Macro Chapter 7 study guide questions

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1 Macro Chapter 7 study guide questions Multiple Choice Identify the choice that best completes the statement or answers the question. 1. Real GDP refers to nominal GDP a. minus gifts to other countries. b. minus total unemployment compensation. c. adjusted for price changes. d. adjusted for unemployment changes. 2. Assume that between 1995 and 2000 nominal GDP increased from $1,000 to $2,500, and the index of prices increased from 100 to 200. Which of the following expresses GDP for 2000 in terms of 1995 prices? a. $1,000 b. $1,250 c. $2,500 d. $5, Which of the following transactions would be counted toward this year's GDP? a. General Motors purchases 10,000,000 tires from Firestone. b. A 300-year-old painting is sold for $12 million. c. A street gang earns $2 million from selling illegal drugs. d. Your real estate agent earns $5,000 commission when you sell your 100-year-old house for $100, The consumer price index (CPI) and the GDP deflator are designed to measure the degree to which a. there have been changes in the proportions of national income generated by (and thus earned by) the rich relative to the poor. b. the cost of purchasing a bundle of goods has changed over time. c. consumption patterns have changed with time. d. consumer prices have risen over and above increases in worker wages. 5. Which of the following would not be counted as part of this year's GDP? a. the increase in the value of an antique automobile that was restored this year b. the value of a new automobile at its sale price c. the value of a used car at its sale price d. a family's replacement of a worn-out washing machine with a new one 6. Jim, a U.S. citizen, gets a summer job working in Germany. His summer earnings a. would count as part of U.S. GDP and German GNP. b. would count as part of U.S. GNP and German GDP. c. would count as part of U.S. GDP but would have no effect on Germany's GNP or GDP. d. would be double-counted, raising both U.S. GDP and German GDP.

2 7. Which of the following is not a problem or shortcoming of GDP? a. Goods produced in one period that are sold in the following period fail to get counted in any period. b. It tends to understate the growth of economic welfare because it does not fully and accurately account for improvements in the quality of products. c. GDP is not an accurate measure of welfare because it makes no adjustment for harmful side effects (such as pollution) or destructive acts of nature. d. GDP understates output because it fails to include nonmarket production such as that which takes place in the household or in illegal markets. 8. If you were required to write a paper for your history class (or a report for your job) in which you were using dollar valued data across different years, you would a. use a price index to remove the effects of inflation to have reliable data measuring changes in the real value of things. b. never attempt to correct for inflation because inflation is a key indicator of economic activity. c. tell your teacher or boss that you never learned how to correct data for inflation. d. assume that prices did not change during the period you are studying. 9. Suppose that nominal GDP increased by 3 percent, but the real GDP increased by only 1 percent during that same period. Which of the following best explains the phenomenon? a. Prices increased by approximately 1 percent. b. Prices increased by approximately 2 percent. c. Prices increased by approximately 3 percent. d. Prices increased by approximately 4 percent. 10. Which of the following would increase U.S. GDP? a. The city government of New York buys file cabinets directly from a Mexican company. b. A Mexican citizen buys stock in a U.S. company. c. A Japanese automobile company produces cars within the U.S. d. A U.S. automobile company produces cars in a foreign country. 11. You buy one hundred shares of IBM stock at $100 per share and pay $250 commission. How much will this transaction add to GDP? a. zero b. $250 c. $10,000 d. $10, If a used-car dealer purchases a used car for $1,000, restores it, and resells it for $1,500, the dealer contributes a. value added equal to $500, but nothing is added to GDP. b. value added equal to $500, and consequently $500 is added to GDP. c. nothing to production because only existing goods are involved. d. value added equal to $1,500, but only $500 is added to GDP. 13. Your grandfather tells you he earned $0.65 per hour at his job when he was a boy in Given that the CPI was 17.1 in 1929 and in 2008, how much would you have had to make in 2008 to have the same real hourly wage as your grandfather? a. $0.65 b. $5.14 c. $8.18 d. $11.12

3 14. Assume that between 2000 and 2010 the money GDP of an economy increased from $3 trillion to $8 trillion and that the appropriate index of prices increased from 100 to 200. Which of the following expresses GDP for 2000 in terms of 2010 prices? a. $1 trillion b. $3 trillion c. $4 trillion d. $6 trillion 15. Suppose that Mike earned $15,000 in 2008 and $15,600 in If the consumer price index was 100 in 2008 and 103 in 2009, by approximately what percent did Mike's real salary increase? a. 1 percent b. 3 percent c. 4 percent d. 5 percent 16. In a country where many families make their own clothes, GDP will be understated because the clothes making represents a. economic bads. b. leisure. c. the underground economy. d. nonmarket production. 17. The primary value of GDP lies in its ability to a. reflect the welfare of a society relative to a previous period. b. compare the quality of a nation's products between two periods widely separated in time. c. indicate short-term changes in the output rate of a nation. d. indicate how much leisure time the people of a nation have. 18. If the Consumer Price Index in 2008 was 150 and the CPI in 2009 was 165, the rate of inflation between 2008 and 2009 would be a percent. b. 10 percent. c. 15 percent. d. 110 percent. Critical Thinking and Application 19. Answer the following questions: a. What does GDP measure, and why is it a useful tool for economists, business decision makers, and government policy makers? b. Explain at least two important things GDP does not measure. 20. Explain the two approaches to calculating GDP. 21. What is the difference between real and nominal GDP? If the president of the United States (or your instructor) asked you to evaluate the economy over the past five years, which one would you use and why? 22. The consumer price index is calculated using a fixed basket of goods. Will this always give an accurate representation of the changing cost of living to consumers? Why or why not?

4 23. Indicate whether the following transactions would be included in GDP. If they are included, indicate which component (consumption, investment, government consumption and gross investment, or net exports) of GDP would be affected. a. A Czech student attending school in Florida takes a summer job as a lifeguard. b. A New York company buys welding equipment from a St. Louis firm to help it build jet fighters. c. The IRS purchases a new computer from the GATS computer company (an American-owned business producing and operating in Germany) that will allow it to better detect income tax evasion. 24. Your grandfather tells you that he earned $.50 per hour at his job when he was a boy in a. Given that the CPI was 17.1 in 1929 and in 2003, how much would you have to make in 2003 to have the same real hourly wage? b. You made $5.50 an hour working during Were you better off than your grandfather in terms of purchasing power? Explain. c. Your grandfather also tells you that a soda cost $.05 in 1929, and you know a soda cost $.55 in You decide to use the price of a soda as the price index. How much would the 2003 "soda equivalent" of $.50 per hour in 1929 be? 25. Answer the following questions: a. What is the difference between gross domestic product and gross national product? b. Give an example of a transaction that would be counted in GDP but not in GNP. c. Give an example of a transaction that would be counted in GNP but not GDP. 26. Discuss the problems with GDP as a measure of a country's current production and income. 27. What is meant by a final good or service as opposed to an intermediate good or service? Why are only final goods and services included in the calculation of GDP?

5 Macro Chapter 7 study guide questions Answer Section MULTIPLE CHOICE 1. C 2. B 3. D 4. B 5. C 6. B 7. A 8. A 9. B 10. C 11. B 12. B 13. C 14. D 15. A 16. D 17. C 18. B