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Chapter 6 macro question

The word “net” in the term “net domestic investment” means that:
A) resales of existing capital equipment are not counted
B) investment by foreigners in the U.S. is not counted
C) investment to replace capital that was used up in the production of the year’s output is not counted
D) depreciation must be added to gross investment
c
Depreciation of capital is subtracted from gross investment to obtain net investment.
If gross investment exceeds depreciation:
A) the nation’s capital stock will expand
B) net investment will be negative
C) net investment will exceed gross investment
D) the nation’s capital stock will shrink
“The market value of all final goods and services produced within a nation in a given year.” This best describes:
A) Net domestic product
B) Gross domestic product
C) National income
D) Personal income
b
This is the definition of GDP. Net domestic product subtracts depreciation, while national income and personal income require further adjustments.
The XYZ Corporation raised $50 million in the sale of common stock last year. It spent $30 million on new plant and equipment, $15 million on replacing equipment that had worn out during the previous year, and $5 on a new advertising campaign. XYZ’s:
A) Gross investment was $50 million
B) Net investment was $45 million
C) Gross investment was $45 million
D) Net investment was $35 million
c
Gross investment includes all investment in plant and equipment. It does not include spending on advertising.
ABC Company had net investment of $20 million and gross investment of $25 million last year while paying $3 million in sales tax receipts to the government. Its depreciation last year was:
A) $17 million
B) $22 million
C) $8 million
D) $5 million
d
Depreciation measures the amount of capital goods used up to produce output and is the difference between gross and net investment—$5 million in this example.
Last year nominal GDP increased by 8% while real GDP increased by 10%. From this, we can conclude that:
A) net investment was positive last year
B) the price level increased last year
C) the price level decreased last year
D) unemployment increased last year
c
Nominal and real GDP increase at the same rate if there is no change in the price level. If prices are increasing, then nominal GDP will increase at a faster rate than real GDP, as the former accounts not only for the growth in output but the growth in prices as well. By similar logic, the price level must have decreased if nominal GDP growth is less than real GDP growth.
After 2000:
A) the price index is less than 100
B) real GDP is growing faster than nominal GDP
C) the price level is falling
D) the price index exceeds 100
d
Since nominal GDP exceeds real GDP after 2000, nominal GDP is being “deflated.” The price level in these years must exceed the price level in the base year.
GDP:
A) includes the value of both market and nonmarket transactions
B) corrects for improved product quality over time
C) corrects for improved productivity that results in increased leisure time
D) does not include transactions conducted “off-the-books”
d
GDP does not include transactions from the so-called “underground economy,” nor does it include the value of nonmarket transactions or corrections for improved product quality or increased leisure time.
Real GDP is found by:
A) adding depreciation to nominal GDP
B) adjusting nominal GDP by the GDP price index
C) adding up the dollar value of all transactions in the economy in a given year
D) excluding exports and imports from nominal GDP
b
Real GDP adjusts for changes in the overall price level by dividing nominal GDP by the GDP price index.
In calculating GDP:
A) both exports and imports are added
B) neither exports nor imports are added
C) exports are added and imports are subtracted
D) imports are added and exports are subtracted
c
GDP measures the market value of all goods and services produced within the country in a year. Goods that are exported certainly meet this criteria; consumption and other expenditures may include the value of goods produced elsewhere, and must be corrected by subtracting imports.
Last year domestic firms spent $115 billion on plant and equipment, of which $15 billion replaced equipment that had worn out during the year. In addition, they added $10 billion to inventories. In calculating GDP, national income accountants would add gross investment of:
A) $95 billion
B) $100 billion
C) $110 billion
D) $125 billion
d
Gross investment includes both inventory changes and depreciation. Net investment would not include the $15 billion for worn equipment.
In calculating GDP, the value of net exports is:
A) included, because exports reflect U.S. production while imports do not
B) included, because exports reflect U.S. production and imports reflect U.S. consumption
C) excluded, because exports reflect a flow of products outside the U.S. and imports reflect a flow of money outside the U.S.
D) excluded, because neither exports nor imports reflect U.S. consumption
a
GDP must include exports to capture spending on U.S. production by those in other countries. Imports must be subtracted from consumption and other spending that does not reflect U.S. production.
Suppose nominal GDP in the base year was $380 billion. Five years later, nominal GDP was $480 and the GDP price index was 120. Over those five years, real GDP:
A) increased by $20 billion
B) increased by $96 billion
C) increased by $80 billion
D) did not change
a
In the base year, real GDP and nominal GDP are equal. To calculate real GDP five years out, divide nominal GDP in that year by the price deflator and multiply the result by 100 to obtain real GDP = $400, a $20 billion increase from the base year.
In order from largest to smallest, the components of U.S. expenditures comprising GDP are:
A) consumption, net exports, gross investment, government purchases
B) government purchases, gross investment, consumption, net exports
C) consumption, government purchases, gross investment, net exports
D) consumption, government purchases, net exports, gross investment
c
Consumption is by far the largest, net exports by far the smallest. Gross investment and government purchases tend to be close to one another.
If business firms draw down their inventories this year:
A) net investment will be negative
B) this will have no impact on measured GDP
C) the drop in inventory must be subtracted in measuring GDP
D) the drop in inventory must be added back in measuring GDP
c
Purchases of these goods represents production from a prior year and must be subtracted from total spending to obtain GDP.
Disposable income consists of:
A) personal income plus personal taxes
B) net domestic product minus personal taxes
C) GDP corrected for inflation
D) consumption plus saving
d
Disposable income is personal income less personal taxes. As such, households are free either to spend it or save it.
In a given year, a country’s exports total $25 billion and its imports are $27 billion. Its net exports are:
A) $52 billion
B) – $2 billion
C) $2 billion
D) $26 billion
b
“Net exports” is defined as exports minus imports.
GDP can be found either by adding up total expenditures on U.S. production or by adding the incomes received by U.S. citizens.
A) True
B) False
false
GDP can be found by adding total expenditures on U.S. production. However, some modifications must be made to incomes received by U.S. citizens to find GDP. In particular, there must be adjustments for net foreign factor income, depreciation, taxes on production and imports, and other forms of income that are earned but not received, such as Social Security taxes and undistributed corporate profits.
If the GDP price index is 150 and nominal GDP is $600, real GDP is $400.
A) True
B) False
true
To find real GDP, divide nominal GDP by the GDP price index and multiply the result by 100. (600/150) x 100 = 400.
GDP includes
A) all government spending at all levels
B) all government spending at all levels except the local level
C) government purchases at all levels plus federal spending on transfer payments
D) government purchases at all levels, which excludes transfer payments
d
Transfer payments do not represent current production of goods and services, merely a transfer of financial assets from some individuals to others.
GDP excludes expenditures for:
A) additions to inventories
B) new housing
C) government purchases of military equipment
D) corporate stock
d
Corporate stock is a certificate of ownership of a firm and does not represent production of final goods and services.
The “G” term in C + Ig + G + Xn includes all of the following except:
A) state government purchases of new computers
B) Social Security checks received by retirees
C) salaries received by members of the military
D) local government expenditures for new school construction
b
Social Security checks are transfer payments—transfers of income from taxpayers to recipients—that does not represent a contribution to current production.
A nation’s capital stock was valued at $400 billion on January 1st and $420 billion on December 31st. If consumption of private fixed capital was $15 billion during the year:
A) net investment was $35 billion
B) net investment was $5 billion
C) gross investment was $20 billion
D) gross investment was $35 billion
d
Net investment is measured by the growth in the capital stock. In this example, net investment is $420 billion minus $400 billion, or $20 billion. Gross investment is this amount plus any depreciation.
Refer to the following data:

Net domestic product in this economy is:
A) $6,080
B) $6,230
C) $6,295
D) $6,270

a
Net domestic product is the sum of C + In + G + Xn: $4,500 + ($800 – $150) + $950 + ($65 – $85) = $6,080.
The income approach to GDP sums the total income earned by resource suppliers and adds:
A) net transfer payments and personal taxes
B) net investment and depreciation
C) depreciation, taxes on production and imports, and net factor income earned abroad
D) net transfer payments, depreciation, and net factor income earned in the U.S.
c
The expenditure approach sums the value of all expenditures on domestically produced output. To match this, the income approach begins with national income—income earned by U.S.-supplied resources. However, it must also include depreciation, taxes on production and imports, and net factor income earned abroad.
This economy produces only one product; price and output data are shown for a five-year period. Year 3 is the base year.
The price index for year 4 is:
A) 80
B) 120
C) 20%
D) 1.2
b
The price index is the ratio of the value of output in year 4 to the value of that same output in year 3, multiplied by 100. In this example, the price index is [(9 x $6) / (9 x $5)] x 100, or 120.
Refer to the following data:

This economy produces only one product; price and output data are shown for a five-year period. Year 3 is the base year.
Real GDP in year 5 is:
A) $40
B) $50
C) $56
D) $70

b
Real GDP measures the value of output using constant prices. In this example, year 5 output is 10 and the base year price is $5, so real GDP is $50. Alternatively, one could calculate the price index for year 5 as 140, then calculate real GDP as year 5 nominal GDP ($70) deflated by the index: real GDP = ($70 /140) x 100 = $50.
In a given year, nominal GDP increased by 12% while the GDP price index rose from 150 to 156. Over this period, real GDP:
A) remained constant
B) rose by approximately 6%
C) rose by approximately 8%
D) rose by approximately 12%
c
The price level rose by 4%, from 150 to 156. Real GDP increased approximately by the difference in the growth of nominal GDP and the growth in the price index.
The change in real GDP is not an accurate measure of the change in economic welfare because:
A) improvements in product quality are overstated
B) expenditures for personal services are excluded
C) the price level changes over time
D) some production creates pollution
d
To the extent that increased production degrades the environment, measured changes in output will fail to account for changes in economic well-being.
If imports exceed exports, the “net exports” term in GDP is positive.
A) True
B) False
false
“Net exports” is defined as exports minus imports. If imports exceed exports, this term will be negative.
In comparing GDP data over a period of years, a difference between nominal and real GDP may arise because:

a. of changes in trade deficits and surpluses.

b. the length of the workweek has declined historically.

c. the price level may change over time.

d. depreciation may be greater or smaller than gross investment.

c
Gross private domestic investment exceeds depreciation in an economy that experiences expanding production capacity.

True

False

True
The simplest way to calculate GDP is to sum the total sales of all business firms.

True

False

False
Personal income usually exceeds disposable income.
True

False

True
Answer the next question(s) on the basis of the following information: Only three goods are produced in an economy in the following amounts: A = 10, B = 30, C = 5. The current year per unit prices of these three goods are A = $2, B = $3, and C = $1.

Refer to the above information. Nominal GDP in the current year is:

a. $110.

b. $115.

c. $45.

d. $90.

b
In determining GDP by the expenditures method it is appropriate to use net investment rather than gross investment as a measure of investment spending.

True

False

False
Use the following table for a hypothetical single-product economy.

Picture

Refer to the above data. Real GDP in year 3 is:

a. $100.

b. $450.

c. $225.

d. $150.

d
Which of the following do national income accountants consider to be investment?

a. the purchase of an automobile for private, nonbusiness use

b. the purchase of a new house

c. the purchase of corporate bonds

d. the purchase of gold coins

b
Answer the next question(s) on the basis of the following data. All figures are in billions of dollars:
government purchases: $15
consumptions: $90
gross investment: $20
consumption of fixed capital: $5
exports: $8
imports: $12

Refer to the above data. GDP is:

a. $116. Incorrect

b. $121.

c. $125.

d. $150.

b
Refer to the above diagram. Which of the following statements is correct?

a. The price index is greater than 100 for every year shown on the graph.

b. Nominal GDP must be deflated in each year prior to 2000 to determine real GDP.

c. Real GDP has grown in this economy, but nominal GDP has not.

d. Nominal GDP must be deflated in each year since 2000 to determine real GDP.

d
Value added refers to:

a. any increase in GDP that has been adjusted for adverse environmental effects.

b. the excess of gross investment over net investment.

c. the difference between the value of a firm’s output and the value of the inputs it has purchased from others.

d. the portion of any increase in GDP that is caused by inflation as opposed to an increase in real output.

c
40 Personal taxes
15 social security contributions
20 taxes on production and imports
22 transfer payments
24 U.S. exports
35 undistributed corporate profits
90 government purchases
75 gross private domestic investments
22 U.S. imports
250 personal consumption expenditures
25 consumption of fixed capital
10 net foreign factor income
Refer to the above data. GDP is:

a. $390.

b. $417.

c. $422.

d. $492.

b
Gross domestic product (GDP) measures and reports output:

a. as an index number.

b. in percentage terms.

c. in dollar amounts.

d. in quantities of physical units (for example, pounds, gallons, and bushels).

c
Assume an economy that is producing only one product. Output and price data for a three-year period are as follows. Answer the next question(s) on the basis of these data.

Picture

Refer to the above data. The nominal GDP for year 3 is:

a. 125 percent higher than the nominal GDP for year 1.

b. 50 percent higher than the nominal GDP for year 1.

c. $120.

d. $30.

a
If nominal GDP in some year is $280 and real GDP is $160. The GDP price index for that year is:

a. 175.

b. 57.

c. 160.

d. 280

a
Refer to the above data. Gross domestic product is:

a. $395.

b. $380.

c. $375.

d. $360.

a
Net exports are negative when:

a. a nation’s imports exceed its exports. Correct

b. the economy’s stock of capital goods is declining.

c. depreciation exceeds domestic investment.

d. a nation’s exports exceed its imports.

a
Real GDP refers to:

a. the value of the domestic output after adjustments have been made for environmental pollution and changes in the distribution of income.

b. GDP data that embody changes in the price level, but not changes in physical output.

c. GDP data that reflect changes in both physical output and the price level.

d. GDP data that have been adjusted for changes in the price level.

d
If personal income exceeds national income in a particular year, we can conclude that:

a. transfer payments exceeded the sum of Social Security contributions, corporate income taxes, and taxes on production and imports.

b. the sum of Social Security contributions, corporate income taxes, and undistributed corporate profits exceeded transfer payments.

c. consumption of fixed capital and taxes on production and imports exceeded personal taxes.

d. transfer payments exceeded the sum of Social Security contributions, corporate income taxes, and undistributed corporate profits.

d
A nation’s gross domestic product (GDP):

a. can be found by summing C + Ig + G + Xn. Correct

b. is the dollar value of the total output produced by its citizens, regardless of where they are living.

c. can be found by summing C + S + G + Xn.

d. is always some amount less than its NDP.

a
1. (Last Word) The U.S. government agency responsible for compiling the national income accounts is the:
A. Census Bureau.
B. Bureau of Labor Statistics (BLS).
C. Commerce Department’s Bureau of Economic Analysis (BEA).
D. Government Accounting Office (GAO).
c
3. If real GDP rises and the GDP price index has increased: A. the percentage increase in nominal GDP must have been less than the percentage increase in the price level. B. nominal GDP may have either increased or decreased. C. nominal GDP must have increased.
D. nominal GDP must have fallen.
c
5. When an economy’s production capacity is expanding: A. nominal GDP, but not necessarily real GDP, is rising.
B. net exports is always a positive amount.
C. DI exceeds PI.
D. domestic investment exceeds depreciation.
d
6. The fact that nominal GDP has risen faster than real GDP:
A. suggests that the base year of the GDP price index has been shifted.
B. tells us nothing about what has happened to the price level.
C. suggests that the general price level has fallen.
D. suggests that the general price level has risen.
d
7. The concept of net domestic investment refers to:
A. the amount of machinery and equipment used up in producing the GDP in a specific year.
B. the difference between the market value and book value of outstanding capital stock.
C. gross domestic investment less net exports.
D. total investment less the amount of investment goods used up in producing the year’s output.
d
8. Which of the following is a final good or service?
A. a haircut
B. fertilizer purchased by a farm supplier
C. diesel fuel bought for a delivery truck
D. Chevrolet windows purchased by a General Motors assembly plant
a
9. Real GDP refers to:
A. the value of the domestic output after adjustments have been made for environmental pollution and changes in the distribution of income.
B. GDP data that embody changes in the price level, but not changes in physical output.
C. GDP data that reflect changes in both physical output and the price level.
D. GDP data that have been adjusted for changes in the price level.
d
10. Transfer payments are included in:
A. NI.
B. PI.
C. GDP.
D. NDP.
b
Answer the next question(s) on the basis of the following information: Only three goods are produced in an economy in the following amounts: A = 10, B = 30, C = 5. The current year per unit prices of these three goods are A = $2, B = $3, and C = $1.
11. (Advanced analysis) Refer to the above information. If the per unit prices of the three goods each were $1 in a base year used to construct a GDP price index, then real GDP in the current year is:
A. $110.
B. $115.
C. $45.
D. $160.
c
12. GDP includes:
A. neither intermediate nor final goods.
B. both intermediate and final goods.
C. intermediate, but not final, goods.
D. final, but not intermediate, goods.
d
13. Value added can be determined by:
A. summing the profits of all enterprises in the economy.
B. subtracting the purchase of intermediate products from the value of the sales of final products.
C. calculating the year-to-year changes in real GDP.
D. deflating nominal GDP.
b
Economy A: gross investment equals depreciation Economy B: depreciation exceeds gross investment Economy C: gross investment exceeds depreciation
15. Other things equal, the above information suggests that the production capacity in economy:
A. B is growing more rapidly than either A or C.
B. A is growing more rapidly than either B or C.
C. A is growing less rapidly than economy B.
D. C is growing more rapidly than economy B.
d
17. The GDP price index:
A. includes fewer goods and services than the consumer price index.
B. is identical to the consumer price index.
C. is another term for the producer price index.
D. includes all goods comprising the nation’s domestic output.
d
19. Historically, real GDP has increased less rapidly than nominal GDP because:
A. price indices have not reflected improvements in product quality.
B. the general price level has increased.
C. technological progress has resulted in more efficient production.
D. the general price level has declined.
b
21. Which of the following activities is excluded from GDP, causing GDP to understate a nation’s well-being?
A. the services of used-car dealers
B. the child-care services provided by stay-at-home parents
C. the construction of new houses
D. government expenditures on military equipment.
b
22. GDP is:
A. the monetary value of all goods and services (final, intermediate, and non-market) produced in a given year.
B. total resource income less taxes, saving, and spending on exports.
C. the economic value of all economic resources used in the production of a year’s output.
D. the market value of all final goods and services produced within a nation in a specific year.
d
28. Suppose a nation’s 2003 nominal GDP was $972 billion and the general price index was 90. To make the 2003 GDP comparable with the base year GDP, the 2003 GDP must be:
A. adjusted downward to $678 billion.
B. deflated to $896 billion.
C. inflated to $1080 billion.
D. deflated to $1080 billion.
c
30. If net foreign factor income is zero and there are no statistical discrepancies, the sum of national income and the consumption of fixed capital equals:
A. disposable income.
B. personal income.
C. net domestic product.
D. gross domestic product.
d

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