# ECON 201- Chapter 8

In 2013, Ford Motor Company’s sales were rising. These events were caused by
An economic expansion
During a business cycle expansion, total production ____ and total employment _____ :
increases; increases
Macroeconomics seeks to expand:
Economic growth, business cycles and inflation
In calculating gross domestic product, the Bureau of Economic Analysis uses the sum of the market value of final goods and services produced. This means that the BEA
Values goods and services at their market prices, multiplies them by the quantity produced, and then adds them up.
Which of the following transactions represents the purchase of a final good?
In the circular flow model, the value of total income for an economy ________ the value of total production.
Equals
To calculate GDP by the expenditure method, one must add
Wages, rents, interest, and profits.
Value added equals the market price of the firm’s product minus
The price of intermediate goods
Home Depot sells new and used doors to contractors who build new homes. Home Depot also sells new and used doors to homeowners. Which of the following would be counted in GDP?
The sale of a new door to homeowner
Investment, as defined by economists, would not include which of the following? General Motors
Which equation represents the relationship between GDP and the four major expenditure components?
Y = C + I + G + NX
The purchase of a new house is included in
investment expenditures.
The purchase by a foreign government of an airplane produced in the United States is included in U.S.
net exports.
In 2012, which component of GDP had a negative value?
government spending
Look at Table 8-1
CANOES-R-US makes canoes. It buys the shell of the canoe from another firm for \$300 and uses its labor and intermediate goods to make the canoe. It sells the finished canoe to a retail canoe store for \$800. The retail canoe store then sells the canoe to a consumer for \$1,200.

Refer to Scenario 8-1. The value added of CANOES-R-US for each canoe equals

\$500
CANOES-R-US makes canoes. It buys the shell of the canoe from another firm for \$300 and uses its labor and intermediate goods to make the canoe. It sells the finished canoe to a retail canoe store for \$800. The retail canoe store then sells the canoe to a consumer for \$1,200.

Refer to Scenario 8-1. The value of each canoe in gross domestic product equals

\$1200
A transfer payment is a payment by the government to an individual
for which the government does not receive a good or service in return.
The largest component of spending in GDP is
consumption spending.
The purchase by a household in China of a CD produced in the United States is included in U.S.
net exports.
Gross domestic product understates the total production of final goods and services because of the omission of
household production.
Gross domestic product understates the total production of final goods and services because of the omission of
the underground economy
The size of the underground economy would tend to increase if the government of a country
increased income tax rates.
The informal sector can be a significant drag on the economies of developing countries because the firms in the informal sector
do not pay taxes to the government.
Recent estimates put the size of the underground economy in the United States at ________ of measured GDP.
8%
Which of the following is likely to increase measured GDP?
Marijuana becomes legal to grow and sell.
A sharp increase in the divorce rate increases the number of lawyers hired to determine divorce settlements. This will
increase GDP and decrease well being in the economy.
Statistics on real GDP during World War II may give a misleading indication of whether World War II was a period of prosperity because
most of the increased production was for military goods, not consumption goods.
Presently, GDP is ________ to compensate for the costs of environmental damage.
Developing countries with large informal sectors tend to have firms that invest less in capital equipment.
True
Real GDP per capita is calculated by dividing the value of real GDP for a country by the country’s adult population.
False
Nominal GDP is GDP in a given year
valued in the prices of that year.
Real GDP is GDP in a given year
valued in the prices of the base year.
LOOK AT QUESTION 14 TABLE 8-8
LOOK AT QUESTION 15 TABLE 8-8
LOOK AT QUESTION 16 TABLE 8-9
If the quantity of goods and services produced in the economy decreases,
it may be possible for nominal GDP to increase.
If prices in the economy rise, then
the purchasing power of a dollar declines.
Real GDP will increase
only if the quantity of final goods and services produced rises.
If nominal GDP is \$5 trillion and real GDP is \$4 trillion, the GDP deflator is
125
The GDP deflator is the
ratio of nominal GDP to real GDP multiplied by 100.
The GDP deflator in year 2 is 105, using year 1 as the base year. This means that, on average, the cost of goods and services is
5% higher in year 2 than in year 1.
LOOK AT QUESTION 23 TABLE 8-11
If the GDP deflator is equal to 100, then for that year nominal GDP is equal to real GDP
True
Gross national product, GNP, of the United States is the market value of all final goods and services
produced by citizens of the United States anywhere in the world.
If an American firm opens a production facility in India, the total value of the production will be included in the
gross domestic product of India.
Which of the following is included in both the U.S. GDP and U.S. GNP?
the value of all cars produced by General Motors in the United States
National income equals gross domestic product (GDP) minus
depreciation.
Suppose that in 2011, the national income in the United States was \$200 billion, depreciation was \$15 billion, personal taxes were \$20 billion, and transfer payments were \$10 billion. Gross domestic product in 2011 is
\$215 billion.
LOOK AT QUESTION 30 TABLE 8-15
Which of the following headlines would be more closely related to what macroeconomists study than what microeconomists study?
Real GDP grows by 2.3% in the second quarter
Gross domestic product is calculated by summing up
the total market value of final goods and services produced in the economy during a period of time
Which of the following goods is directly counted in GDP?
12-inch Subway sandwich purchased by a student
In the circular flow model, the value of total production for an economy ________ the value of total expenditures on final goods and services.
Equals
Which of the following is not a durable good?
Clothing
The factors of production include
Capital
The nominal GDP of the U.S. in 2010 was approximately \$14.6 trillion. This means that
A. total income in 2010 was around \$14.6 trillion.
B. the value of output in 2010 was around \$14.6 trillion.
C. total spending in 2010 was around \$14.6 trillion. Incorrect
Investment, as defined by economists, would not include which of the following? Ford
The purchase by a household in China of a CD produced in the United States is included in U.S.
Net Exports
The sum of the value added of every firm involved in producing all final goods and services ________ gross domestic product.
Equals
Gross domestic product understates the total production of final goods and services because of the omission of
Household Production
Gross domestic product understates the total production of final goods and services because of the omission of
the underground economy
The size of the underground economy would tend to decrease if the government of a country
Suppose Bob works for Mary as a proofreader. Mary and Bob fall deeply in love, marry and have eight children. Bob stops working for Mary in order to care for the children. What will be the effect on GDP?
GDP will decrease.
Recent estimates put the size of the underground economy in the United States at ________ of measured GDP.
8%
Legalizing all forms of illegal activities
increases GDP and reduces the size of the underground economy.
The U.S. work week has declined from 60 hours in 1890 to 40 hours today. The impact of the decline in working hours
decreases U.S. GDP and increases the well-being of a typical working person in the U.S
Which of the following is not a true statement about the impact of World War II on the U.S. economy?
The war time years were a period of prosperity for U.S. consumers
Presently, GDP is ________ to compensate for the costs of environmental damage.
If income is unequally distributed in an economy, increases in GDP may not raise well-being in an economy.
True
Nominal GDP is GDP in a given year
valued in the prices of that year.
Suppose that nominal GDP in 2011 was less than real GDP in 2011. Given this information, we know for certain that
the price level in 2011 was less than the price level in the base year.
To examine how the total production of an economy has changed over time, it would be better to examine
Real GDP
Real GDP will increase
only if the quantity of final goods and services produced rises.
Nominal GDP will increase
if either the price level or the quantity of goods and services produced rises.
The GDP deflator is a measure of the
average level of prices of final goods and services in the economy.
If prices rise on average in the U.S. economy, the purchasing power of a dollar declines
True
Gross national product, GNP, of the United States is the market value of all final goods and services
produced by citizens of the United States anywhere in the world.
The output of Mexican citizens who work in Texas would be included in the
gross national product of Mexico.
The output of U.S. citizens who work in Canada would be included in the
The value of what a U.S.-owned McDonald’s produces in South Korea is included in the U.S. ________ and the South Korean ________.
GNP; GDP
National income equals gross domestic product
minus the consumption of fixed capital.
The best measure of the income households actually have available to spend is
disposable personal income.

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