1 A definition of the gross domestic product _GDP_ is a by tyndale

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									                                        Chapter 7.8.9 Review


1. A definition of the gross domestic product (GDP) is:
a) personal consumption expenditures, gross private domestic investment, and net exports.
b) the sum of wage and salary compensation of employees, interest income, and rental income.
c) the value added of all final and intermediate goods and services produced by the economy in one
   year.
d) the market value of final goods and services produced by the economy in one year.

2.   GDP excludes expenditures by:
a)   businesses on pollution control equipment.
b)   business for travel and entertainment.
c)   government on military hardware.
d)   consumers on used automobiles.

3.   An example of a public transfer payment is a(n):
a)   airline pass giving price discounts to senior citizens.
b)   monthly subsidy from home for a university student.
c)   gift of land from a wealthy relative.
d)   veteran's benefit payment.

4.   In a declining economy:
a)   net private domestic investment is positive.
b)   net private domestic investment is negative.
c)   disposable income exceeds personal income.
d)   nominal GDP exceeds real GDP.

5.   Gross domestic product (GDP) is equal to personal consumption expenditures:
a)   plus gross private domestic investment, minus government spending, and plus net exports.
b)   plus gross private domestic investment, plus government spending, and minus net exports.
c)   minus gross private domestic investment, plus government spending, and plus net exports.
d)   plus gross private domestic investment, plus government spending, and plus net exports.




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                                          Chapter 7.8.9 Review


Use the following to answer questions 6-8:

(The following national income data are in billions of dollars.)

        Consumption of fixed capital                   $ 25
        Government purchases                            315
        U.S. imports                                    260
        Personal taxes                                   45
        Transfer payments                               247
        U.S. exports                                    249
        Personal consumption expenditures               475
        Net foreign factor income earned in the United States      5
        Gross private domestic investment               300
        Indirect business taxes                         245
        Undistributed corporate profits                  60
        Social security contributions                   240
        Corporate income taxes                           65


   6.   Refer to the above data. National income is:
   a)   $804 billion.
   b)   $834 billion.
   c)   $925 billion.
   d)   $960 billion.

   7.   Refer to the above data. Personal income is:
   a)   $687 billion.
   b)   $686 billion.
   c)   $705 billion.
   d)   $716 billion.

   8.   Refer to the above data. Disposable income is:
   a)   $641 billion.
   b)   $659 billion.
   c)   $667 billion.
   d)   $686 billion.

   9.   GDP less consumption of fixed capital equals:
   a)   NDP.
   b)   NI.
   c)   PI.
   d)   DI.




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                                            Chapter 7.8.9 Review


Use the following to answer question 10:

           Year               1        2        3         4       5        6

           Price index     100        95     105        125    125      120


  10.   Refer to the above table. From year 1 to 2:
   a)   there is inflation.
   b)   prices are stable.
   c)   there is deflation.
   d)   there is hyperinflation.

Use the following to answer questions 11-13:

Answer the question(s) based on the following price and output data over a five-year period for an
economy that produces only one good. Assume that year 2 is the base year.

        Year      Units of output      Price per unit
         1               8                  $2
         2              10                    3
         3              15                    4
         4              18                    5
         5              20                    6


  11.   Refer to the above data. If year 2 is the base year, the price index for year 3 is:
   a)   120.
   b)   125.
   c)   133.
   d)   150.

  12.   Refer to the above data. In year 4, nominal GDP would be:
   a)   $60.
   b)   $90.
   c)   $120.
   d)   $316.

  13.   Refer to the above data. Real GDP in year 5 is:
   a)   $120.
   b)   $90.
   c)   $60.
   d)   $30.




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                                           Chapter 7.8.9 Review


Use the following to answer question 14:

Assume an economy is producing only one product. Year 2 is the base year. Output and price data for a
five-year period are given.

        Year Units of output Price per unit
         1          4             $4
         2          5               5
         3          7               8
         4          9               9
         5         10             10


  14.   Refer to the above data. Nominal GDP for year 3 is:
   a)   $16.
   b)   $25.
   c)   $56.
   d)   $81.

  15. The expansion or contraction of business activity which occurs over a long period of time (e.g.,
      25, 50, or 100 years) is referred to by economists as:
   a) a secular trend.
   b) fluctuation variations.
   c) a seasonal business cycle.
   d) a long-term business adjustment.

  16.   The best example of a "frictionally unemployed" worker is one who:
   a)   reduces productivity by causing frictions in a business.
   b)   is laid off during a recessionary period in the economy.
   c)   is in the process of voluntarily switching jobs.
   d)   is discouraged and not actively seeking work.

  17. A mismatch between the geographic location of workers and the location of job openings would
      result in what type of unemployment?
   a) wait
   b) cyclical
   c) frictional
   d) structural

  18. Assuming the total population is 200 million, the labor force is 100 million, and 92 million
      workers are employed, the unemployment rate is:
   a) 4 percent.
   b) 6 percent.
   c) 8 percent.
   d) 10 percent.



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                                        Chapter 7.8.9 Review


19.In calculating the unemployment rate, part-time workers are:
    a) counted as unemployed.
   b) counted as employed.
    c) used to determine the size of the labor force, but not the unemployment rate.
   d) treated the same as "discouraged" workers who are not actively seeking employment.

  20. Okun's law indicates that for:
   a) every 1 percent that the actual unemployment rate exceeds the natural unemployment rate, there
      is generated a 2 percent GDP gap.
   b) every 1 percent that the actual unemployment rate exceeds the natural unemployment rate, there
      is generated a 5 percent GDP gap.
   c) a 5 percent GDP gap, there is generated a 1 percent increase in the natural unemployment rate.
   d) a 2 percent GDP gap, there is generated a 2 percent increase in the actual unemployment rate.

  21. The consumer price index was 247 in year 1 and 272 in year 2. The rate of inflation in year 2
      was:
   a) 12 percent.
   b) 10 percent.
   c) 8 percent.
   d) 6 percent.

Use the following to answer questions 22-24:




  22. Refer to the above graph. In which range does the price level begin to rise as the economy either
      approaches or surpasses the full employment level of output?
   a) Range a
   b) Range b
   c) Range c
   d) Range d




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                                        Chapter 7.8.9 Review


23. Refer to the above graph. In which range does the price level rise but real output remains the
    same?
 a) Range a
 b) Range b
 c) Range c
 d) Range d

24. Refer to the above graph. In which range does the output increase but price level remains
    constant?
 a) Range a
 b) Range b
 c) Range c
 d) Range d

25. If average nominal income was about $15,000 and the price level index was 118, then average
    real income would be about:
 a) $11,146.
 b) $12,712.
 c) $13,385.
 d) $14,249.

26. The percentage change in real income can be approximated by subtracting the percentage change
    in the price level from the percentage change in nominal income.
 a) True
 b) False

27.   The fraction, or percentage, of total income which is consumed is called the:
 a)   break-even income.
 b)   consumption schedule.
 c)   marginal propensity to consume.
 d)   average propensity to consume.

28.   As disposable income decreases, the:
 a)   average propensity to consume increases.
 b)   average propensity to consume decreases.
 c)   level of consumption increases.
 d)   level of investment increases.

29. In a private closed economy, national income is $4.5 trillion and savings equals $6.4 billion.
    Based on this data, the marginal propensity to consume:
 a) decreases as income increases.
 b) is greater than the marginal propensity to save.
 c) is less than the average propensity to consume.
 d) cannot be calculated from the data given.




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                                         Chapter 7.8.9 Review


Use the following to answer questions 30-32:

The following is a consumption schedule.

        Disposable income     Consumption
             $300                $310
              350                 340
              400                 370
              450                 400
              500                 430


  30.   Refer to the above data. At the $300 level of disposable income:
   a)   the marginal propensity to save is .80.
   b)   the average propensity to consume is .60.
   c)   the average propensity to save is .30.
   d)   there is a dissaving of $10.

  31.   Refer to the above data. The marginal propensity to consume is:
   a)   .80.
   b)   .75.
   c)   .60.
   d)   .40.

  32.   Refer to the above data. If disposable income is $550, we would expect consumption to be:
   a)   $430.
   b)   $450.
   c)   $460.
   d)   $470.

  33. A firm invests in a new machine that costs $2,000 a year but which is expected to produce an
      increase in total revenue of $2,200 a year. The current real rate of interest is 8 percent. The firm
      should:
   a) undertake the investment because the expected rate of return of 12 percent is greater than the real
      rate of interest.
   b) undertake the investment because the expected rate of return of 10 percent is greater than the real
      rate of interest.
   c) undertake the investment because the expected rate of return of 9 percent is greater than the real
      rate of interest.
   d) not undertake the investment because the expected rate of return of 7 percent is less than the real
      rate of interest.

  34. Actual investment may be defined as planned minus unintended investment.
   a) True
   b) False



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