Macro QUIZ - useful PDF

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2. Angus the sheep farmer sells wool to Barnaby the knitter for $20. Barnaby makes two sweaters, each of which has a market price of $40. Collette buys one of them, while the other remains on the shelf of Barna by’s store to be sold later. What is GDP here? a. $40 b. $60 c. $80 d. $100 3. Which of the following does NOT add to U.S. GDP? a. Air France buys a plane from Boeing, the U.S. air craft manufacturer. b. General Motors builds a new auto factory in North Carolina. c. The city of New York pays a salary to a policeman. d. The federal government sends a Social Security check to your grandmother 4. An American buys a pair of shoes made in Italy. How do the U.S. national income accounts treat the transaction? a. Net exports and GDP both rise. b. Net exports and GDP both fall. c. Net exports fall, while GDP is unchanged. d. Net exports are unchanged, while GDP rises. 5. Which is the largest component of GDP? a. consumption b. investment c. government purchases d. net exports 6. If all quantities produced rise by 10 percent and all prices fall by 10 percent, which of the following occurs? a. Real GDP rises by 10 percent, while nominal GDP falls by 10 percent. b. Real GDP rises by 10 percent, while nominal GDP is unchanged. c. Real GDP is unchanged, while nominal GDP rises by 10 percent. d. Real GDP is unchanged, while nominal GDP falls by 10 percent. 7.The CPI measures approximately the same economic phenomenon as a. nominal GDP. b. real GDP. c. the GDP deflator. d. the unemployment rate.

8. The largest component in the basket of goods and services used to compute the CPI is a. food and beverages. b. housing. c. medical care. d. apparel. 9. If a Pennsylvania gun manufacturer raises the price of rifles it sells to the U.S. Army, its price hikes will increase a. both the CPI and the GDP deflator. b. neither the CPI nor the GDP deflator. c. the CPI but not the GDP deflator. d. the GDP deflator but not the CPI. 10. Because consumers can sometimes substitute cheaper goods for those that have risen in price, a. the CPI overstates inflation. b. the CPI understates inflation. c. the GDP deflator overstates inflation. d. the GDP deflator understates inflation. 11. If the CPI is 200 in year 1980 and 300 today, then $600 in 1980 has the same purchasing power as ________ today. a. $400 b. $500 c. $700 d. $900 12. You deposit $2,000 in a savings account, and a year later you have $2,100. Meanwhile, the CPI rises from 200 to 204. In this case, the nominal interest rate is _____ percent, and the real interest rate is _____ percent. a. 1, 5 b. 3, 5 c. 5, 1 d. 5, 3 13.In the national income accounts GDP can be measured as production, income, or expenditures. A. True B. False 14.Real GDP takes __________ into account. A. Unemployment B. Inflation C. The quality of the environment D. Leisure time 15.If economists want to gauge economic well being it is appropriate to look at A. nominal GDP. If they want to look at economic growth it is also appropriate to look at nominal GDP. B. nominal GDP. If they want to look at economic growth it is appropriate to look at real GDP. C. real GDP. If they want to look at economic growth it is appropriate to look at nominal GDP.

D. real GDP. If they want to look at economic growth it is also appropriate to look at real GDP

16.The CPI gives greater weights to goods that consumers purchase more A. True B. False 17.The CPI overstates the increase in the cost of living because A. it doesn't take into account that consumers substitute toward goods that become relatively cheaper. B. it doesn't take into account the introduction of new goods that allow consumers access to a greater variety of goods . C. it doesn't take into account improvements in the quality of goods in the market basket. D. all of the above are correct. 18.Other things constant, if Dunkin Doughnuts increases the price of coffee, then both the CPI and GDP deflator increase. A. True B. False 19.Other prices the same, an increase in the price of French wine would increase A. both the GDP deflator and the CPI. B. the GDP deflator but not the CPI. C. the CPI but not the GDP deflator. D. neither the GDP deflator nor the CPI. 20.The group of goods and services used to compute the GDP deflator changes automatically over time. A. True B. False 21.Which of the following examples of production of goods and services would be included in U.S. GDP? A. Sally, a Canadian citizen, works on a drilling crew in North Dakota for Northland Gas Services, and Northland sells the natural gas to utility company in Canada B. Joe grows marijuana in his Kansas City home and sells it to his friends and neighbors. C. Jim grows pecans for his family in the year of their San Antonio home. D. None of the above examples of production would be included in U.S. GDP. 22.Which of the following is included in GDP? A. neither the market value of owner-occupied housing services nor the market value of rental housing services. B. the market value of rental housing services, but not the market value of owner-occupied housing services. C. Both the market value of rental housing services and the market value of owner-occupied housing services D. the market value of owner-occupied housing services, but not the market value of rental housing services 23.Which of the following is included in government purchases? A. Social Security payments the U.S. government makes B. Unemployment benefits a state pays C. the services of a U.S. government attorney valued at the cost of her salary. D. All of the above are correct

24.To encourage formation of small businesses, the government could provide subsidies; these subsidies a. would be included in GDP because they are part of government purchases. b. would be included in GDP because they are part of investment expenditures. c. would not be included in GDP because they are transfer payments. d. would not be included in GDP because the government raises taxes to pay for them. 25.If the prices of all goods and services produced in the economy rose while the quantity of all goods and services stayed the same, which would rise? a. both real GDP and nominal GDP. b. real GDP but not nominal GDP. c. nominal GDP but not real GDP. d. neither nominal GDP nor real GDP. 26.GDP does not reflect a. the value of leisure. b. the value of goods and services produced at home. c. the quality of the environment. d. All of the above are correct. 27.Suppose the government eliminates all environmental regulations and, as a result, the production of goods and services increases, but there is considerably more pollution. Based on this scenario, which of the following statements is correct? a. GDP would definitely increase, despite the fact that GDP includes environmental quality. b. GDP would definitely decrease because GDP includes environmental quality. c. GDP would definitely increase because GDP excludes environmental quality. d. GDP could either increase or decrease because GDP excludes environmental quality. 28.A decrease in the price of domestically produced nuclear reactors will be reflected in a. both the GDP deflator and the consumer price index. b. neither the GDP deflator nor the consumer price index. c. the GDP deflator but not in the consumer price index. d. the consumer price index but not in the GDP deflator. (C because nuclear reactors will not be used by typical customer)

-Gross domestic product understates the total production of final goods and services because of the omission of household production -Gross domestic product understates the total production of final goods and services because of the omission of the underground economy -Legalizing all forms of illegal activities increases GDP and reduces the size of the underground economy. -Macroeconomics, as opposed to microeconomics, includes the study of what determines the average price levels of goods and services in the economy. -The purchase of a new automobile is included in

consumption expenditures on durable goods. -Which of the following is not an example of a transfer payment? health insurance payments to an army private -If a US citizen buys a television made in Korea by a Korean firm US net exports decrease but US GDP is unaffected -A transfer payment is a form of government spending that is not made in exchange for a currently produced good or service -The US Air Force pays a Turkish citizen $30 000 to work on a US base in Turkey. As a result US government purchases increase by $30 000 and US net exports decrease by $30 000. US GDP and GNP are unaffected (In Turke and pay for Turkish citizen) -Which of the following represents a transfer payment The government sends your grandfather his superannuation payment -Which of the following is included in the investment component of GDP Savings made by firms to fund future capital assets -Many things that society values, such as good health, high-quality education, enjoyable recreation opportunities and desirable moral attributes of the population, are not measured as part of GDP However, GDP is still a useful measure of society's welfare because it measures a nation's ability to purchase the inputs that can be used to help produce the things that contribute to welfare -According to the circular-flow diagram GDP can be computed as either the revenue firms receive from the sales of goods and services or the payments they make to factors of production. OR can be computed as the total income paid by firms or as expenditures on final goods and services. -Much of macroeconomics attempts to explain long-run growth and short-run fluctuations in real GDP 1/Starbucks raises the price of Frappuccinos. The CPI and GDP deflator both rise. 2/Caterpillar raises the price of the industrial tractors it manufactures at its Illinois factory. The GDP deflator rises, the CPI does not. 3/Armani raises the price of the Italian jeans it sells in the U.S. The CPI rises, the GDP deflator does not. -GDP is not a perfect measure of well-being; for example, GDP does not address the distribution of income, GDP does not address environmental quality, GDP excludes the value of volunteer work.

What valuable items are left out of GDP? - Leisure - Non-market activities - Quality of Environment - Equitable Distribution of Income -Last year country A had a nominal GDP of $600 billion, a GDP deflator of 150 and a population of 40 million. Country B had a nominal GDP of $720 billion, a GDP deflator of 120 and a population of 50 million. From these numbers which country is likely to have had the higher standard of living? Country B because it had the higher real GDP per person -US. GDP and U.S. GNP are related as follows: GNP = GDP - Income earned by foreigners in the U.S. + Income earned by U.S. citizens abroad. -A good is produced by a firm in 2010, added to the firm's inventory in 2010, and sold to a household in 2011. It follows that The value of the good is added to the investment category of 2010 GDP because it is produced that year. The consumption of the good is added to the consumption category of 2011 GDP because it is consumed that year. It is subtracted from the investment category of 2011 so that it is not double counted. -The notion that GDP might overstate a nation's economic well-being is illustrated by its treatment of which of the following there is a massive oil spill, and the government spends millions of dollars cleaning it up -Consider the following three items of spending by the government: (i) the federal government pays a $500 unemployment benefit to an unemployed person; (ii) the federal government makes a $2,000 salary payment to a Navy lieutenant; (iii) the city of Bozeman, Montana makes a $10,000 payment to ABC Lighting Company for street lights in Bozeman. Which of these payments contributes directly to government purchases in the national income accounts? (i) and (ii) -If a state made a previously-illegal activity, such as growing and selling marijuana, legal, then, other things equal, GDP -Increases -What is investment? It is the purchase of goods that will be used in the future to produce more goods and services -What is not included in government purchases? Transfer payments because they are not made in exchange for a currently produced good or service. An example would be social security person, who is unemployed -What is the main indicator of the average person's standard of living? Real GDP per capita -What is equitable distribution of income? GDP per person doesn't show the actual distribution of income in the economy...