Revision for Chapter 8

Multiple Choice
Identify the letter of the choice that best completes the statement or answers the question.

____ 1. Most economists believe that appropriate macroeconomic goals include __________ and __________
unemployment.
a. continual inflation; low
b. continual inflation; high
c. price stability; low
d. price stability; high
____ 2. The three major economic goals are
a. price stability, income stability and economic growth.
b. high price stability, growth control and low unemployment.
c. price stability, low unemployment and high economic growth.
d. sustained prices, employment stability and high economic growth.
____ 3. The CPI was 117.6 in one year and 121.3 the following year. Approximately how much did prices rise
between the two years?
a. 3.7 percent
b. 3.15 percent
c. 0.03 percent
d. 1.03 percent
e. none of the above
____ 4. If the CPI is 100 in the base year and 127 in the current year, how much did prices rise between the two
years?
a. 27 percent
b. 227 percent
c. 1.27 percent
d. 0.27 percent
____ 5. Suppose the market basket consists of 10X, 20Y, and 30Z. Current-year prices are $1.00 for each unit of X,
$0.96 for each unit of Y, and $1.13 for each unit of Z. Base-year prices are $1.00 for each unit of X, Y, and Z.
What is the approximate CPI in the current year?
a. 1.03
b. 203
c. 105.17
d. 309
____ 6. One measure of the inflation rate is the
a. sum of the CPIs of adjacent years.
b. percentage change in the CPI of adjacent years.
c. percentage change in the Real GDP of adjacent years.
d. GDP minus the Real GDP in a year.
____ 7. Suppose there are five goods in the economy, A-E. The current-year quantity of each is 10A, 20B, 30C, 40D,
and 50E. Current-year prices are $1 for each unit of A, $2 for each unit of B, $3 for each unit of C, $4 for
each unit of D, and $5 for each unit of E. Base-year prices are $1 for each good. Real GDP in the current year
equals __________.
a. $100
b. $130
c. $150
d. $180
 e. $200
____ 8. In year 1 the CPI is 140.1, and in year 2 the CPI is 146.7. From year 1 to year 2, Martha's salary rises from
$32,000 to $34,000, and Chiang's salary rises from $43,000 to $45,000. Who is "more than keeping up with
inflation"?
a. Martha
b. Chiang
c. both Martha and Chiang
d. neither Martha nor Chiang
____ 9. In year 1 the CPI is 140.1, and in year 2 the CPI is 148.9. If Sarah's salary was $33,500 in year 1, what salary
in year 2 would cause her to exactly "keep up with inflation"?
a. $36,448
b. $42,300
c. $40,508
d. $35,604
____ 10. In year 1 the CPI is 140.1, and in year 2 the CPI is 148.9. If Dennis's salary was $63,000 in year 1, what is the
minimum salary he must earn in year 2 to "more than keep up with inflation"?
a. $69,281
b. $66,957
c. $71,800
d. $63,625
____ 11. Suppose that 1967 is the base year for the Consumer Price Index (CPI) and in 1988 the CPI is 340. What does
this "340" mean?
a. What cost $100 in 1967 will cost 340 times as much in 1988.
b. What cost $100 in 1967 will cost $340 more in 1988.
c. What cost $100 in 1967 will cost 100/340 (or .2941) times as much in 1988 (that is, it will
cost $29.41 in 1988).
d. What cost $100 in 1967 will cost $240 more in 1988.
____ 12. The base year is the year
a. in which prices are unstable.
b. in which prices are lowest.
c. in which prices are highest.
d. that serves as a reference point or benchmark.
e. in which nominal output is largest.

Exhibit 5-1
____ 13. Refer to Exhibit 5-1. Prices rose by __________ percent from 1981 to 1982.
a. 6.0
b. 6.5
c. 6.2
d. 6.4
e. 6.1
____ 14. Refer to Exhibit 5-1. Prices rose by __________ percent from 1983 to 1984.
a. 3.7
b. 3.8
c. 3.5
d. 3.6
e. 3.9
____ 15. Refer to Exhibit 5-1. Prices rose by __________ percent from 1980 to 1984.
a. 22.0
b. 25.7
c. 20.4
d. 29.3
e. none of the above
____ 16. Refer to Exhibit 5-1. Prices rose by __________ percent from 1981 to 1983.
a. 9.5
b. 9.9
c. 10.9
d. 10.5
e. none of the above
____ 17. Persons who are retired or engaged in own-home housework are considered to be in which of the following
categories?
a. in the civilian labor force
b. not in the labor force
c. employed
d. unemployed
____ 18. A person in the civilian labor force falls into one of two categories:
a. a person who works in a service industry or a person who works in a manufacturing
 industry.
b. unemployed or employed.
c. disemployed or unemployed.
d. a self-employed worker or a non-self-employed worker.
____ 19. If a person did at least one hour of work as a paid employee during the survey week, how is she classified?
a. as an employed person
b. as not in the labor force
c. as an unemployed person
d. none of the above
____ 20. If a person is waiting to be called back to a job from which she has been laid off, how is she classified?
a. as not in the labor force
b. as an unemployed person
c. as an employed person
d. none of the above
____ 21. In order to be classified as unemployed, a person must
a. not have worked during the survey week, actively have looked for work within the past
four weeks, and currently be available for work.
b. not have worked during the survey week, and currently be available for work.
c. actively have looked for work within the past six weeks.
d. not have a job.
____ 22. The unemployment rate equals the
a. number of employed persons divided by the number of unemployed persons.
b. number of unemployed persons divided by the civilian noninstitutional population.
c. number of unemployed persons divided by the civilian labor force.
d. sum of unemployed persons and discouraged workers divided by the civilian labor force.
____ 23. The employment rate equals the number of
a. employed persons divided by the number of unemployed persons.
b. unemployed persons divided by the civilian noninstitutional population.
c. employed persons divided by the civilian labor force.
d. employed persons divided by the civilian noninstitutional population.
e. none of the above
____ 24. A person is unemployed if he
a. is a member of the civilian labor force, out of work, and actively seeking work.
b. is 15 years old and seeking his first job.
c. is out of work, available for work, but not actively seeking work.
d. all of the above
____ 25. In an economy with 100 million people, 70 million hold jobs and 10 million are not working but are looking
for jobs. The number of people in the labor force is
a. 100 million.
b. 40 million.
c. 10 million.
d. 80 million.
e. 70 million
____ 26. In an economy with 100 million people, 70 million hold jobs and 10 million are not working but are looking
for jobs. The number counted as unemployed is
a. 60 million.
b. 10 million.
c. 30 million.
d. 70 million.
 e. 80 million.
____ 27. In an economy with 100 million people, 64 million hold jobs and 4.7 million are not working but are looking
for jobs. The unemployment rate is __________.
a. 15.0 percent
b. 13.1 percent
c. 7.3 percent
d. 4.7 percent
e. 6.8 percent
____ 28. The unemployment due to the time it takes for unemployed people to locate a job utilizing their transferable
skills is called __________ unemployment.
a. structural
b. cyclical
c. natural
d. frictional
____ 29. The unemployment due to changes in the types of skills employers require is called __________
unemployment.
a. structural
b. cyclical
c. natural
d. frictional
____ 30. The cyclical unemployment rate is defined as the __________ unemployment rates.
a. sum of the structural and the frictional
b. difference between the structural and the frictional
c. difference between the existing (actual) and the natural
d. sum of the natural and the frictional
____ 31. "Full employment" is said to exist when the unemployment rate equals
a. zero.
b. the cyclical unemployment rate.
c. the structural unemployment rate.
d. the natural unemployment rate.
____ 32. In many large retail stores, price markdowns are now determined by computer. The "middle managers" who
used to make these decisions personally became __________ unemployed.
a. frictionally
b. structurally
c. naturally
d. cyclically
____ 33. A dynamic, changing economy will
a. experience frictional and structural unemployment.
b. experience only cyclical unemployment.
c. have zero unemployment.
d. have no natural unemployment.
____ 34. Assume that Ms. Sawyer's salary is $74,500, up from $68,900 last year, while the CPI is 165 this year, up
from 150 last year. This means that Ms. Sawyer's real income has
a. increased.
b. decreased.
c. stayed the same.
d. It depends on which year is the base year.
____ 35. A market basket is made up of three goods, 10X, 12Y, and 18Z. The prices in the base year are $1.20, $2.10,
and $3.25, respectively. The prices in the current year are $1.44, $2.23, and $3.88. What is the approximate
consumer price index in the current year?
a. 103
b. 111
c. 116
d. 110
e. 96
____ 36. If the CPI is 123 in year 1 and 143 in year 2, what is the approximate percentage change in prices between the
two years?
a. 10.3 percent
b. 16.3 percent
c. 15.7 percent
d. 11.4 percent
e. 23.9 percent
____ 37. Which of the following statements is true?
a. Base year prices are necessarily higher than current year prices.
b. The CPI in the base year is 100.
c. If the CPI is 112 in year 1 and 123 in year 2, prices have risen by approximately 9.8
percent between the two years.
d. b and c
e. a, b, and c
____ 38. Smith's income was $50,000 in year 1 and $53,232 in year 2. The CPI was 114 in year 1 and 124 in year 2.
What was the approximate percentage change in Smith's real income between the two years?
a. -3.1 percent
b. +3.4 percent
c. -1.7 percent
d. +5.6 percent
e. -2.1 percent
____ 39. A movie star was paid $1 million in 1960 to do a movie. The CPI was 29.3 in 1960 and the CPI in 2000 was
168.7. Approximately how much did the movie star earn in 2000 dollars?
a. $6.7 million
b. $2.5 million
c. $5.4 million
d. $5.7 million
e. none of the above
____ 40. The movie "Return of the Jedi" earned $264 million in 1983 when it was released. The CPI in 1983 was 97.8
and the CPI in 2000 was 168.7. Approximately how much did the movie earn in 2000 dollars?
a. $603 million
b. $421 million
c. $321 million
d. $355 million
e. $455 million
____ 41. Suppose that the price index in 1999 was 120 and your salary was $24,000. Suppose in 2010 the consumer
price index will be 300. What salary will you have to earn to equal your 1999 salary?
a. $50,000
b. $60,000
c. $72,000
d. none of the above
____ 42. There are two goods in the economy, A and B. In year 1 the prices of A and B are $0.45 and $1.23,
respectively. The relevant quantities of each good are 50 units and 54 units, respectively. In year 2 the prices
of A and B are $0.50 and $2.33, respectively. The relevant quantities of each good are 70 and 50, respectively.
What is the approximate chain-weighted price index in year 2?
a. 150.3
b. 110.5
c. 143.9
d. 134.5
e. 166.2
____ 43. Look at the following data: Total population = 230 million; employed persons = 80 million; unemployed
persons = 8 million. The unemployment rate is approximately __________ and the employment rate
__________.
a. 9.1 percent; cannot be determined
b. 10 percent; is 90 percent
c. 8.2 percent; is 34 percent
d. 11 percent; is 38 percent
e. 10 percent; cannot be determined
____ 44. Which of the following statements is false?
a. The sum of the unemployment rate and the employment rate equals 100 percent.
b. The sum of the number of employed persons and the number of unemployed persons
equals the civilian noninstitutional population.
c. The labor force participation rate equals the number of persons in the civilian labor force
divided by the number of persons in the total population.
d. a and b
e. a, b and c
____ 45. Look at the following data: The frictional unemployment rate is 3 percent, the natural unemployment rate is
5.5 percent, and the cyclical unemployment rate is 2.4 percent. The structural unemployment rate is
__________ percent and the actual unemployment rate (in the economy) is __________ percent.
a. 3; 7.9
b. 2.5; 7.9
c. 2.5; 5.4
d. 5.4; 2.4
e. none of the above
____ 46. If the cyclical unemployment rate is negative, then the __________.
a. natural unemployment rate is less than the actual unemployment rate in the economy.
b. natural unemployment rate is greater than the actual unemployment rate in the economy.
c. structural unemployment rate is greater than the frictional unemployment rate.
d. structural unemployment rate is less than the frictional unemployment rate.
e. a and d
____ 47. Is it possible for the economy to be at full employment and still have some people who are unemployed?
a. No, full employment means that no one is unemployed.
b. Yes, since full employment exists if the economy is operating at the natural
unemployment rate and there is always some natural unemployment.
c. Yes, since full employment exists if the economy is operating at the frictional
unemployment rate and there is always some frictional unemployment.
d. Yes, since full employment equals the sum of the cyclical unemployment rate and the
natural unemployment rate, and there is always some cyclical unemployment.
e. none of the above
____ 48. Jones lost his job in industry A, but he has skills that can be transferred to industry B (which is currently
hiring). Smith lost a job in industry C, but his skills cannot be transferred to industry B or to any other
industry. Jones is __________ unemployed and Smith is __________ unemployed.
a. structurally; frictionally
b. structurally; structurally
c. frictionally; frictionally
d. frictionally; structurally
____ 49. If the CPI was 164.3 in 1999 and 142.6 in 1993, by what percentage did prices rise during the period
1993-1999?
a. 10.3 percent
b. 16.7 percent
c. 13.7 percent
d. 15.2 percent
____ 50. Good X sold for $40 in 1957. The CPI in 1957 was 27.6 and the CPI in 1999 was 164.3. What was the price
of good X in 1999 dollars?
a. $233.88
b. $238.12
c. $345.87
d. $211.89
e. none of the above
____ 51. A __________ is a person who was employed in the civilian labor force and was either fired or laid off.
a. new entrant
b. reentrant
c. job leaver
d. job fixer
e. none of the above
____ 52. The answer is "a person employed in the civilian labor force who quits his or her job." The question is:
a. Who is a job loser?
b. Who is an entrant?
c. Who is a reentrant?
d. Who is a job leaver?
e. Who is a discouraged worker?
____ 53. A(n) __________ is a person who was previously employed, hasn't worked for some time, and is currently
reentering the labor force.
a. discouraged worker
b. entrant
c. reentrant
d. job loser
e. job leaver
____ 54. Which of the following statements is false?
a. A discouraged worker is counted as an unemployed worker.
b. The frictional unemployment rate is greater than the natural unemployment rate.
c. The natural unemployment rate is greater than the structural unemployment rate.
d. a and b
e. b and c
____ 55. Of all the categories of unemployment, most unemployed persons fall into the category of
a. reentrant.
b. new entrant.
c. job leaver.
 d. job loser.
e. none of the above
____ 56. If there are 10 job losers, 12 job leavers, 13 reentrants, and 12 new entrants, then there are __________
unemployed persons.
a. 35
b. 47
c. 25
d. 37
e. There is not enough information to answer the question.
____ 57. The number of employed persons plus the number of unemployed persons equals the number of persons
a. in the total population.
b. in the civilian noninstitutional population.
c. in the civilian labor force.
d. not in the labor force.
e. none of the above
____ 58. If we subtract the number of people not in the labor force from the civilian noninstitutional population, we get
the number of people in the
a. ranks of the unemployed.
b. civilian labor force.
c. ranks of the employed.
d. ranks of discouraged workers.
e. none of the above
____ 59. Which of the following statements is true?
a. The unemployment rate in the 1990s wasn't the same for all categories of people. For
example, it tended to be higher for persons with only a high school diploma than for
persons with a college degree.
b. The labor force participation rate is equal to the civilian noninstitutional population
divided by the civilian labor force.
c. A discouraged worker is an unemployed worker.
d. a and c
e. a, b, and c
____ 60. Refer to Exhibit 5-3. The unemployment rate rises if the typical job searcher's optimum point moves from
a. D to C.
b. D to A.
c. C to B.
d. B to A.
Revision chapter 9

Multiple Choice
Identify the letter of the choice that best completes the statement or answers the question.

____ 1. Gross Domestic Product (GDP) is the total market value of all
a. final goods and services produced annually within a country's borders.
b. final and intermediate goods and services produced annually within a country's borders.
c. intermediate goods and services produced annually within a country's borders.
d. final goods and services produced every two years within a country's borders.
____ 2. In the definition of GDP, the words "total market value" refer to total
a. dollar value at base prices.
b. dollar value at current prices.
c. subjective value.
d. objective value.
e. a and d
____ 3. Which of the following illustrates double counting?
a. The total market value of the steel used to produce a car and the total market value of the
car itself are summed.
b. The total market value of tennis rackets and the total market value of tennis balls are
summed.
c. The total market value of picture frames and the total market value of camera film are
summed.
d. The total market value of eyeglasses and the total market value of carpet are summed.
e. b and c
____ 4. The best reason economists take only final goods and services into account when calculating GDP is that
a. this is the way things have always been done.
b. they want to avoid the problem of final counting.
c. they want to avoid the problem of double counting.
d. this is the only way things can be done.
____ 5. Which of the following items is a final good?
a. mayonnaise in a restaurant
b. rubber purchased by a tire company
c. a watch purchased by someone in a retail store
d. a and b
e. a, b, and c
____ 6. Underground activities are not counted in GDP because
a. some underground activities are illegal and the government doesn't want to place, for
instance, drug dealers on an equal footing with small businesses.
b. there are no written records of underground activities.
c. this decision was made in the 1930s and no one has gotten around to changing it yet-there
is such a thing as the "GDP-counting" lag.
d. although it is possible to accurately measure underground activities, it is harder than
measuring above-ground activities because with the latter, one doesn't have to dig as deep.
____ 7. Which of the following is counted in GDP?
a. the purchase of 100 shares of IBM stock
b. the services of a real estate broker
c. the consumption of leisure by people
d. the sale of a used car
 e. none of the above
____ 8. Which of the following would not be included in the measurement of GDP?
a. a bill from a doctor
b. wages of an Atlantic City card dealer
c. the increased value of shares of stock
d. commissions of a stockbroker
____ 9. Which of the following would not be included in the measurement of GDP?
a. value of the services of a painter who paints your garage
b. value of the services of a person who mows his or her own lawn
c. value of the services of a maid who cleans your house
d. value of the services of a plumber who fixes your kitchen sink
____ 10. Gross Domestic Product is computed by using
a. costs of production.
b. wholesale prices.
c. previous-year prices.
d. current-year prices.
____ 11. Which of the following is a nonmarket good?
a. the corn you grow and consume
b. the clothes you sew and sell to a neighbor who pays by check
c. the self-portrait hanging in your den
d. a and c
e. a, b, and c
____ 12. Which of the following statements is false?
a. The market value of all nonmarket goods is omitted from GDP.
b. The sale of used goods is omitted from GDP.
c. The market value of a person mowing his or her own lawn is omitted from GDP.
d. If a good is produced but not sold, it is included in GDP.
____ 13. Net exports equals
a. exports divided by imports.
b. the sum of exports and imports.
c. the difference between exports and imports.
d. exports during the year.
e. none of the above
____ 14. Macroeconomists define "consumption" as
a. purchases by the business sector.
b. wearing away and breakdown of capital goods.
c. the difference between imports and exports.
d. purchases by the household sector.
____ 15. To macroeconomists, "investment" is mainly the purchases of goods and services
a. by businesses.
b. to hold as wealth, such as gold coins or art.
c. by foreign countries.
d. in the period previous to the period being studied.
____ 16. The expenditure approach to measuring GDP sums
a. consumption, gross private domestic investment, government purchases, and net exports.
b. sales, revenues, income, and wages.
c. profits, compensation of employees, consumption, and investment.
d. net exports, consumption, wages, and salaries.
____ 17. Suppose the total market value of all final goods and services produced this year in economy X is $4 million.
Of the $4 million worth of goods, $3 million is sold and $1 million is held in inventory. For this year, the
GDP for economy X is
a. $4 million.
b. $3 million.
c. $1 million.
d. $7 million.
e. none of the above
____ 18. Government purchases consist of the total dollar amount(s) spent by the
a. federal government only.
b. state governments only.
c. local governments only.
d. state and local governments.
e. federal, state, and local governments.
____ 19. Leisure is
a. a good that is not counted in GDP.
b. a good that is counted in GDP.
c. neither a good nor a bad, and it is not counted in GDP.
d. a bad as far as economists are concerned, because it is not tangible.
____ 20. The two ways of measuring Gross Domestic Product are the __________ approach and the __________
approach.
a. expenditure; income
b. expenditure; national product
c. national product; income
d. real gross domestic product; nominal gross domestic product
e. net national product; personal income
____ 21. Gross private domestic investment is equal to all purchases of newly produced capital goods
a. minus changes in business inventories.
b. plus fixed investment minus inventory investment.
c. plus changes in business inventories.
d. plus purchases of capital goods produced in previous years to replace "worn-out" capital
goods.
____ 22. Business firms make which of the following two types of investment?
a. foreign investment and domestic investment
b. fixed investment and capital investment
c. investment in stocks and investment in bonds
d. investment in new capital goods and investment in used capital goods to replace
"worn-out" capital goods
e. fixed investment and inventory investment
____ 23. National income equals
a. wages + salaries + corporate profits + net income.
b. compensation of employees + proprietors' income + corporate profits + rental income +
net interest.
c. compensation of employees + proprietors' income + indirect business taxes + rental
income + net interest.
d. the monetary value of fringe benefits + tips + wages + profits + salaries.
e. none of the above
____ 24. If a person receives a (stock) dividend check, this is part of
a. compensation of employees.
 b. proprietors' income.
c. rental income.
d. net interest.
e. none of the above
____ 25. Capital consumption allowance refers to
a. capital goods being used up in production through natural wear, obsolescence, and
accidental destruction.
b. people sending money between countries.
c. the purchase of used factories.
d. the purchase of goods that allow households to consume more services.
____ 26. Which of the following statements is true?
a. The main items that comprise indirect business taxes include excise taxes, sales taxes, and
property taxes.
b. Capital consumption allowance is sometimes better known as depreciation.
c. A sales tax is an indirect business tax.
d. a and c
e. a, b, and c
____ 27. An example of income received but not earned is
a. government transfer payments.
b. undistributed profits.
c. compensation of employees.
d. rental income.
e. a and c
____ 28. An example of income earned but not received is
a. welfare payments.
b. Social Security payments.
c. undistributed profits.
d. a and b
e. a, b, and c
____ 29. Which is the largest dollar figure?
a. national income
b. gross domestic product
c. net national product
d. personal income
____ 30. Net domestic product (NDP) is the total value of
a. all final goods and services produced within a country's borders in a year.
b. only intermediate goods produced within a country's borders in a year.
c. all final goods and services produced within a country's borders in a year minus gross
private domestic investment.
d. only intermediate goods produced within a country's borders in a year plus gross private
domestic investment.
e. all final goods and services produced within a country's borders in a year minus capital
consumption allowance.
____ 31. Which of the following statements is true?
a. Indirect business taxes are a component of national income because when added to the
other components of national income, the sum must equal GDP.
b. Indirect business taxes must be subtracted from national income to yield a figure equal to
GDP.
c. Indirect business taxes are a part of national income because they are considered a
 payment to a factor of production.
d. Indirect business taxes are not part of national income because they are not considered a
payment to a factor of production.
____ 32. Disposable income is
a. equal to GDP minus the capital consumption allowance.
b. that portion of personal income that can be used for consumption and saving.
c. the sum of all payments to suppliers of the factors of production.
d. the amount of income that individuals actually receive.
e. another term for personal income.
____ 33. Personal income is
a. equal to GDP.
b. that portion of national income that can be used for consumption and saving.
c. the sum of all payments to suppliers of the factors of production.
d. the amount of income that individuals actually receive.
e. another term for disposable income.
____ 34. To derive net domestic product (NDP) from gross domestic product (GDP), we must subtract
a. depreciation or capital consumption allowance from GDP.
b. gross private domestic investment from GDP.
c. imports from GDP.
d. inventory investment from GDP.
e. the statistical discrepancy from GDP.

Exhibit 6-1

____ 35. Refer to Exhibit 6-1. Which of the following summations represents GDP using the expenditure approach?
a. $1750 + $412 + $200 + $299
b. $1750 + $412 + $200 - $331 + $299
c. $1750 + $412 + $200 + $331 + $299
d. $1750 + $412 + $200 + $331 + $299 - $355
e. $1750 + $412 + $200 + $331 + $299 - $355 + $188
____ 36. Refer to Exhibit 6-1. Which of the following summations represents net domestic product assuming GDP is
$3,000?
a. $3,000 - $147
b. $3,000 - $355
c. $3,000 - $412
d. $3,000 - $295
e. $3,000 + $147
____ 37. Refer to Exhibit 6-1. Which of the following summations represents personal income assuming that national
income is $3000?
a. $3000 + $111 + $222 + $23 + $66
b. $3000 - $111 - $222 - $23 - $66
c. $3000 - $111 - $222 - $23 + $66
d. $3000 + $111 - $222 - $23 - $66
____ 38. Refer to Exhibit 6-1. Which of the following summations represents disposable income assuming that
personal income is $3000?
a. $3000 - $222
b. $3000 - $ 45
c. $3000 - $222 - $23 - $45
d. $3000 - $147
____ 39. By far the largest expenditure component in GDP is
a. gross private domestic investment.
b. government purchases of goods and services.
c. household consumption expenditures.
d. net exports.
e. none of the above
____ 40. Depreciation refers to a decrease in the value of a good caused by
a. an increase in the price level.
b. a decrease in the price level.
c. "wear and tear" of capital goods over time.
d. the depreciation allowance.
e. a decrease in purchasing power.
____ 41. Which of the following qualifies as a stock variable?
a. the dollar value of U.S. imports from Japan
b. the New York state government deficit
c. the amount of Dell Computer securities presently held by Paul Solomon
d. yearly wages and salaries earned by Microsoft employees
e. both a and b
____ 42. Which of the following is a flow variable?
a. the number of red roses in Mr. Smith's garden
b. the quantity of candy bars in inventory at Chocolate Unlimited
c. the outstanding balance on Peter Marx's credit card statement
d. the quantity of ice cream sold by a street vendor in August
____ 43. Norman just bought shares of stock in Amazon.com for $1,000 and paid a $45 commission to his broker.
How did this affect GDP?
a. It had no impact on GDP.
b. GDP increased by $45.
c. GDP increased by $955.
d. GDP increased by $1,000.
e. GDP increased by $1,045.
____ 44. Which of the following would not be included in the calculation of this year's GDP?
a. a headlight bulb purchased at Joe's Auto Supply by Susan to replace a burnt out bulb in
her car
b. a headlight bulb purchased by Ford Motor Co. from a supplier
c. a headlight bulb produced but not sold this year and thus ending up as inventory
d. none of the above, i.e., all would be included
____ 45. If in the process of calculating GDP, the market value of all intermediate goods is added to the market value
of all final goods, this would
a. overstate the actual value of GDP.
b. produce the correct value of GDP.
c. understate the actual value of GDP.
d. avoid the possible error of double counting.
____ 46. Suppose there are five goods in the economy, A-E. The current-year quantity of each is 10A, 20B, 30C, 40D,
and 50E. Current-year prices are $1 for each unit of A, $2 for each unit of B, $3 for each unit of C, $4 for
each unit of D, and $5 for each unit of E. Base-year prices are $1 for each good. Real GDP in the current year
equals
a. $100.
b. $130.
c. $150.
d. $180.
e. $200.
____ 47. Real GDP is GDP
a. in current-year prices.
b. in base-year prices.
c. in GDP-prices.
d. adjusted for services.
____ 48. Real GDP is always measured in
a. cheaper dollars.
b. quality of goods produced.
c. base-year dollars.
d. nominal dollars.
e. current dollars.
____ 49. The base year is the year
a. in which prices are unstable.
b. in which prices are lowest.
c. in which prices are highest.
d. that serves as a reference point or benchmark.
e. in which nominal output is largest.
____ 50. Real GDP is the value of all __________ goods and services produced in a given year in __________ prices.
a. intermediate; that year's
b. intermediate; base-year
c. final; that year's
d. final; base-year

Exhibit 6-2
____ 51. Refer to Exhibit 6-2. Real GDP in 1980 is
a. 2,906.4.
b. 2,732.0.
c. 3,187.9.
d. 2,629.5.
e. none of the above
____ 52. Refer to Exhibit 6-2. Real GDP in 1982 is
a. 3,166.0.
b. 3,368.1.
c. 3,694.3.
d. 3,047.2.
e. none of the above

Exhibit 6-3
____ 53. Refer to Exhibit 6-3. Nominal GDP in 2000 is
a. $49.
b. $51.
c. $86.
d. $92.
e. not possible to calculate without the CPI.
____ 54. Refer to Exhibit 6-3. Assuming that 1990 is the base year, Real GDP in 2000 is
a. $49.
b. $51.
c. $86.
d. $92.
e. not possible to calculate without the CPI.
____ 55. Refer to Exhibit 6-3. GDP in 1990 is
a. $49
b. $51
c. $86
d. $92
e. impossible to calculate without the CPI.
____ 56. "Economic growth" has occurred if the
a. inflation rate between this year and last year is zero or less.
b. GDP this year exceeds the Real GDP this year.
c. unemployment rate this year is below the natural rate of unemployment.
d. Real GDP or per-capita Real GDP this year exceeds those of last year.
____ 57. The typical U.S. business cycle, measured peak to peak, lasts approximately
a. 4-5 years.
b. 8-10 years.
c. 1-3 years.
d. 6 months to 2 years.
____ 58. A "recession" is defined as
a. a period of a positive frictional unemployment rate.
b. two or more consecutive quarters of falling Real GDP.
c. the lowest point in a business cycle.
d. a period of negative inflation.
____ 59. A recession is always part of a
a. contraction
b. recovery
c. detraction
d. remission
____ 60. Which of the following is true?
a. GDP is the total market value of all final goods and services produced annually by the
citizens of a country.
b. GNP is the total market value of all final goods and services produced annually within a
country's borders.
c. GDP is a stock variable.
d. a and b
e. none of the above
____ 61. When someone says that income is a flow variable, this means that in order for income to have meaning
a. a time period must be specified.
 b. we must identify who receives the income.
c. we must adjust for price changes.
d. we must identify where the income was earned.
e. none of the above
____ 62. The words "total market value" are part of the definition of GDP. These words refer to the monetary value of
goods and services at
a. base-year prices.
b. today's prices.
c. current prices.
d. GDP-adjusted prices.
e. b and c
____ 63. If GDP in year 1 is the same dollar amount as the GDP in year 2, does it follow that Real GDP in year 1 is the
same as Real GDP in year 2?
a. Yes, since prices must necessarily be the same in the two years.
b. No, since equal GDP figures do not account for population.
c. No, since prices may not be the same in the two years.
d. Yes, since equal GDP figures do account for a change in the quality of goods produced in
the two years.
e. none of the above
____ 64. Which of the following goods is an intermediate good?
a. lettuce that a restaurant buys to put on sandwiches
b. tires that a car company buys to put on the cars it produces
c. a television set that Chi-Mai buys to put in her college dorm room
d. a and b
e. b and c
____ 65. Which of the following does GDP omit?
a. Jack purchases $2,300 worth of stock in company X.
b. Bob mows his lawn and washes and irons his shirts.
c. Helen receives $4,000 a year in Social Security payments.
d. a and b
e. a, b, and c
____ 66. The sale of __________ goods is omitted from current GDP because __________.
a. intermediate goods; these goods do not constitute production
b. used goods; these goods were counted in an earlier year
c. illegal; these goods do not constitute economic value
d. b and c
e. a, b, and c
____ 67. Is it possible for a country with a relatively large GDP to have a relatively small per-capita GDP?
a. Yes, since the country with a relatively large GDP could have a relatively large
population.
b. No, since countries with a relatively large GDP (such as the United States and Japan) also
have relatively high per-capita GDP.
c. Yes, but only under the condition that the country "produces" relatively more "bads" than
other countries.
d. Yes, since government transfer payments may be exorbitantly high in the country with the
relatively high GDP.
e. There is not enough information to answer this question.
____ 68. Country A has a higher GDP than country B. What does this mean?
a. It means that on a per-capita basis the residents of country A are relatively better off (in
 terms of the goods and services they have available to them) than the residents of country
B.
b. It means that on a per-capita basis the residents of country A are richer than the residents
of country B.
c. It means that more goods and services were produced in country A than country B.
d. It means that the total market value of the final goods and services produced in country A
is greater than the total market value of the final goods and services produced in country
B.
e. a and d
____ 69. Look at the following data: durable goods = $100 billion; nondurable goods = $350 billion; services = $400
billion; fixed investment - inventory investment = $200 billion; government purchases = $400 billion; exports
= $30 billion; imports = $79 billion. What is GDP?
a. $1,401 billion
b. $1,201 billion
c. $1,240 billion
d. $1,010 billion
e. There is not enough information to answer the question.
____ 70. Look at the following data: consumption = $813 billion; exports = $43 billion; imports = $33 billion;
inventory investment = $123 billion; fixed investment = $300 billion; government purchases = $320 billion.
What is GDP?
a. $1,632 billion
b. $1,466 billion
c. $1,566 billion
d. $1,599 billion
e. none of the above
____ 71. Suppose you have data on durable goods, nondurable goods, fixed investment, government purchases, exports,
and imports. Can you compute GDP?
a. No, since data on services and prices are missing.
b. No, since data on inventory investment are missing.
c. No, since data on inventory investment and services are missing.
d. No, since data on services are missing.
e. Yes.
____ 72. Which of the following statements is true?
a. Government purchases is the largest component of GDP.
b. Net exports are equal to exports plus imports.
c. U.S. imports refer to the physical quantity of foreign-produced goods that are purchased
by residents of the United States.
d. Government purchases includes the spending by all levels of government-federal, state,
and local.
e. c and d
____ 73. Look at the following data: GDP = $5,998 billion; investment = $1,322 billion; exports = $300 billion;
government purchases = $1,450 billion; consumption = $3,400 billion. What does import spending equal?
a. $400 billion
b. $374 billion
c. $200 billion
d. $274 billion
e. none of the above
____ 74. Increases in import spending
a. raise GDP.
b. lower GDP.
 c. are balanced off in GDP by changes in exports.
d. may raise or lower GDP depending on whether they are intermediate or final goods.
____ 75. Which of the following statements is false?
a. Domestic income is the total income earned by the people and businesses within a
country's borders.
b. National income is the total income earned by U.S. citizens and businesses, no matter
where they reside or are located.
c. Compensation of employees is the largest component of national income.
d. National income = compensation of employees + proprietors' income + corporate profits +
rental income + net interest.
e. none of the above
____ 76. You have data for compensation of employees, proprietors' income, rental income, and net interest. Can you
compute national income?
a. Yes.
b. No, since data on indirect business taxes are missing.
c. No, since data on corporate profits are missing.
d. No, since data on the capital consumption allowance is missing.
e. No, since net interest has not been adjusted for profits.
____ 77. Which of the following is the correct equation for computing personal income?
a. Personal income = National income + undistributed profits - social insurance taxes -
corporate profits taxes + transfer payments.
b. Personal income = National income - undistributed profits - social insurance taxes +
corporate profits taxes + transfer payments
c. Personal income = National income - taxes
d. Personal income = National income - undistributed corporate profits - social insurance
taxes - corporate profits taxes + transfer payments
e. none of the above
____ 78. Look at the following data: personal income = $3,400 billion; personal taxes = $700 billion; transfer
payments = $880 billion. What is disposable income?
a. $2,700 billion
b. $3,580 billion
c. $3,220 billion
d. $4,980 billion
e. There is not enough information to answer the question.
____ 79. Which of the following statements is true?
a. National income accountants consider corporate profits taxes to be income earned by
households.
b. Net domestic product (NDP) is a smaller dollar amount than GDP.
c. Personal income includes transfer payments.
d. b and c
e. a, b, and c
____ 80. An economy produces 10X, 20Y, and 30Z in a year. Base-year prices for these goods are $1, $2, and $3,
respectively. Current-year prices for these goods are $2, $3, and $4, respectively. What is Real GDP?
a. $180
b. $200
c. $140
d. $240
e. none of the above
____ 81. Why do economists prefer to compare Real GDP figures for various years instead of GDP figures?
 a. Because when GDP in one year is higher than in another year, there is no way to tell why
it is higher. Is it because output is higher, prices are higher, etc.? This is not the case with
Real GDP. If Real GDP is higher in one year than in another year, it is because output is
higher.
b. Because when GDP in one year is higher than in another year, there is no way of knowing
if the quality of goods produced is higher in one year than the other. This is not the case
with Real GDP. If Real GDP is higher in one year than in another year, it is because the
quality of the goods produced is higher.
c. Actually the question is incorrect. Economists prefer to compare GDP figures instead of
Real GDP figures.
d. Because Real GDP is easier to compute than GDP.
e. Because when GDP in one year is higher than in another year, there is no way to tell if the
quality of life is higher in one year than the other. This is not the case with Real GDP. If
Real GDP is higher in one year than in another year, it is because the quality of life is
higher.
____ 82. Real GDP was $6,742.9 billion in 1995 and $6,608.7 billion in 1994. What was the approximate economic
growth rate during this time?
a. 1.92 percent
b. 3.31 percent
c. 2.03 percent
d. 1.34 percent
e. none of the above
____ 83. Which of the following statements is true?
a. Another name for capital consumption allowance is depreciation.
b. When there are two consecutive quarterly declines in Real GDP the economy is said to be
in recession.
c. The expansion (of a business cycle) refers to increases in Real GDP beyond the recovery.
d. a and b
e. a, b, and c
____ 84. What is the proper sequence of the phases of a business cycle?
a. peak, contraction, trough, expansion, recovery
b. peak, contraction, recovery, trough, expansion
c. peak, contraction, trough, recovery, expansion
d. contraction, peak, trough, recovery, expansion
e. recovery, trough, peak, expansion, contraction
____ 85. A business cycle refers to the
a. continued expansion in Real GDP.
b. recurrent swings (up and down) in Real GDP.
c. continued decline in Real GDP.
d. period when Real GDP grows at unusually high rates.
e. none of the above
____ 86. What does annual economic growth refer to?
a. annual increases in GDP
b. annual increases in consumption spending
c. annual increases in investment spending
d. annual increases in Real GDP
e. none of the above
____ 87. The sum of durable goods, nondurable goods, and services equals
a. investment.
b. fixed investment.
 c. government purchases.
d. consumption.
e. net exports.
____ 88. Investment equals inventory investment added to
a. purchases of new capital goods.
b. purchases of new residential housing.
c. fixed investment.
d. purchases of new capital goods and purchases of new residential housing.
e. c and d
1. The consumption function relates ______________
A. the total amount of consumption by households to prices.
B. expected future consumption and expected future income.
C. desired consumption expenditure to the interest rate.
D. desired consumption expenditure to disposable income.

2. Which of the following would cause a parallel upward shift of the consumption function?
A. An increase in marginal propensity to consume.
B. An increase in household wealth.
C. An increase in disposable income.
D. An increase in interest rates.

3. The greater is the value of the marginal propensity to consume,____________

A. the greater is the value of the multiplier.
B. the greater is autonomous consumption.
C. the smaller is the value of the multiplier.
D. the greater is the value of the marginal propensity to save

4. Which of the following would cause a downward shift of the aggregate expenditure
function?
A. Household expectations of higher future income.
B. An increase in interest rates.
C. A higher business confidence.
D. An increase in the marginal propensity to spend.

5. Refer to the Figure 3. The segment illustrated along the line between the two points is an
explanation of __________

Figure 3/Rajah 3

A. the marginal propensity to save.

B. the marginal propensity to consume.
C. why a portion of aggregate consumption does not depend on income.
D. how consumption could possibly decrease with increases in the level of income.

1
6. Refer Table 1, which gives selected data about a straight-line consumption function. Which
of the following statement is TRUE?

Table 1/Jadual 1
Disposable Income Consumption
100 180
200 260
300 340

A. At a disposable income of zero, consumption equals 80.

B. At a disposable income of 400, consumption equals 400 as well.
C. At all income levels, the marginal propensity to save equals 0.2.
D. At all income levels, the marginal propensity to consume equals 0.2.

7. Refer to Figure 4. When aggregate output equals RM800 billion, which of the following
happens?
Figure 4/Rajah 4

A. Unplanned inventory is falling, and output will tend to rise.

B. Unplanned inventory is falling, and output will tend to fall.
C. Unplanned inventory is rising, and output will tend to rise.
D. Unplanned inventory is rising, and output will tend to fall.

8. Consider a closed economy without government, where the consumption function is C =

100 + .8Y, and investment is I = 50. At what value of output is Y = C + I?
A. 150.
B. 500.
C. 187.5
D. 750.

2
 9. The marginal propensity to consume is 0.9 and the average propensity to consume is 0.75.
The multiplier is ______________
A. 4.
B. 10.
C. 1.11.
D. 1.25.

10. If the marginal propensity to spend is 0.75, then a RM100 million increase in autonomous
aggregate expenditure would ______________
A. increase equilibrium national income by RM133.33 million.
B. increase equilibrium national income by RM40 million.
C. decrease equilibrium national income by RM400 million.
D. increase equilibrium national income by RM400 million

11.

12.

13.

3
14.

15.