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1. Which of the following is not included in GDP?

Select one:

a.

a.unpaid cleaning and maintenance of houses

b.

b.services such as those provided by lawyers and hair stylists

c.

c.the estimated rental value of owner-occupied housing

d.

d.production of foreign citizens living in the United States

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2. Which of the following transactions adds to U.S. GDP for 2006?

Select one:

a.

a.In 2006, Ashley sells a car that she bought in 2002 to William for $5,000.

b.

b.An American management consultant works in Mexico during the summer of 2006 and earns the

equivalent of $30,000 during that time.

c.

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.

d.None of the above transactions adds to GDP for 2006.

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3. 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

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Select one:

a.

a.caused GDP to fall.

b.

b.not caused any change in GDP.

c.

c.caused GDP to rise.

d.

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.

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4. A steel company sells some steel to a bicycle company for $100. The bicycle company uses

the steel to produce a bicycle, which it sells for $200. Taken together, these two transactions

contribute

Select one:

a.

a.$100 to GDP.

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b.

b.$200 to GDP.

c.

c.between $200 and $300 to GDP, depending on the profit earned by the bicycle company when it sold

the bicycle.

d.

d.$300 to GDP.

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5. Grapes are

Select one:

a.

a.always counted as an intermediate good.

b.

b.counted as an intermediate good only if they are used to produce another good such as wine.

c.

c.counted as an intermediate good only if they are consumed.

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d.

d.counted as an intermediate good, whether they are used to produce another good or consumed.

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6. The local Chevrolet dealership has an increase in inventory of 25 cars in 2006. In 2007 it sells

all 25 cars. Which of the following statements is correct?

Select one:

a.

a.The full value of the increased inventory will be counted as part of GDP in 2006, and the value of the

cars sold in 2007 will not cause 2007 GDP to increase.

b.

b.The value of the increased inventory will not affect 2006 GDP; instead, the full value of the inventory will

be counted as part of 2007 GDP.

c.

c.The value of the increased inventory will be counted as part of 2006 GDP and the value of the cars sold

in 2007 will increase 2007 GDP.

d.

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d.One-half of the value of the increased inventory will be counted as part of 2006 GDP and the other one-

half of the value will be counted as part of 2007 GDP.

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7. Until recently, George lived in a home that was newly constructed in 2005. In 2005, he paid

$200,000 for the brand new house. He sold the house in 2006 for $225,0000. Which of the

following statements is correct regarding the sale of the house?

Select one:

a.

a.The 2006 sale increased 2006 GDP by $225,000 and had no effect on 2005 GDP.

b.

b.The 2006 sale increased 2006 GDP by $25,000 and had no effect on 2005 GDP.

c.

c.The 2006 sale increased 2006 GDP by $225,000; furthermore, the 2006 sale caused 2005 GDP to be

revised upward by $25,000.

d.

d.The 2006 sale affected neither 2005 GDP nor 2006 GDP.

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8. An American company operates a fast food restaurant in Romania. Which of the following

statements is accurate?

Select one:

a.

a.The value of the goods and services produced by the restaurant is included in both Romanian GDP and

U.S. GDP.

b.

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.

c.The value of the goods and services produced by the restaurant is included in Romanian GDP, but not in

U.S. GDP.

d.

d.The value of the goods and services produced by the restaurant is included in U.S. GDP, but not in

Romanian GDP.

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9.U.S. GDP and U.S. GNP are related as follows:

Select one:

a.

a.GNP = GDP - Income earned by foreigners in the U.S. + Income earned by U.S. citizens abroad.

b.

b.GNP = GDP + Income earned by foreigners in the U.S. - Income earned by U.S. citizens abroad.

c.

c.GNP = GDP + Value of exported goods - Value of imported goods.

d.

d.GNP = GDP - Value of exported goods + Value of imported goods.

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10. In a certain small country, the unit of currency is the huck. That country's government

recently announced that "GDP amounted to 400 million hucks in the quarter that just ended."

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Assuming this country has adopted American GDP accounting conventions, this statement

means that GDP,

Select one:

a.

a.without seasonal adjustment, amounted to 100 million hucks in the quarter that just ended.

b.

b.with seasonal adjustment, amounted to 100 million hucks in the quarter that just ended.

c.

c.without seasonal adjustment, amounted to 400 million hucks in the quarter that just ended.

d.

d.with seasonal adjustment, amounted to 400 million hucks in the quarter that just ended.

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11. If you buy a burger and fries at your favorite fast food restaurant,

Select one:

a.

a.neither GDP nor consumption will be affected because you would have eaten at home had you not

bought the meal at the restaurant.

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b.

b.GDP will be higher, but consumption spending will be unchanged.

c.

c.GDP will be unchanged, but consumption spending will be higher.

d.

d.both GDP and consumption spending will be higher.

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12. For the purpose of calculating GDP, investment is spending on

Select one:

a.

a.stocks, bonds, and other financial assets.

b.

b.real estate and financial assets.

c.

c.new capital equipment, inventories, and structures, including new housing.

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d.

d.capital equipment, inventories, and structures, excluding household purchases of new housing.

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13. The U.S. Air Force pays a Turkish citizen $30,000 to work on a U.S. base in Turkey. As a

result,

Select one:

a.

a.U.S. government purchases increase by $30,000; U.S. net exports decrease by $30,000; and U.S. GDP

and GNP are unaffected.

b.

b.U.S. government purchases increase by $30,000; U.S. GNP increases by $30,000; and U.S. GDP and

U.S. net exports are unaffected.

c.

c.U.S. government purchases; and U.S. net exports, GDP, and GNP are unaffected.

d.

d.U.S. government purchases increase by $30,000; U.S. net exports decrease by $30,000; U.S. GNP

increases by $30,000; and U.S. GDP is unaffected.

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14. If a U.S. citizen buys a television made in Korea by a Korean firm,

Select one:

a.

a.U.S. net exports decrease and U.S. GDP decreases.

b.

b.U.S. net exports are unaffected and U.S. GDP decreases.

c.

c.U.S. net exports are unaffected and U.S. GDP is unaffected.

d.

d.U.S. net exports decrease and U.S. GDP is unaffected.

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Question text

Table 23-3.

15. Refer to Table 23-3. Nominal GDP for 2007 is

Select one:

a.

a.$900.

b.

b.$1,100.

c.

c.$1,250.

d.

d.$1,350.

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16. Refer to Table 23-3. Nominal GDP is

12
Select one:

a.

a.$680 for 2006, $880 for 2007, and $1,200 for 2008.

b.

b.$760 for 2006, $880 for 2007, and $1,000 for 2008.

c.

c.$760 for 2006, $1,100 for 2007, and $1,600 for 2008.

d.

d.$960 for 2006, $1,280 for 2007, and $1,300 for 2008.

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17. Refer to Table 23-3. Using 2006 as the base year, for 2007,

Select one:

a.

a.real GDP is $880 and the GDP deflator is 80.

b.

b.real GDP is $880 and the GDP deflator is 125.

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c.

c.real GDP is $950 and the GDP deflator is 95.

d.

d.real GDP is $950 and the GDP deflator is 116.

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18. Refer to Table 23-3. Using 2007 as the base year, for 2006,

Select one:

a.

a.real GDP is $760 and the GDP deflator is 100.

b.

b.real GDP is $760 and the GDP deflator is 125.

c.

c.real GDP is $880 and the GDP deflator is 80.

d.

d.real GDP is $950 and the GDP deflator is 80.

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19. Refer to Table 23-3. Using the GDP deflator to measure the average level of prices and

using 2006 as the base year, the economy's inflation rate is

Select one:

a.

a.20 percent for 2007 and 12.5 percent for 2008.

b.

b.20 percent for 2007 and 30 percent for 2008.

c.

c.25 percent for 2007 and 28 percent for 2008.

d.

d.44.7 percent for 2007 and 45.5 percent for 2008.

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Question text

20. The consumer price index is used to

Select one:

a.

a.track changes in the level of wholesale prices in the economy.

b.

b.monitor changes in the cost of living.

c.

c.monitor changes in the level of real GDP.

d.

d.track changes in the stock market.

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21. The term inflation is used to describe a situation in which

Select one:

a.

a.the overall level of prices in the economy is increasing.

16
b.

b.incomes in the economy are increasing.

c.

c.stock-market prices are rising.

d.

d.the economy is growing rapidly.

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Table 24-4
The table below pertains to an economy with only two goods -- books and calculators. The fixed
basket consists of 5 books and 10 calculators.

22. Refer to Table 24-4. Using 2006 as the base year, the consumer price index is
Select one:

a.

a.100 in 2006, 135 in 2007, and 155 in 2008.

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b.

b.100 in 2006, 270 in 2007, and 310 in 2008.

c.

c.200 in 2006, 270 in 2007, and 310 in 2008.

d.

d.200 in 2006, 540 in 2007, and 620 in 2008.

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23. Refer to Table 24-4. Using 2007 as the base year, the consumer price index is

Select one:

a.

a.78.22 in 2006, 100 in 2007, and 121.10 in 2008.

b.

b.74.07 in 2006, 100 in 2007, and 114.81 in 2008.

c.

c.100 in 2006, 135 in 2007, and 155 in 2008.

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d.

d.200 in 2006, 270 in 2007, and 310 in 2008.

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24. Refer to Table 24-4. Using 2008 as the base year, the consumer price index is

Select one:

a.

a.52.66 in 2006, 84.25 in 2007, and 106.5 in 2008.

b.

b.64.52 in 2006, 87.10 in 2007, and 100 in 2008.

c.

c.52.66 in 2006, 90.89 in 2007, and 100 in 2008.

d.

d.100 in 2006, 135 in 2007, and 155 in 2008.

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25. Refer to Table 24-4. Using 2006 as the base year, the inflation rate is

Select one:

a.

a.13.3 percent for 2007 and 14.8 percent for 2008.

b.

b.35 percent for 2007 and 14.8 percent for 2008.

c.

c.35 percent for 2007 and 55 percent for 2008.

d.

d.135 percent for 2007 and 155 percent for 2008.

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26. In an imaginary economy, consumers buy only shirts and pants. The fixed basket consists of

6 shirts and 4 pairs of pants. A shirt cost $20 in 2006 and $25 in 2007. A pair of pants cost $30

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in 2006 and $40 in 2007. Using 2006 as the base year, which of the following statements is

correct?

Select one:

a.

a.For the typical consumer, the number of dollars spent on shirts is equal to the number of dollars spent

on pants in each of the two years.

b.

b.The consumer price index is 134 in 2007.

c.

c.The rate of inflation is 29.17% in 2007.

d.

d.All of the above are correct.

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27. In an imaginary economy, consumers buy only sandwiches and magazines. The fixed basket

consists of 20 sandwiches and 30 magazines. In 2006, a sandwich cost $4 and a magazine cost

$2. In 2007, a sandwich cost $5. The base year is 2006. If the consumer price index in 2007 was

125, then how much did a magazine cost in 2007?

Select one:

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a.

a.$2.50

b.

b.$2.80

c.

c.$3.20

d.

d.$3.45

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28. Suppose the price index in 2004 was 100; the price index in 2005 was 118; and the inflation

rate between 2005 and 2006 was lower than it was between 2004 and 2005. This means that

Select one:

a.

a.the price index in 2006 was lower than 118.00.

b.

b.the price index in 2006 was lower than 136.00.

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c.

c.the price index in 2006 was lower than 139.24.

d.

d.the inflation rate between 2005 and 2006 was lower than 1.18 percent.

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29. In the basket of goods that is used to compute the consumer price index, the three most

important categories of consumer spending are

Select one:

a.

a.housing, transportation, and entertainment.

b.

b.housing, transportation, and food & beverages.

c.

c.housing, medical care, and food & beverages.

d.

d.education, medical care, and food & beverages.

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 Question 30
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30. Suppose the price of gasoline increases rapidly, and that consumers respond by buying a

smaller quantity of gasoline. The consumer price index

Select one:

a.

a.reflects this price increase accurately.

b.

b.understates the price increase due to the so-called income bias.

c.

c.overstates the price increase due to the so-called income bias.

d.

d.overstates the price increase due to the so-called substitution bias.

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Question text

31. Which of these events would cause the consumer price index to overstate the increase in the

cost of living?

Select one:

a.

a.Carmakers benefit from a new technology that allows them to sell higher-quality cars to consumers with

no increase in price.

b.

b.Energy prices decrease, and consumers respond by buying more gas and electricity.

c.

c.A new good is introduced that renders cellular telephones inferior and obsolete.

d.

d.All of the above are correct.

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32. When the quality of a good improves, the purchasing power of the dollar

Select one:

a.

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a.increases, so the CPI overstates the change in the cost of living if the quality change is not accounted

for.

b.

b.increases, so the CPI understates the change in the cost of living if the quality change is not accounted

for.

c.

c.decreases, so the CPI overstates the change in the cost of living if the quality change is not accounted

for.

d.

d.decreases, so the CPI understates the change in the cost of living if the quality change is not accounted

for.

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33. An important difference between the GDP deflator and the consumer price index is that

Select one:

a.

a.the GDP deflator reflects the prices of goods and services bought by producers, whereas the consumer

price index reflects the prices of goods and services bought by consumers.

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b.

b.the GDP deflator reflects the prices of all final goods and services produced domestically, whereas the

consumer price index reflects the prices of some goods and services bought by consumers.

c.

c.the GDP deflator reflects the prices of all final goods and services produced by a nation's citizens,

whereas the consumer price index reflects the prices of final goods and services bought by consumers.

d.

d.the GDP deflator reflects the prices of all goods and services bought by producers and consumers,

whereas the consumer price index reflects the prices of final goods and services bought by consumers.

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34. An increase in the price of dairy products produced domestically will be reflected in

Select one:

a.

a.both the GDP deflator and the consumer price index.

b.

b.neither the GDP deflator nor the consumer price index.

c.

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c.the GDP deflator but not in the consumer price index.

d.

d.the consumer price index but not in the GDP deflator.

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35. The price of imported olives produced by a U.S. company operating in Spain increases. By

itself, what effect will this price increase have on the GDP deflator and on the CPI?

Select one:

a.

a.The GDP deflator and the CPI will both increase.

b.

b.The GDP deflator will increase and the CPI will be unaffected.

c.

c.The GDP deflator and the CPI will both be unaffected.

d.

d.The GDP deflator will be unaffected and the CPI will increase.

Question 36
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36. Babe Ruth's 1931 salary was $80,000. Government statistics show a consumer price index

of 15.2 for 1931 and 195 for 2005. Ruth's 1931 salary was equivalent to a 2005 salary of about

Select one:

a.

a.$536,000.

b.

b.$828,000.

c.

c.$1,026,000.

d.

d.$1,216,000.

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Question text

37. If the nominal interest rate is 6 percent and the rate of inflation is 9 percent, then the real

interest rate is

Select one:

a.

a.15 percent.

b.

b.3 percent.

c.

c.-3 percent.

d.

d.-15 percent.

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38. The real interest rate tells you

Select one:

a.

a.how fast the number of dollars in your bank account rises over time.

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b.

b.how fast the purchasing power of your bank account rises over time.

c.

c.the number of dollars in your bank account today.

d.

d.the purchasing power of your bank account today.

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39. If the real interest rate relevant to a bank account is 5 percent and the expected inflation rate

is 4 percent, then after a year a person expects to have, relative to today,

Select one:

a.

a.9 percent more dollars in the bank account, which will purchase 5 percent more goods.

b.

b.5 percent more dollars in the bank account, which will purchase 4 percent more goods.

c.

c.5 percent more dollars in the bank account, which will purchase 4 percent more goods.

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d.

d.4 percent more dollars in the bank account, which will purchase 1 percent more goods.

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40. Ralph puts money in the bank and earns a 5 percent nominal interest rate. Then, if the

inflation rate is 3 percent,

Select one:

a.

a.Ralph will have 3 percent more money, which will purchase 2 percent more goods.

b.

b.Ralph will have 3 percent more money, which will purchase 8 percent more goods.

c.

c.Ralph will have 5 percent more money, which will purchase 2 percent more goods.

d.

d.Ralph will have 5 percent more money, which will purchase 8 percent more goods.

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