose the correct answer.

Personal consumption expenditures

$300

Government consumption and gross investment

115

Rent income

75

Net investment expenditures

100

Gross imports

15

Personal savings

125

Gross exports

10

Depreciation

50

Gross domestic product equals

a.

$550.

b.

$510.

c.

$595.

d.

$610.

ANS: B PTS: 1 DIF: Moderate NAT: BUSPROG: Analytic

STA: DISC: Measuring the Economy TOP: GDP as a Measure of Both Output and Income

KEY: Bloom’s: Application MSC: On-line Practice

273. Which of the following would be counted in the calculation of GDP?

a.

the sale of a rare, old coin to a coin collector

b.

the damage to a house caused by a hurricane

c.

the brokerage commission from the sale of 100 shares of Microsoft stock

d.

the sale of cocaine in the black market

ANS: C PTS: 1 DIF: Easy NAT: BUSPROG: Analytic

STA: DISC: Measuring the Economy TOP: GDP-A Measure of Output

KEY: Bloom’s: Comprehension MSC: On-line Practice

274. How much would be added to this year’s GDP if you sold your four-year-old automobile for $4,000 and purchased a two-year-old model from an acquaintance for $10,000.

a.

nothing

b.

$6,000

c.

$10,000

d.

$14,000

ANS: A PTS: 1 DIF: Moderate NAT: BUSPROG: Analytic

STA: DISC: Measuring the Economy TOP: GDP-A Measure of Output

KEY: Bloom’s: Application MSC: On-line Practice

275. If on-the-job working conditions have improved over time,

a.

real GDP will understate the growth rate of real income.

b.

real GDP will overstate the growth rate of real income.

c.

the GDP deflator will overestimate inflation.

d.

real GDP will overstate the growth rate of real income, and the GDP deflator will understate inflation.

ANS: A PTS: 1 DIF: Moderate NAT: BUSPROG: Analytic

STA: DISC: Measuring the Economy TOP: Problems with GDP as a Measuring Rod

KEY: Bloom’s: Comprehension MSC: On-line Practice

276. Assume that between 1999 and 2009 nominal GDP increased from $7 trillion to $12 trillion and that the GDP deflator rose from 100 to 150. Which of the following expresses GDP for 2009 in terms of 1999 prices?

a.

$7.5 trillion

b.

$8.0 trillion

c.

$9.0 trillion

d.

$18.0 trillion

ANS: B PTS: 1 DIF: Moderate NAT: BUSPROG: Analytic

STA: DISC: Measuring the Economy

TOP: Adjusting for Price Changes and Deriving Real GDP KEY: Bloom’s: Application

MSC: On-line Practice

ESSAY

277. Answer the following questions:

a.

What does GDP measure, and why is it a useful tool for economists, business decision makers, and government policy makers?

b.

Explain at least two important things GDP does not measure.

ANS:

a.

GDP measures the productive output of a country’s economy. It is a measure of the market value of all domestically produced final goods and services during a specific period. It gives economists and other interested parties a way to gauge the health of the economy and to forecast the economy.

b.

Although GDP is generally a good measure of the productive capacity of an economy, it cannot measure the quality of goods and the introduction of new goods through time. It also is incapable of measuring the underground economy (both legal and illegal transactions) or the extent of nonmarket production in a country. In addition, it excludes leisure and the human cost associated with the production of goods and services. Lastly, it does not make an adjustment for the harmful side effects that arise from production and consumption and the events of nature.

PTS: 1 DIF: Challenging NAT: BUSPROG: Analytic

STA: DISC: Measuring the Economy TOP: GDP as a Measure of Both Output and Income

KEY: Bloom’s: Comprehension MSC: Critical Thinking

278. Explain the two approaches to calculating GDP.

ANS:

One approach involves adding up the expenditures on goods and services produced during the year. This figure would be the sum of personal consumption expenditures, government consumption and gross expenditures, gross private domestic investment, and net exports to foreigners. The other approach is calculated by adding up the income payments to resource suppliers and the other costs of producing those goods and services. Specifically, this method would sum employee compensation, proprietors’ income, interest, rents, corporate profits, indirect business taxes, cost of depreciation, and the net income of foreigners.

PTS: 1 DIF: Moderate NAT: BUSPROG: Analytic

STA: DISC: Measuring the Economy TOP: GDP as a Measure of Both Output and Income

KEY: Bloom’s: Comprehension MSC: Critical Thinking

279. What is the difference between real and nominal GDP? If the president of the United States (or your instructor) asked you to evaluate the economy over the past five years, which one would you use and why?

ANS:

Real GDP is nominal GDP adjusted for the effects of inflation. Mathematically, real GDP (in constant base-year dollars) equals nominal GDP multiplied by 100 divided by the GDP deflator. An increase in nominal GDP may be due to increases in production of goods and services, or it may simply be due to an increase in prices. For this reason, real GDP is a better variable for evaluating the performance of the economy over several years.

PTS: 1 DIF: Moderate NAT: BUSPROG: Analytic

STA: DISC: Measuring the Economy

TOP: Adjusting for Price Changes and Deriving Real GDP KEY: Bloom’s: Comprehension

MSC: Critical Thinking

280. The consumer price index is calculated using a fixed basket of goods. Will this always give an accurate representation of the changing cost of living to consumers? Why or why not?

ANS:

The CPI tends to overstate inflation because it uses a fixed basket of goods. The fixed basket does not allow the CPI to take into account the fact that consumers will substitute cheaper goods for goods whose price is rising. When faced with rising prices, consumers are likely to alter the basket of goods that they consume.

PTS: 1 DIF: Moderate NAT: BUSPROG: Analytic

STA: DISC: Measuring the Economy

TOP: Adjusting for Price Changes and Deriving Real GDP KEY: Bloom’s: Analysis

MSC: Critical Thinking

281. Answer the following questions:

a.

In 2004, four major hurricanes hit Florida. Explain how this destruction of property, and the rebuilding that went on afterward, affected GDP.

b.

Explain how GDP has trouble accounting for other parts of the economy as well.

ANS:

a.

The goods that are destroyed are not subtracted from GDP, and there is no way to account for the loss in productive capacity to the economy. The rebuilding that occurs after a natural disaster, however, is counted in GDP; for this reason, disasters like hurricanes and earthquakes can actually end up increasing GDP.

b.

GDP also cannot account for production of goods outside of the market system, like household production. Also, unreported and illegal transactions (the underground economy) are not counted in GDP. These factors will cause GDP to understate the true level of production in the economy.

PTS: 1 DIF: Moderate NAT: BUSPROG: Analytic

STA: DISC: Measuring the Economy TOP: Problems with GDP as a Measuring Rod

KEY: Bloom’s: Analysis MSC: Critical Thinking