Lui

zEconsPasco

Chapt
er2
TheMeasur
ementandStruct
ure
oft
heNati
onalEconomy

Mul
ti
pleChoi
ceQuest
ions
1. Thethreeappr oachestomeasuringeconomicactivi
tyarethe
(a)cost,i
ncome, andexpendit
ureapproaches.
(b)product,
income, andexpendi
tureapproaches.
(c)consumer ,busi
ness,andgovernmentapproaches.(d)pri
vat
e,publ
ic,
andi
nter
nat
ional
approaches.
Answer:B
Levelofdif
ficult
y:1
Secti
on:2.1

2. Thev alueofapr oducer

’soutputminustheval
ueoft
hei
nput
sitpur
chasesf
rom ot
her
producersiscalledtheproducer’
s(a)surpl
us.
(b)profit
.
(c)valueadded.
(d)grosspr oduct.
Answer :C
Levelofdiffi
cult
y :2
Secti
on:2. 1

3. TheBi gdri
llcompanydril
lsf oroil,whi
chitsell
sf or$200mi l
li
ontotheBigoilcompanyto
bemadei ntogas.TheBigoi lcompany ’
sgasi ssoldforatotalof$600mill
ion.Whatisthe
totalcontr
ibuti
ontothecount ry’
sGDPf r
om compani esBigdril
landBigoi
l?
(a)$200mi l
li
on(b)$400mi ll
ion(c)$600mi l
lion(d)$800mi l
li
on
Answer :C
Levelofdiffi
cult
y:2
Section:2.1
4. Sam’ sSemi conduct
orsproducescomput erchips,whichitsel
lsfor$10milli
ontoCarl’
s
Comput erCompany( CCC) .CCC’ scomput er
sar esoldforatotalof$16mill
ion.Whatis
thev al
ueaddedt oCCC?
(a)$6mi ll
ion
(b)$10mi l
li
on(c)$16mi l
lion( d)$26mi l
li
on
Answer :A
Levelofdiffi
cult
y:1
Section:2.1

5. TheCompagni eNaturell
esellsmount
edbutter
fl
ies,usi
ngbutter
fl
ybai
titbuysf
rom
anotherfi
rmfor$20,000.Itpaysi
tsworker
s$35,000,pays$1000int
axes,andhaspr
ofi
ts
of$3,000.Whatisi
tsv al
ueadded?(a)$3000
(b)
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Lui
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$19,000
(c)
$39,000
(d)
$59,000
Answer :C
Levelofdiff
icul
ty:2
Section:2.
1

6. Toensur ethatthefundamentalident
it
yofnat
ionali
ncomeaccount
inghol
ds,
changesi
n
inventori
esar e
(a)treatedaspar tofexpendi
ture.
(b)treatedaspar tofsavi
ng.
(c)ignored.
(d)count edasconsumpt ion.
Answer :A
Levelofdi f
ficul
ty:2
Section:2.1

7. Towhatext entar ehomemaki ngandchi l

d-rearingaccountedf ori
nthegov
ernment
’sGDP
account s?
(a)Notatal l
(b)Onl yt otheext entthatt
heyarepr ovi
dedf orpay
(c)Onl yt otheext entthatt
axesarepai donthem
(d)Al lhomemaki ngandchi l
dreari
ngar eaccount edfor
Answer :B
Levelofdi fficulty
:2
Section:2. 2
8. Themeasur ementofGDPi ncludes
(a)nonmar ketgoodssuchashomemaki ngandchi ld-rear
ing.
(b)thebenef i
tsofcl eanairandwat er.
(c)est i
mat edv al
uesofact ivi
tyintheundergr oundeconomy .
(d)pur chasesandsal esofgoodspr oducedinpr eviousperiods.
Answer :C
Levelofdi fficulty
:2
Section:2. 2

9. Whichofthefoll
owingisi
ncludedinU.
S.GDP?
(a)Thesaleofanewcarfrom amanufacturer
’si
nvent
ory
(b)Thepurchaseofawatchfrom aSwisscompany
(c)Thesaleofausedcar
(d)Anewlyconstruct
edhouse
Answer:D
Levelofdi
ff
icul
ty:2
Secti
on:2.
2

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10. Becausegov er nmentser vi

cesarenotsoldinmar kets,(
a)theyar
eexcl
udedf
rom
measur ement sofGDP.
(b)thegov ernmentt ri
estoesti
mat ethei
rmar ketvalueanduses
thistomeasur ethegovernment’scont
ributi
ont oGDP.
(c)theyarev aluedatt hei
rcostofproduct
ion.(d)taxesareusedto
valuetheircont r
ibuti
on.
Answer :C
Levelofdiffi
culty:1
Section:2.
2

11. Int
ermediategoodsar e
(a)capit
algoods, whichareusedupi nthepr
oduct
ionofothergoodsbutwereproduced
inearl
ierperiods.
(b)fi
nalgoodst hatremainininvent
ories.
(c)goodst hatareusedupi ntheproducti
onofot
hergoodsinthesameperiodthatthey
werepr oduced.
(d)eit
hercapi t
algoodsorinventori
es.
Answer:C
Levelofdiffi
cult
y:1
Secti
on:2.2

12. Capitalgoodsar e
(a)at ypeofi ntermediat
egood.
(b)finalgoods, becausetheyar enotusedupdur i
ngagi venyear.
(c)pr oducedi nthesamey earastherel
atedfi
nalgood,whereasinter
mediategoodsare
pr oducedi ndiff
erentyears.
(d)pr oducedi noney ear,
wher easfi
nalgoodsareproducedov eraperi
odofmor ethan
oney ear.
Answer :B
Levelofdi ff
iculty
:2
Section:2.2
13. Mar vin’
sMet alCompanypr oducesscrewsthatitsel
lstoFord,whichusesthescrewsasa
componentofi t
scars.Inthenat i
onali
ncomeaccount s,
thescrewsareclassi
fi
edas( a)
inventory.
(b)finalgoods.
(c)capi t
algoods.
(d)intermedi ategoods.
Answer :D
Levelofdi ff
iculty
:2Sect i
on:
2.2

14. Fredthefarmerpurchasedfi
venewtract
orsat$20,
000each.Fredsoldhi
sol
dt r
actor
sto
otherfar
mer sfor$50,
000.Theneti
ncreasei
nGDPoft heset
ransacti
onswas(a)$50,
000.
(b)$100,000.
(c)$125,000.
(d)$150,000.

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Answer:B
Levelofdi
ff
icul
ty:2
Secti
on:2.
2

15. Inventori
esi ncludeeachofthef
oll
owingEXCEPT
(a)unsoldf ini
shedgoods.
(b)goodsi npr ocess.
(c)rawmat erialsheldbyf
ir
ms.(d)of
fi
ceequi
pment
.
Answer :D
Levelofdifficulty:1
Section:2.2

16. GDPdi
ff
ersf
rom GNPbecause
(
a)GDP=GNP–netf
act
orpay
ment
sfr
om abr
oad.
(
b)GNP=GDP–netf
act
orpay
ment
sfr
om abr
oad.
(
c)GDP=GNP–capi
talconsumpt
ional
lowances.
(d)GNP=GDP–capi t
alconsumpt
ional
lowances.
Answer:A
Levelofdi
ff
icul
ty:1
Secti
on:2.
2

17. IfanAmer icanconst ructi

oncompanybui ltar oadi nKuwai t
,thi
sactiv
itywouldbe
(a)excl udedf rom U.S.GNP.
(b)full
yi ncludedi nU.S.GDP.
(c)includedi nU. S.GNPonl yforthatportiont hatwasat t
ri
butabletoAmer i
cancapi
taland
labor .
(d)includedi nU. S.GDPbutnoti nU.S.GNP.
Answer :C
Levelofdi ffi
culty:3
Section:2.2
18. NationssuchasEgy ptandTur keymayhav ewi dedi f
ferencesbetweenGNPandGDP
becausebot ht hecount r
ies
(a)hav eahi ghl evelofimpor t
sandexpor t
sr elativ
etoGNP.
(b)hav eal argepor ti
onoft heirGNPpr oducedbymul ti
nationalcor
porati
ons.
(c)hav eal argenumberofci ti
zenswor kingabr oad.
(d)pur chasel argeamount sofmi li
tarywar esf r
om ot hercountri
es.
Answer :C
Levelofdi ffi
culty:2
Section:2.2

19. IfC=$500, I=$150,

G=$100,
NX=$40,
andGNP=$800, sNFP?
howmuchi
(a)–$10
(b)–$5(c)$5
(d)$10
Answer:D
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Levelofdi
ff
icul
ty:3
Secti
on:2.
2

20. Theincome-expendi
tur
eident
it
ysay
st a)Y=C+S+T.(
hat( b)Y=C+I+G.
(c)Y=C+I+G+NX.
(d)Y=C+I+G+NX+CA.
Answer:C
Levelofdi
ff
icul
ty:1
Secti
on:2.
2

21. Whichoft hefollowingisnotacat

egor
yofconsumpt
ionspendi
ngi
nthenat
ionali
ncome
accounts?
(a)Consumerdur ables
(b)Nondur abl
egoods
(c)Servi
ces
(d)Housingpur chases
Answer:D
Levelofdiffi
cul
ty :1
Secti
on:2.2

22. Consumerspendi ngi sspendi ngby___________househol dsonfi

nalgoodsand
servi
cespr oduced___________.
(a)domest ic;domest i
cal l
yandabr oad
(b)domest ic;domest i
cal l
y
(c)domest icandf oreign; domesti
call
yandabr oad
(d)domest icandf oreign; domesti
call
y
Answer :A
Levelofdifficul
ty:1
Secti
on:2.2
23. Intheexpendi tureappr oacht oGDP,whi chofthef
oll
owingwouldbeexcl
udedfrom
measur ement sofGDP?
(a)Gov er
nmentpay ment sforgoodspr oducedbyfor
eignfi
rms
(b)Gov er
nmentpay ment sforgoodspr oducedbyfi
rmsownedbystateorlocal
government s
(c)Gov er
nmentpay ment sforwelf
are
(d)Allgover nmentpay ment sar
eincludedinGDP
Answer :C
Levelofdifficul
ty:2
Secti
on:2.2

24. Netnationalproductequals
(a)grossnat i
onalproductminusindir
ectbusi
nesstaxes.
(b)grossnat i
onalproductminusdepreci
ati
on.
(c)nati
onalincomemi nusi
ndirectbusi
nesstaxes.(
d)nati
onali
ncomepl
usdepr
eci
ati
on.
Answer:B
Levelofdif
ficult
y:2
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ord5
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Sect
ion:2.
2

25. Moni cagrowscoconut sandcatchesf

ish.Lastyearsheharv est
ed1500coconutsand600
fish.Shevaluesonefishashav i
ngawor t
hoft hr
eecoconut s.ShegaveRachel300
coconut sand100fishforhelpi
nghertoharvestcoconutsandcat chfi
sh,al
lofwhich
wer econsumedbyRachel .Moni
casetaside200f i
shtohelpwi thnextyear
’shar
vest
.In
termsoff i
sh,Monica’
si ncomewouldequal(a)700f i
sh.(b)900f i
sh.
(c)1100f i
sh.
(d)2700f i
sh.
Answer :B
Lev elofdi
ffi
cul
ty:2
Sect i
on:2.2

26. Moni cagr owscoconut sandcatchesf

ish.Lasty earsheharv est
ed1500coconutsand600
fish.Shev aluesonefishashavingawor thofthreecoconut s.ShegaveRachel300
coconut sand100f ishforhel
pinghertoharvestcoconut sandcat chfi
sh,al
lofwhich
wer econsumedbyRachel .Monicaconsumedt heremainingf i
shandcoconuts.I
nterms
off ish,totalconsumptionbybothMoni caandRachelwoul dequal(a)700fi
sh.(b)900
fish.
(c)1100f ish.
(d)2700f ish.
Answer :C
Lev elofdi ff
icul
ty:2
Sect ion:2.2
27. Pr i
vat edisposableincomeequal s
(
a)GNP–t
axes+t
ransf
ers+i
nter
est
.
(
b)NNP–t
axes+t
ransf
ers+i
nter
est
.
(
c)nat
ionali
ncome–t
axes+t
ransf
ers+i
nter
est
.
(d)nati
onalincome–t
axes–t
ransf
ers+i
nter
est
.
Answer:A
Levelofdi
ffi
culty
:2
Secti
on:2.2

28. Thev alueofahousehol

d’sasset
smi
nust
hev
alueofi
tsl
iabi
li
ti
esi
scal
led(
a)weal
th.
(b)income.
(c)debt .
(d)stock.
Answer :A
Levelofdiffi
cul
ty:1
Section:2.3

29. Ifalocalgovernmentcoll
ectstaxesof$500,000,has$350,
000ofgover
nment
consumpt i
onexpenditur
es,makest ransf
erpaymentsof$100,000,
andhasnoi
nter
est
payment sorinvest
ment,it
sbudgetwoul d
(a)showasur pl
usof$75,000.(b)showasur pl
usof$50,000.
(c)beinbalancewithneit
herasur pl
usnora

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 Chapt
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defi
cit
.(d)showadefi
citof$75,
000.
Answer:B
Levelofdif
fi
cul
ty:1
Secti
on:2.3

30. Thegov ernmentbudgetsur pl

usequals
(a)governmentpur chasesplustransf
ers.
(b)netgov ernmentreceipt
smi nusgovernmentpurchases.
(c)governmentpur chasesmi nusnetrecei
pts.(
d)governmentpur
chasesmi
nust
ransf
ers.
Answer:B
Levelofdiffi
cult
y:1
Secti
on:2.3

31. Nat
ionalsav
ingequal
spr
ivat
esav
ingpl
usgov
ernmentsav
ing,
whi
chi
ntur
nequal
s(a)C
+S+T.
b)GDP+C+G.
(
c)GDP+NFP.
(
(d)GDP+NFP–C–G.
Answer :D
Levelofdiffi
cult
y :2
Section:2.
3
32. Theuses-of -sav ingidenti
tysaysthataneconomy ’
spri
vatesav i
ngisusedf or(a)
investment,int
erestexpenses, andthegovernmentbudgetdefici
t.
(b)investment,thegov ernmentbudgetdefici
t,andt
hecurrentaccount.
(c)investment,interestexpenses,t
hegovernmentbudgetdeficit
,andthecur r
entaccount
.
(d)investment,interestexpenses,t
hegovernmentbudgetdeficit
,tr
ansferpayments,and
thecurrentaccount .
Answer :B
Levelofdiffi
cult
y :1
Section:2.3

33. Theuses-of -savingi

denti
tyshowsthati
fthegovernmentbudgetdefici
tri
ses,t
henone
ofthefoll
owingmusthappen.
(a)Pri
vatesav i
ngmustrise,i
nvest
mentmustfall,
and/orthecur
rentaccountmustfall
.
(b)Pri
vatesav i
ngmustrise,i
nvest
mentmustfall,
and/orthecur
rentaccountmustri
se.(c)
Pri
vatesav i
ngmustrise,i
nvest
mentmustrise,and/ort
hecurrentaccountmustf
all.
(d)Pri
vatesavingmustrise,i
nvest
mentmustrise,and/
orthecurr
entaccountmustrise.
Answer:A
Levelofdif
fi
culty:2
Secti
on:2.3

34. In2002,pri
vatesavingwas$1590bill
ion,
invest
mentwas$1945bil
li
on,andt
hecur
rent
accountbal
ancewas–$489bi ll
ion.Fr
om theuses-of
-sav
ingident
it
y,howmuchwas
governmentsaving?
(a)–$134bill
ion(b)–$844bi
ll
ion
(c)$844bil
li
on
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Lui
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(d)$134bil
li
on
Answer:A
Levelofdi
ff
icul
ty:2
Secti
on:2.
3

35. In2002, nati

onalsavingwas$1456bi
ll
ion,
inv
estmentwas$1945bi l
li
on,
andpr
ivat
e
savingwas$1590bi l
lion.Howmuchwasthecur
rentaccountbal
ance?
(a)$489bi l
li
on( b)$221bill
ion
(c)–$221bi l
li
on
(d)–$489bi ll
ion
Answer :D
Levelofdiffi
cult
y:2
Section:2.3

36. Inthemi d-to-late1980s,theUnitedStateshad“twi

ndefi
cit
s”becauseboth
___________and___________wer enegati
ve.
(a)gov er
nmentsav ing;priv
atesaving
(b)sav i
ng;investment
(c)thecurrentaccount ;i
nvest
ment
(d)gov er
nmentsav ing;thecurr
entaccount
Answer :D
Levelofdiffi
culty
:1
Section:2.
3
37. Thecount ryofOl dJerseyproducesmi l
kandbut t
er,
andithaspubli
shedthefol
lowi
ng
macr oeconomi cdata,wherequantiti
esareingall
onsandpricesar
edoll
arspergall
on.
2003 2004
Good
Quant
it
y Pr
ice Quant
it
y Pr
ice
Mi
lk 500 $2 900 $3
Butter 2000 $1 3000 $2
Bet
ween2003and2004,nomi nalGDP gr
ew by(a)
60.0%.( b)65.
5%.(c)83.
3%.
(d)190.0%.
Answer :D
Levelofdi f
fi
cul
ty:2
Section:2.4

38. Thev alueofrealGDPinthecurrentyearequal

s
(a)thev al
ueofcurrent
-yearoutputi
npr i
cesofthebaseyear.
(b)thev al
ueofcurrent
-yearoutputi
npr i
cesofthecurr
entyear.
(c)thev al
ueofbase-yearoutputinpri
cesofthebaseyear.
(d)thev al
ueofbase-yearoutputinpri
cesofthecurr
entyear.
Answer :A
Levelofdiff
icul
ty:1
Section:2.
4
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 Chapt
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39. ThecountryofOl
dJerseyproducesmil
kandbut
ter,
andithaspubli
shedthefol
lowi
ng
macroeconomicdat
a,wherequanti
ti
esarei
ngal
lonsandpricesar
edoll
arspergall
on.
2003 2004
Good
Quant
it
y Pr
ice Quant
it
y Pr
ice
Mi
lk 500 $2 900 $3
Butt
er 2000 $1 3000 $2
Between2003and2004, thepercentchangeinrealGDP( basedon2003asabasey ear)was
(a)58%.(b)60%.
(c)130%.
(d)190%.
Answer:B
Levelofdi
ffi
cul
ty:3
Secti
on:2.4
40. ThecountryofOldJerseyproducesmi l
kandbutter,
andi thaspubli
shedthefol
lowing
macroeconomicdata,wherequanti
tiesareingal
lonsandpr icesar
edoll
arspergallon.
2003 2004
Good
Quant
it
y Pr
ice Quant
it
y Pr
ice
Mi
lk 500 $2 900 $3
Butt
er 2000 $1 3000 $2
Bet
ween2003and2004,t heGDPdefl
ator(basedon2003asabasey
ear
)
rose(a)60.00%.(b)81.
25%.(
c)83.33%.
(d)123.00%.
Answer:B
Levelofdif
ficul
ty:3
Secti
on:2.4

41. Currently,t
heU. S.nationali
ncomeandpr
oductaccount
s(NI
PA)usewhatt
ypeofpr
ice
indextocal culaterealGDP?
(a)Fixed-wei ght
(b)Var i
able-wei ght
(c)Chai n-weight
(d)Heav y-wei ght
Answer :C
Levelofdi f
ficult
y:1
Section:2.4

42. IfnominalGDPfor2003i
s$6400bi
ll
ionandrealGDPf
or2004i
s$6720bi
ll
ion(
in2003
doll
ars),
thent
hegrowthrat
eofr
ealGDPis(a)0%.
(b)0.5%.
(c)5%.
(d)50%.
Answer:C
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Levelofdi
ff
icul
ty:2
Secti
on:2.
4

43. Ifthepr iceindexwas100i n1990and120i n2000, andnominalGDPwas$360bi l

li
onin
1990and$480bi ll
ionin2000,t
hent hevalueof2000GDPi ntermsof1990dollarswould
be( a)$300bi ll
ion.(b)$384bi
ll
ion.(
c)$400bi ll
ion.(d)$424bil
li
on.
Answer :C
Lev elofdi ff
icul
ty:2
Sect i
on:2. 4
44. Nomi nalGDPi n1970was$1, 035.6bil
li
on, andin1980i twas$2,784.
2bil
li
on.TheGDP
pricei ndexwas30. 6for1970and60. 4for1980, where1992wast hebaseyear.Calcul
ate
theper centchangei nrealGDPinthedecadef rom 1970t o1980.Roundofftot
henear est
per cent agepoi nt.
(a)36%( b)97%
(c)136%( d)
169%
Answer :A
Lev elofdi ff
icul
ty:2
Sect i
on:2. 4

45. Nomi nalper sonalconsumptionexpenditur

esintheUnitedStateswer e$1760.4bil
li
onin
1980andr oset o$3839.3bill
ionin1990.Thepr i
ceindexforpersonalconsumpt i
on
expenditureswas58. 5for1980and92. 9for1990,where1992wast hebasey ear.
Calculatetheper centchangei nr
ealpersonalconsumptionexpendit
ures(roundedtothe
nearestper centagepoint)i
nt hedecade.
(a)37%( b)59%
(c)118%( d)
137%
Answer :A
Levelofdifficult
y:2
Secti
on:2.4

46. Achain-wei ghtpri

cei ndex
(a)equalsthev al
ueofcur r
entoutputatcurr
entpri
cesdiv
idedbythevalueofcurrent
outputatbase-y earprices.
(b)equalsthev al
ueofaf i
xedbasketatcur r
entpri
cesdi
videdbytheval
ueofaf ixed
basketatbasey earprices.
(c)isanav erageoffixed-wei ghtandvari
able-wei
ghti
ndexes.(
d)isusedtocalculat
ethe
CPI.
Answer :C
Levelofdiff
icult
y:2
Secti
on:2.4

47. Adi
sadvantageofchain-weight
ingi
sthat
(
a)pasti
nflat
ionrateschangewhenevert
hebaseyearchanges.
(
b)pastgrowthratesofrealGDPchangewhenev
erthebasey earchanges.

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ord10
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er2 Lui
zEconsPasco

(c)itcausesout putgrowt htoslow.

(d)thecomponent sofr ealGDPdon’tsum t
orealGDP.
Answer :D
Levelofdifficult
y :2
Section:2.4
48. TheU. S.inflati
onr ate___________i nthe1960sand1970s,
___________i
nthe1980s,
and___________i nt he1990s.
(a)wasst eady ;roseshar ply;f
ell
(b)wasst eady ;roseshar ply;r
emainedhi
gh
(c)rose;fellshar pl
y;remai nedlow
(d)rose;fellshar pl
y;roseagai n
Answer :C
Levelofdifficult
y :2
Section:2.4

49. In2002t heGDPdef lat

orf
orOldYorkwas300,andin2004i
thadrisent
o330.
75.Based
onthisinformati
ontheannualav
eragei
nfl
ati
onratefort
het
woy earswas(
a)5%.
(b)5.
125%.( c)
10%.
(d)10.25%.
Answer :A
Levelofdiff
icul
ty:1
Secti
on:2.4

50. Ifthepr i
ceindexlasty
earwas1.
0andt
odayi
tis1.
4,whati
sthei
nfl
ati
onr
ateov
ert
his
period?
(a)–4%
(b)1. 4%
(c)4%
(d)40%
Answer :D
Lev elofdif
fi
cult
y:1
Sect i
on:2.4

51. Youaregi
veninf
ormati
onontheconsumerpr
icei
ndex(
CPI
),wher
ethev
aluesgi
venar
e
thosef
orDecember31ofeachyear
.
Year CPI
1989 126.1
1990 133.8
1991 137.9
1992 141.9
1993 145.8
I
nwhichy earwast hei
nfl
ati
onrat
ethehi
ghest
?
(a)1990(b)1991( c)1992(d)1993
Answer:A

Casf
ord11
Lui
zEconsPasco

Levelofdif
fi
culty
:2
Secti
on:2.4
52. Theconsumerpr iceindex(CPI
)was180for2002whenusing1983asthebasey
ear
(1983=100) .Nowsupposeweswi tchanduse2002asthebaseyear(
2002=100).What
istheCPIfor1983wi ththenewbaseyear
?
(a)18.0(b)55.6(c)80.0
(d)111.2
Answer:B
Levelofdif
fi
culty
:3
Secti
on:2.4

53. TheBoskinCommi ssi

onconcl
udedthatt
heCPIov
erst
atesi
ncr
easesi
nthecostofl
ivi
ng
by___________per cent
agepoi
nt(
s)peryear
.
(a)Lessthan1
(b)1to2
(c)About3
(d)Over4
Answer:B
Levelofdi
ffi
cul
ty:2
Secti
on:2.4

54. TheCPImayov erst

ateinfl
ati
onforallt
hefol
lowingreasonsEXCEPT (
a)pr
obl
ems
measur i
ngchangesi nt hequali
tyofgoods.
(b)substit
utionbyconsumer stowardscheapergoods.
(c)problemsmeasur i
ngthequalit
yofservi
ces.(d)changesi
n
SocialSecurit
ybenef i
ts.
Answer:D
Levelofdiff
icult
y:1
Secti
on:2.4

55. Thenomi nalinterestr

ateminusthei
nfl
ati
onr
atei
sthe(
a)depr
eci
ati
onr
ate.
(b)realinterestrate.
(c)discountr ate.(d)f
orwar
dr at
e.
Answer :B
Levelofdi f
fi
culty:1
Section:2.5

56. ByMar ksbuy saone-y earGermangovernmentbond(call

edabund)for$400.He
receivesprincipalandinter
estt
otal
ing$436oney earl
ater
.Dur
ingtheyeartheCPIr
ose
from 150t o162.Thenomi nali
nter
estr
ateonthebondwas___________, andt
hereal
interestrat
ewas___________.
(a)9%; 1%
(b)9%; –1%
(c)36%; 24%( d)36%;12%
Answer :A
Lev elofdif
ficult
y:2

Casf
ord12
 Chapt
er2 Lui
zEconsPasco

Secti
on:2.5
57. Theexpectedr ealinterestrat r
e()isequalto
(a)nominalinterestratemi nusi
nflat
ionrate.
(b)nominalinterestratemi nusexpectedinfl
ati
onr
ate.(
c)expectednomi
nalint
erestr
ate
minusinflati
onr ate.(d)nominali
nterestrat
epl
usexpectedinfl
ati
onr
ate.
Answer:B
Levelofdi
ffi
culty:1
Secti
on:2.5

58. ByMar ksbuysaone-y earGermangov ernmentbond(call

edabund)for$400.He
receivespri
ncipalandinter
esttotal
ing$436oney earl
ater
.Dur
ingtheyeartheCPIrose
from 150to162, buthehadt houghttheCPIwouldbeat159byt heendoftheyear.By
Mar kshadexpect edthereali
nterestr
atetobe___________,butitactual
lyt
urnedoutto
be___________.
(a)8%; 1%
(b)6%; 3%
(c)3%; 1%
(d)1%; 3%
Answer :C
Levelofdiff
icult
y:3
Section:2.
5

59. Hist ori

calanalysi
sofr eali
nter
estr
atesi ntheUnitedStat
esshowsthat(a)reali
nter
est
rateswer eunusuallylowinbotht
he1970sand1980s.
(b)r ealinter
estrateswereunusuall
yhi ghinboththe1970sand1980s.
(c)r ealinter
estrateswereunusuall
ylowi nt he1970sandunusual
lyhighinthe1980s.
(d)r ealinter
estrateswereunusuall
ylowi nt he1980s,
spurr
ingtheeconomicgrowththat
occur r
eddur i
ngt heReaganadministr
ation.
Answer :C
Lev elofdiffi
cul
ty:2
Sect ion:2.5

EssayQuest
ions
1. Carl’
sComput erCent ersell
scomputerstobusi nessf
irms.Busi
nessest henusethe
comput erstopr
oduceot hergoodsandserv i
ces.Overthepastyear,
salesrepresentat
ives
wer epaid$3.5mill
ion, $.
5mi l
li
onwentforr entonthebuil
ding,
$.5mi l
li
onwentf ortaxes,
$.5mi ll
ionwasprofitforCarl
,and$10mi ll
ionwaspai dforcomputersatthewhol esal
e
level.Whatwasthef irm’stot
alcont
ribut
iont oGDP?
Answer:$5mi l
li
on.Not ethatt he$10mi l
li
onpaidforcomputer
sisnotpar
tofv al
ueadded.
Notealsothatthef actthatthef
irm pr
oducesanint
ermedi
ategooddoesn’t
meanthati tdoesn’tcontri
butet
oGDP.
Levelofdi
ffi
cul
ty :2
Secti
on:2.2
2. Whatisthemai nconcept ualdiff
erencebetweenGDPandGNP?Howdi ff
erentareGDP

Casf
ord13
Lui
zEconsPasco

andGNPf
ort
heUni
tedSt
ates?Forcount
ri
eswi
thmanyci
ti
zenswhowor
kabr
oad?
Answer
s:GDPr epresentsoutputproducedwithinacount r
y,whil
eGNPr epresentsoutput
producedbyacount ry’
sfactorsofproduction;t
hediff
erenceisnetfactor
payment sf
rom abroad.FortheUnitedSt at
esthere’
sli
ttl
ediff
erence,butfor
countri
esthathavemanyci ti
zenswor kingabroad,t
heremaybeabi gdiff
erence.
Levelofdi
ff
icul
ty:1
Secti
on:2.
2

3. Citi
zensoft hecount ryofHeehawpr oducehayandpr ovi
deent er
tai
nmentser vi
ces(banjo
playi
ng) .In1993theypr oduced$15mi ll
ionwor thofhay,wit
h$11mi ll
ionconsumed
domest icall
yandt heother$4mi l
li
onsol dtonei ghbor
ingcountri
es.Theypr ovi
ded$7
mi l
li
onwor t
hofbanj o-play
ingservi
ces, $5mi l
li
oni nHeehaw,and$2mi l
li
onin
neighbor i
ngcount ri
es.Theypurchased$6mi l
li
onwor thofsodapopf r
om neighbor
ing
countries.
Calculatethemagni tudesofGNP, GDP, netfactorpaymentsfrom abroad,netexpor
ts,and
thecur rentaccountbalance.

Answer
s:GNPi sout putbyciti
zens,whichequal
s$15mi ll
ion+$7mi l
li
on=$22mi ll
ion.
GDPi soutputproducedinthecountry,
whichequals$15mi l
li
on(hay)+$5
mill
ion(domest i
cbanjoplaying)=$20mil
lion.Netfact
orpaymentsfrom abroad
repr
esentthedi f
ferencebetweenGNPandGDP; thi
sisthe$2mill
ionpaidfor
banjoplayi
ngi nothercountr
ies.
Netexport
sar e$4mi ll
ion(haysoldabroad)mi nus$6mi l
li
on(sodapopi mpor
ts)
=–$2mi ll
ion.(NotethatbanjoplayingabroadisnotpartofGDP, soi
tisnotpart
ofnetexportseit
her.
)Thecur rentaccountbalanceisnetexport
s+netf act
or
payments=–$2mi ll
ion+$2mi ll
ion=0.
Levelofdi
ffi
cul
ty:3
Secti
on:2.2

4. I
nt hecountryofKwaki,peopleproducecanoes, fi
shforsalmon,andgrowcorn.In1993
theyproduced5000canoesusi ngl aborandnaturalmateri
alsonl
y,butsoldonl
y4000,as
theeconomyent eredarecession.Thecostofpr oducingeachcanoewas$1000, butt
he
onesthatsoldwerepricedat$1250.Theyf ished$30mi l
li
onworthofsalmon.Theyused
$3mi l
li
onoft hesalmonasf ert
il
izerforcor
n.Theygr ewandat e$55mi l
li
onofcorn.What
wasKwaki ’
sGDPi n1993?
Answer:Inventori
esarev aluedatt
hecostofpr oduction,sothe1000canoesininventor
y
werev al
uedat$1000each, f
oratotalof$1mi l
li
on.Fourthousandcanoesat
$1250eacht otaled$5mi l
li
on.Sal
monasaf inalgoodwerewor t
h$27mi l
li
on
(t
heot her$3mi ll
ionwereusedupasani ntermediategood),
andcornwor t
h$55
mill
ionwasgr own.Sot ot
alGDP( i
nmi ll
ions)was$1+$5+$27+$55=$88
mill
ion.
Levelofdif
fi
culty:2
Secti
on:2.2

5. Howdoeschai
nweight
ingl
eadtoadif
fer
entmeasurementofrealGDPt
hanthemethods
usedbyt
heBEApri
orto1996?Whataret
headvantagesofchai
nweight
ing?Whatar
ethe

Casf
ord14
 Chapt
er2 Lui
zEconsPasco

di
sadv
ant
ages?
Answer s:Priorto1996, thegr owthrateofrealGDPdependedonwhi chy earwaschosen
asthe
basey ear.Now, howev er,
thecurrentyearandprecedingyearar eusedasbase
years,averagingresultsusingeachasbasey ear
.Theadv ant
agesoft his
met hodar ethatthere’
snol ongeraneedt orecomput ehi
stor
icaldataort o
changebasey ears.Howev er,adisadvant
agei st
hatrealGDPi snol ongerthe
sum ofi t
scomponent s.
Levelofdi f
fi
culty:2
Section:2.3
6. Explainhowi twaspossi bl
ef orU.S.nati
onalwealthtohaverisensubstantial
lyfrom 1990
to1999, yetnat i
onalsav i
ngdecl i
nedasaper cent
ageofGDP.
Answer:Ani ncreaseinwealthdoesn’
trequi
readdi
ti
onalsav
ing,ift
hev al
ueofexist
ing
assetsincreases.I
nthe1990s,gai
nsinthest
ockmar ketcausedU.S.nati
onal
wealthtorise.
Levelofdif
fi
culty:2
Secti
on:2.3

7. Whati
sthediff
erencebet
weennominalandr
ealeconomi
cvar
iabl
es?Whydoeconomi
sts
t
endtoconcentr
ateonchangesi
nrealmagni
tudes?
Answers:Nomi nalvariablesarei nunitsofmoney ,whilerealvariabl
esar einphy si
cal
quant i
ti
esofout put.Wemeasur enomi nalvari
ablesusi ngcurrentmar ketpri
ces
andr ealvariablesusingmar ketpri
cesi nagi venbasey ear.Nomi nalvari
abl
es
mayi ncrease, butyoudon’ tknowi fthei ncreaseisduet ohigherpricesandthe
samequant ity,orahi gherquantit
ywi thunchangedpr ices;realvariabl
esrefl
ect
j
ustquant itychanges.Fort hemostpar t,r
ealv ar
iables(consumpt i
on,
i
nv estment, andt hecapi t
alstock)affecteachot herint heeconomy ,wit
hlesser
rol
espl ayedbynomi nalvariabl
es(moneysuppl y,andpr i
celevel)
.
Levelofdiff
iculty
:1
Secti
on:2.4

8. Thecountr
yofMyrulehaspr
oducedthef
oll
owi
ngquant
it
yofgaugesandpot
atoes,
wit
h
thepr
iceofeachl
ist
edindol
lart
erms.

Year
1999 2000
Quant
it
y Pr ice Quant i
ty Pri
ce
Gauges 8,
000 $4 10,000 $3
Potatoes 6,
000 $8 5,
000 $14
(
a)Usi ng1999asthebaseyear,whatisthegrowthrateofr
ealGDPfrom 1999t
o2000?
(b)BasedontheGDPdeflat
or,whatistheinf
lati
onratef
rom 1999to2000?
Answer
s:
(
a)RealGDPfor1999=1999quant
it
iesat1999pr
ices=(
8000×$4)+(
6000×$8)=
$80,
000.

Casf
ord15
Lui
zEconsPasco

RealGDPf or2000=2000quant
it
iesat1999pr
ices=(
10,
000×$4)+(
5000×$8)=
$80,000.Growthr
ateofr
ealGDP=0%
(
b)NominalGDPf
or1999=1999quant
it
iesat1999pr
ices=(
8000×$4)+(
6000×$8)=
$80,
000.
Nomi
nalGDPf
or2000=2000quant
it
iesat2000pr
ices=(
10,000×$3)+(
5000
×$14)=$100,000.
GDPdefl
ator=nomi
nalGDP/
realGDP
GDPdefl
atori
n1999=
$80,
000/
$80,000=1.
GDPdef
lat
ori
n2000=$100,
000/
$80,
000=1.
25.
Inflat
ionrat
e=[ (
1.25/
1)–1]×
100%=25%.
Levelofdi f
fi
culty:3
Section:2.4
9. Byhowmuchdoest heCPIover
stat
etr
ueincreasesinthecostofl
ivi
ng,accor
dingt
othe
Boski nCommi ssion?Whataret
hemainreasonsf ort
hisbi
asintheCPI?Whatar et
he
economi cimplicati
onsofthebi
as?
Answers:TheBoski nCommi ssionrepor tedthattheCPIov er
statesinflati
onby1t o2
percentagepoi ntspery ear.Thebi asar i
sesbecauseofdi f
ficultyi
nmeasur ing
qualit
ychange( especiall
yf orservices)andbecauset heCPIdoesn’ taccountfor
thesubstitut
iont hatpeoplemakebet weengoodswhenr elativepri
ceschange.
Thebi asimpliest hatourmeasur esofr ealincomegrowthar eunderstatedand
thatSocialSecur i
tybenef i
tsar ebei ngadjustedmorethant heyshouldbet o
accountforinflation.
Levelofdiff
icul
ty:2
Secti
on:2.4

10. Thenominalint
erestr
atei
s7%,today’
spricel
eveli
s150,andyouexpectthepri
celev
elt
o
be156oney earfr
om now.Whatistheexpect
edinf
lat
ionr
ate?Whatistheexpectedr
eal
i
nter
estr
ate?

Answers:Expect
edinf
lat
ion=156/
150–1=0.
04=4%;
expect
edr
eali
nter
estr
ate=
7%–4%=3%.
Levelofdi
ffi
cul
ty:1
Secti
on:2.5

11. Lorett
aagr eest olendTed$500,000tobuycomput ersforhi
sconsul
ti
ngfirm.Theyagr
ee
toanomi nali
nterestrat
eof8%.Bothexpectt heinflat
ionrat
etobe2%.
(a)Calculatetheexpectedreali
nter
estr at
e.
(b)Ifi
nflati
ont urnsouttobe3%ov erthelif
eoft heloan,whati
sthereali
nter
estrat
e?
Whogai nsfrom unexpect
edl
yhighi nfl
ati
on,Lorett
aorTed?
(c)Ifi
nflati
ont urnsouttobe1%ov erthelif
eoft heloan,whati
sthereali
nter
estrat
e?
Whogai nsfrom unexpect
edl
yhighi nfl
ati
on,Lorett
aorTed?
Answer
s:

Casf
ord16
 Chapt
er2 Lui
zEconsPasco

(
a)8%–2%=6%.
(
b)8%–3%=5%.Tedgai nsf
rom unexpect
edl
yhi
ghi
nfl
ati
on,
becauseher
epay
sthel
oan
wi
thdol
lar
sthatar
en’
twort
hasmuchaswasexpected.
(c)8%–1%=7%.Lor ett
againsf
rom unexpect
edl
ylowinf
lat
ion,
becausesheget
srepai
d
withdol
larsthatar
eworthmorethanwasexpected.
Levelofdi
ffi
cult
y :2
Secti
on:2.5

Casf
ord17