Chapter 7. Practice Problems

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1 Chapter 7 Practice Problems 1. The national accounts keep track of everything except: A) the spending of consumers and the government. B) the sales of producers. C) business investment. D) exchange rates. 2. A share in the ownership of a company held by a shareholder is considered a(n): A) bond. B) stock. C) dividend. D) IOU. 3. Which of the following is considered to be an IOU? A) stocks B) bonds C) interest D) dividends 4. Private savings is equal to: A) disposable income less taxes. B) disposable income less consumption. C) wealth. D) wealth plus government transfer payments. Page 1

2 Use the following to answer questions 5-10: Figure: Circular-Flow Model 5. (Figure: Circular-Flow Model) What is GDP in this economy? A) $100 B) $400 C) $500 D) $ (Figure: Circular-Flow Model) If the circular-flow model is in equilibrium (the sum of money flowing into each box is equal to the sum of the money flowing out of that box), which of the following is likely to happen if there is an increase in consumer spending? A) an increase in the nominal GDP B) a decrease in the nominal GDP C) an increase in the unemployment rate D) a decrease in the inflation rate 7. (Figure: Circular-Flow Model) If the circular-flow model is in equilibrium (the sum of money flowing into each box is equal to the sum of the money flowing out of that box), which of the following is likely to happen if there is a decrease in consumer spending? A) an increase in the nominal GDP B) an increase in the real GDP C) an increase in the unemployment rate D) an increase in the inflation rate Page 2

3 8. (Figure: Circular-Flow Model) If the circular-flow model is in equilibrium (the sum of money flowing into each box is equal to the sum of the money flowing out of that box), which of the following is likely to happen if there is an increase in investment spending? A) a decrease in the nominal GDP B) an increase in the nominal GDP C) an increase in the unemployment rate D) a decrease in the inflation rate 9. (Figure: Circular-Flow Model) If the circular-flow model is in equilibrium (the sum of money flowing into each box is equal to the sum of the money flowing out of that box), which of the following is likely to happen if there is a decrease in investment spending? A) an increase in the nominal GDP B) an increase in the real GDP C) an increase in the unemployment rate D) an increase in the inflation rate 10. (Figure: Circular-Flow Model) If the circular-flow model is in equilibrium (the sum of money flowing into each box is equal to the sum of the money flowing out of that box), which of the following is likely to happen if there is an increase in government spending? A) an increase in the nominal GDP B) a decrease in the real GDP C) an increase in the unemployment rate D) a decrease in the inflation rate 11. In the circular-flow model, households: A) receive transfer payments from the government. B) buy resources in the factor markets. C) sell products in the market for goods and services. D) issue stocks and bonds to raise capital. 12. An example of a government transfer is a(n): A) expenditure on an interstate highway. B) bequest from a deceased relative. C) Social Security payment. D) salary for a member of the armed forces. Page 3

4 13. Disposable income equals: A) income plus government transfers minus taxes. B) income plus government spending minus taxes. C) income minus taxes plus government spending. D) income minus taxes minus government transfers. 14. Investment spending represents spending on: A) productive physical capital. B) stocks. C) mutual funds. D) corporate bonds. 15. Investment spending is: A) spending on productive physical capital. B) spending on bonds. C) spending on shares of stock. D) spending on productive physical capital, on bonds, and on shares of stock. 16. If we add up the consumer spending on goods and services, investment spending, government purchases of goods and services, and the value of exports, then subtract the value of imports, we have measured the nation's: A) disposable income. B) gross domestic product. C) trade deficit. D) value added. 17. Goods that are produced in a particular period but NOT sold in that period: A) go into inventory and are called consumption. B) end up in inventory and are included in investment. C) are finally included in depreciation when they are sold. D) are classified as intermediate goods. Page 4

5 Use the following to answer questions 18-22: Figure: Expanded Circular-Flow Model 18. (Figure: Expanded Circular-Flow Model) What is GDP in this economy? A) $200 B) $700 C) $1,000 D) $1, (Figure: Expanded Circular-Flow Model) What is the value of net exports? A) $20 B) $20 C) $50 D) $130 Page 5

6 20. (Figure: Expanded Circular-Flow Model) What is the value of disposable income? A) $1,020 B) $1,000 C) $870 D) $ (Figure: Expanded Circular-Flow Model) How much is total government spending? A) $20 B) $220 C) $370 D) $ (Figure: Expanded Circular-Flow Model) The government has a budget: A) surplus of $150. B) surplus of $220. C) deficit of $70. D) deficit of $ GDP is: A) the total dollar value intermediate goods and services produced in the economy in a given period. B) the total dollar value of wages paid to producing workers in a given period. C) the total dollar value of final goods and services produced in the economy in a given period. D) the total dollar value of government production in a given period. 24. The equation that breaks GDP down by the four sources of aggregate spending is: A) GDP = C + I + G + X + IM. B) GDP = C + I + G X IM. C) GDP = C I G X + IM. D) GDP = C + I + G + X IM. Page 6

7 Use the following to answer question 25: 25. (Table: Calculating GDP) Using the information in the table provided, which of the following is the correct calculation for GDP? A) $47,475 B) $12,200 C) $21,485 D) $34, GDP is the sum of: A) personal consumption, investment, government purchases, exports, and imports. B) personal consumption, investment, government purchases, and net exports. C) personal consumption, investment, government purchases, and net imports. D) value added, net imports, and government purchases. 27. A nation's exports minus its imports: A) equals its private investment. B) is net exports. C) is always a positive number. D) is equal to net transfer payments. Page 7

8 Use the following to answer questions 28-29: 28. (Table: Peanut Butter and Jelly Economy) A simple economy produces only peanut butter and jelly. Using the data in the attached table, in 2011, nominal GDP was and real GDP was. A) $450; $400 B) $525; $450 C) $525; $400 D) $450; $ (Table: Peanut Butter and Jelly Economy) A simple economy produces only peanut butter and jelly. Using the data in the attached table, from 2010 to 2011 real GDP by %. A) increased; 12.5 B) decreased; 50 C) increased; D) decreased; 12.5 Use the following to answer questions 30-33: 30. (Table: Pizza Economy III) Considering 2010 as the base year, nominal GDP in 2011 was: A) $47,000. B) $69,000. C) $72,000. D) $114,000. Page 8

9 31. (Table: Pizza Economy III) Considering 2010 as the base year, real GDP in 2011 was: A) $47,000. B) $69,000. C) $72,000. D) $114, (Table: Pizza Economy III) Considering 2010 as the base year, real GDP between 2010 and 2011 grew at a rate of: A) 53.19%. B) 39.47%. C) 39.47%. D) 58.67%. 33. (Table: Pizza Economy III) Considering 2010 as the base year, given that total population was 1,140 in 2010 and 1,300 in 2011, real GDP per capita in 2010 was: A) $80. B) $53. C) $60. D) $ In a market basket of goods: A) the quantities stay constant and the prices may change. B) the quantities may change and the prices are held constant. C) both the prices and the quantities are held constant. D) both the prices and the quantities may change. Use the following to answer questions 35-36: Page 9

10 35. (Table: Market Basket of School Supplies) The accompanying table shows the prices of three common school supplies in 2010 and 2011 and the quantities of each school supply that consumers bought in 2010, the base year. If we were to construct a school supply index in 2011, it would be equal to: A) 81.8 B) 100 C) D) 112, (Table: Market Basket of School Supplies) The accompanying table shows the prices of three common school supplies in 2010 and 2011 and the quantities of each school supply that consumers bought in 2010, the base year. If we were to construct a school supply index (SSI) to measure the rate at which average school supply prices have changed, we would find an inflation rate of: A) 22% B) 122% C) 82% D) 18% Page 10

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