Name: ________________________ Class: ___________________ Date: __________ ID: A
Problem Set Chapter5
Identify the letter of the choice that best completes the statement or answers the question.
____ 1. Which of the following questions is more likely to be studied by a microeconomist than a
a. Why do prices in general rise by more in some countries than in others?
b. Why do wages differ across industries?
c. Why do production and income increase in some periods and not in others?
d. How rapidly is GDP currently increasing?
____ 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
b. Money continuously flows from households to government and then back to households,
and GDP measures this flow of money.
c. GDP is to a nation抯 economy as household income is to a household.
d. All of the above are correct.
____ 3. For an economy, expenditure is equal to income because
a. by law firms must pay out all their revenue as income to someone.
b. for every sale there is a buyer and a seller.
c. prices of individual goods and services change, but the average price level stays the same.
d. None of the above is correct; expenditure is not always equal to income for an economy.
____ 4. GDP is defined as
a. the market value of all goods and services produced within a country in a given period of
b. the market 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. the market value of all final goods and services produced within a country in a given
period of time.
d. the market 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.
____ 5. In order to include many different goods and services in an aggregate measure, GDP is computed using,
a. values of goods and services based on surveys of consumers.
b. market prices.
c. consumer and producer surpluses.
d. costs of producing goods and services.
____ 6. Which of the following transactions adds to U.S. GDP for 2006?
a. In 2006, Ashley sells a car that she bought in 2002 to William for $5,000.
b. An American management consultant works in Mexico during the summer of 2006 and
earns the equivalent of $30,000 during that time.
c. When John and Jennifer were both single, they lived in separate apartments and each paid
$750 in rent. John and Jennifer got married in 2006 and they bought a house that,
according to reliable estimates, could be rented for $1,600 per month.
d. None of the above transactions adds to GDP for 2006.
1 Name: ________________________ ID: A
____ 7. Suppose an apartment complex converts to a condominium, so that the former renters are now owners of
their housing units. Suppose further that a current estimate of the value of the condominium owners'
housing services is the same as the rent they previously paid. What happens to GDP as a result of this
a. GDP necessarily increases.
b. GDP necessarily decreases.
c. GDP is unaffected because neither the rent nor the estimate of the value of housing
services is included in GDP.
d. GDP is unaffected because previously the rent payments were included in GDP, and now
the rent payments are replaced in GDP by the estimate of the value of housing services.
____ 8. Over time, people have come to rely more on market-produced goods and less on goods that they produce
for themselves. For example, busy people with high incomes, rather than cleaning their own houses, hire
people to clean their houses. By itself, this change has
a. caused GDP to fall.
b. not caused any change in GDP.
c. caused GDP to rise.
d. probably changed GDP, but in an uncertain direction; the direction of the change depends
on the difference in the quality of the cleaning that has resulted.
____ 9. A professional gambler moves from a state where gambling is illegal to a state where gambling is legal.
Most of his income was, and continues to be, from gambling. His move
a. necessarily raises GDP.
b. necessarily decreases GDP.
c. doesn't change GDP because gambling is never included in GDP.
d. doesn't change GDP because in either case his income is included.
____ 10. Grapes are
a. always counted as an intermediate good.
b. counted as an intermediate good only if they are used to produce another good such as
c. counted as an intermediate good only if they are consumed.
d. counted as an intermediate good, whether they are used to produce another good or
____ 11. A movie company makes 500,000 DVDs of one of its latest releases. It sells 300,000 of them before the
end of the second quarter, and holds the others in its warehouse. How will the 200,000 unsold DVDs be
treated in the GDP statistics?
a. Since the DVDs eventually will be bought by consumers, they are included as
consumption in the second quarter.
b. Since the DVDs were not purchased this quarter, they will be counted as an increase in
c. The DVDs will be counted as a change in inventory in the second quarter and so will be
included in second-quarter GDP.
d. The DVDs will be counted as a change in inventory in the second quarter, and when sold
in the third quarter will raise third-quarter GDP.
____ 12. An American company operates a fast food restaurant in Romania. Which of the following statements is
a. The value of the goods and services produced by the restaurant is included in both
Romanian GDP and U.S. GDP.
b. One-half of the value of the goods and services produced by the restaurant is included in
Romanian GDP, and the other one-half of the value is included in U.S. GDP.
c. The value of the goods and services produced by the restaurant is included in Romanian
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 Romanian GDP.
2 Name: ________________________ ID: A
____ 13. Which of the following items is included in U.S. GDP?
a. goods produced by foreign citizens working in the United States
b. the difference in the price of the sale of an existing home and its original purchase price
c. known illegal activities
d. None of the above is included in GDP.
____ 14. National income differs from net national product in that it includes business subsidies and excludes
a. profits of corporations.
b. indirect business taxes.
c. retained earnings of corporations.
____ 15. In the nation of Paolaland, quarterly GDP is always higher in the second quarter than in other quarters. In
order to account systematically for this predictable second-quarter jump in GDP, Paolaland's government
a. employ a statistical procedure called seasonal adjustment.
b. report a four-quarter moving average of GDP rather than the one-quarter figure.
c. report GNP rather than GDP.
d. report personal income rather than GDP.
____ 16. For the purpose of calculating GDP, investment is spending on
a. stocks, bonds, and other financial assets.
b. real estate and financial assets.
c. new capital equipment, inventories, and structures, including new housing.
d. capital equipment, inventories, and structures, excluding household purchases of new
____ 17. 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. saving, since the goods are being saved until they are sold in another period.
c. investment, since GDP aims to measure the value of the economy's production.
d. spending on durable goods, since the goods could not be inventoried unless they were
____ 18. Consider two items that might be included in GDP: (1) The estimated rental value of owner-occupied
housing; and (2) purchases of newly-constructed homes. How are these two items accounted for when
GDP is calculated?
a. Both item (1) and item (2) are included in the consumption component of GDP.
b. Item (1) is included in the consumption component, while item (2) is included in the
c. Item (1) is included in the investment component, while item (2) is included in the
d. Only item (2) is included in GDP and it is included in the investment component.
____ 19. If a U.S. citizen buys a television made in Korea by a Korean firm,
a. U.S. net exports decrease and U.S. GDP decreases.
b. U.S. net exports are unaffected and U.S. GDP decreases.
c. U.S. net exports are unaffected and U.S. GDP is unaffected.
d. U.S. net exports decrease and U.S. GDP is unaffected.
____ 20. After the terrorist attacks on September 11, 2001, governments within the United States raised
expenditures to increase security at airports. These purchases of goods and services are
a. not included in GDP since they do not represent production.
b. not included in GDP since the government will have to raise taxes to pay for them.
c. included in GDP since government expenditures are included in GDP.
d. included in GDP only to the extent that the federal government, rather than state or local
governments, paid for them.
3 Name: ________________________ ID: A
____ 21. 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
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.
____ 22. To encourage formation of small businesses, the government could provide subsidies; these subsidies
a. would be included in GDP because they are part of government expenditures.
b. would be included in GDP because they are part of investment expenditures.
c. would not be included in GDP because they are transfer payments.
d. would not be included in GDP because the government raises taxes to pay for them.
____ 23. Social Security payments are
a. included in GDP because they represent payments for work performed in the past.
b. included in GDP because they represent potential consumption.
c. excluded from GDP because they are not private pensions.
d. excluded from GDP because they do not represent current government purchases of
goods and services.
____ 24. Unemployment compensation is
a. part of GDP because it represents income.
b. part of GDP because the recipients must have worked in the past to qualify.
c. not part of GDP because it is a transfer payment.
d. not part of GDP because the payments reduce business profits.
____ 25. Which of the following is included in the consumption component of U.S. GDP?
a. purchases of staplers, paper clips, and telephones by U.S. business firms
b. purchases of natural gas by U.S. households
c. purchases of newly constructed homes by U.S households
d. All of the above are correct.
____ 26. Which of the following is included in the investment component of GDP?
a. households? purchases of newly constructed homes
b. net additions to firms? inventories
c. firms? purchases of capital equipment
d. All of the above are correct.
____ 27. Which of the following items is counted as part of government purchases?
a. The federal government pays $2,000 in Social Security benefits to a retired person.
b. The city of Des Moines, Iowa pays $10,000 to a tree-trimming firm to trim trees along
c. The state of Iowa pays $1,000 to help a low-income family pay its medical bills.
d. All of the above are correct.
____ 28. In a certain economy in 2005, GDP amounted to $5,000; consumption amounted to $3,000; government
purchases were equal to investment; and the value of imports exceeded the value of exports by $200. It
follows that government purchases amounted to
4 Name: ________________________ ID: A
____ 29. In a certain economy in 2005, government purchases exceeded investment by $2,000; investment
amounted to 1/6 of GDP; consumption amounted to 1/2 of GDP; and the economy抯 imports exceeded its
exports by $500. It follows that GDP amounted to
____ 30. If total spending rises from one year to the next, then
a. the economy must be producing a larger output of goods and services.
b. prices at which goods and services are sold must be higher.
c. either the economy must be producing a larger output of goods and services, or the prices
at which goo