Problem Set for Chapter 10(Multiple choices) 1. Because every transaction has a buyer and a seller, a. GDP is more closely associated with an economy s income than it is with an economy s expenditure. b. every transaction contributes equally to an economy s income and to its expenditure. c. the number of firms must be equal to the number of households in a simple circular-flow diagram. d. firms profits are necessarily zero in a simple circular-flow diagram. 2. According to the circular-flow diagram GDP a. can be computed as the total income paid by firms or as expenditures on final goods and services. b. can be computed as the total income paid by firms, but not as expenditures on final goods and services. c. can be computed as expenditures on final goods and services, but not as the total income paid by firms. d. cannot be computed as either total income paid by firms or expenditures on final goods and services. 3. The value of the housing services provided by the economy's owner-occupied houses is a. included in GDP, and the estimated rental values of the houses are used to place a value on these housing services. b. included in GDP, and the actual mortgage payments made on the houses are used to estimate the value of these rental services. c. excluded from GDP since these services are not sold in any market. d. excluded from GDP since the value of these housing services cannot be estimated with any degree of precision. 4. Ralph pays someone to mow his lawn, while Mike mows his own lawn. Regarding these two practices, which of the following statements is correct? a. Only Ralph s payments are included in GDP. b. Ralph s payments as well as the estimated value of Mike s mowing services are included in GDP. c. Neither Ralph s payments nor the estimated value of Mike's mowing services is included in GDP. d. Ralph s payments are included in GDP, while the estimated value of Mike s mowing services is included in GDP only if Mike voluntarily provides his estimate of that value to the government. 1
5. Gasoline is considered a final good if it is sold by a a. gasoline station to a bus company that operates a bus route between San Francisco and Los Angeles. b. pipeline operator to a gasoline station in San Francisco. c. gasoline station to a motorist in Los Angeles. d. All of the above are correct. 6. Suppose there are only two firms in an economy: Rolling Rawhide produces rawhide and sells it to Chewy Chomp, Inc., which uses the rawhide to produce and sell dog chews. With each $2 of rawhide that it buys from Rolling Rawhide, Chewy Chomp, Inc. produces a dog chew and sells it for $5. Neither firm had any inventory at the beginning of 2008. During that year, Rolling Rawhide produced enough rawhide for 1000 dog chews. Chewy Chomp, Inc. bought 75% of that rawhide for $1500 and promised to buy the remaining 25% for $500 in 2009. Chewy Chomp, Inc. produced 750 dog chews during 2008 and sold each one during that year for $5. What was the economy's GDP for 2008? a. $3750 b. $4250 c. $5250 d. $5750 7. The Patersons bought a home that was newly constructed in 2007 for $275,000. They sold the home in 2009 for $205,000. Which of the following statements is correct regarding the sale of the house? a. The 2009 sale increased 2009 GDP by $205,000 and had no effect on 2007 GDP. b. The 2009 sale reduced 2009 GDP by $70,000 and had no effect on 2007 GDP. c. The 2009 sale increased 2009 GDP by $205,000; and caused 2007 GDP to be revised downward by $70,000. d. The 2009 sale affected neither 2007 GDP nor 2009 GDP. ANS: D 8. An American company operates a fast food restaurant in Paris, France. Which of the following statements is accurate? a. The value of the goods and services produced by the restaurant is included in both French GDP and U.S. GDP. b. The value added by American workers and equipment in France is included in U.S. GDP and the value added by French workers and equipment is added to French GDP. c. The value of the goods and services produced by the restaurant is included in French GDP, but not in U.S. GDP. d. The value of the goods and services produced by the restaurant is included in U.S. GDP, but not in French GDP. 2
9. Which of the following transactions adds to U.S. GDP for 2010? a. In 2010, Ashley sells a car that she bought in 2006 to William for $5,000. b. An American management consultant works in Mexico during the summer of 2010 and earns the equivalent of $30,000 during that time. c. When John and Jennifer were both single, they lived in separate apartments and each paid $750 in rent. John and Jennifer got married in 2010 and they bought a previously unoccupied house that, according to reliable estimates, could be rented for $1,600 per month. d. None of the above transactions adds to U.S. GDP for 2010. 10. In the equation Y = C + I + G + NX, a. Y represents the economy s total expenditure on domestically produced final goods and services. b. C represents household expenditures on services and durable goods. c. all of the variables are always positive numbers. d. All of the above are correct. 11. John buys a used car for $5,400 and spends $600 on new parts, made in the U.S., to fix the car. The end result of these two transactions is a. U.S. consumption purchases increase by $5,400 and U.S. GDP increases by $5,400. b. U.S. consumption purchases increase by $6,000 and U.S. GDP increases by $6,000. c. U.S. consumption purchases increase by $600 and U.S. GDP increases by $600. d. U.S. consumption purchases increase by $600 and U.S. GDP increases by $6,000. 12. A U.S. publisher purchases new computers that were manufactured in the U.S. This purchase by itself makes a. a positive contribution both to investment and to GDP. b. a positive contribution both to consumption and to GDP. c. a positive contribution to GDP, but it does not affect investment or consumption. d. a positive contribution to investment, but it does not affect GDP. 13. A U.S. firm produces nail guns in the first quarter of 2010 and adds them to its inventory. In the second quarter of 2010 the firm sells the nail guns to a U.S. construction company. In which quarter(s) is (are) GDP higher? a. the first and the second b. the first but not the second c. the second but not the first d. neither the first nor the second 3
14. When an American household purchases a bottle of Italian wine for $100, a. U.S. consumption does not change, U.S. net exports decrease by $100, and U.S. GDP decreases by $100. b. U.S. consumption does not change, U.S. net exports increase by $100, and U.S. GDP increases by $100. c. U.S. consumption increases by $100, U.S. net exports decrease by $100, and U.S. GDP does not change. d. U.S. consumption increases by $100, U.S. net exports do not change, and U.S. GDP increases by $100. 15. In the economy of Ukzten in 2010, exports were $200, GDP was $2000, government purchases were $300, imports were $130, and investment was $400. What was Ukzten s consumption in 2010? a. $970 b. $1230 c. $1370 d. $1630 16. In the economy of Ukzten in 2010, consumption was $500, exports were $200, GDP was $1200, government purchases were $250, and investment was $300. What were Ukzten s imports in 2010? a. -$150 b. -$50 c. $50 d. $150 Table 10-1 The table below contains data for country A for the year 2010. Household purchases of durable goods $1293 Household purchases of nondurable goods $1717 Household purchases of services $301 Household purchases of new housing $704 Purchases of capital equipment $310 Inventory changes $374 Purchases of new structures $611 Depreciation $117 Salaries of government workers $1422 Government expenditures on public works $553 Transfer payments $777 Foreign purchases of domestically produced goods $88 Domestic purchases of foreign goods $120 4
17. Refer to Table 10-1. What were country A s government purchases in 2010? a. $553 b. $1198 c. $1975 d. $2752 18. Which of the following statements about GDP is correct? a. Nominal GDP values production at current prices, whereas real GDP values production at constant prices. b. Nominal GDP values production at constant prices, whereas real GDP values production at current prices. c. Nominal GDP values production at market prices, whereas real GDP values production at the cost of the resources used in the production process. d. Nominal GDP values production at the cost of the resources used in the production process, whereas real GDP values production at market prices.. 19. A country s real GDP rose from 500 to 550 while its nominal GDP rose from 600 to 770. What was this country s inflation rate? a. 16.7% b. 20% c. -14.3% d. -20% 20. If nominal GDP is $8 trillion and real GDP is $10 trillion, then the GDP deflator is a. 80, and this indicates that the price level has decreased by 20 percent since the base year. b. 80, and this indicates that the price level has increased by 80 percent since the base year. c. 125, and this indicates that the price level has increased by 25 percent since the base year. d. 125, and this indicates that the price level has increased by 125 percent since the base year. 21. A country reported a nominal GDP of $85 billion in 2010 and $100 billion in 2009. It also reported a GDP deflator of 100 in 2010 and 105 in 2009. Between 2009 and 2010, a. real output and the price level both rose. b. real output rose and the price level fell. c. real output fell and the price level rose. d. real output and the price level both fell. ANS: D 5
Table 10-4 The country of Caspir produces only cereal and milk. Quantities and prices of these goods for the last several years are shown below. The base year is 2008. Prices and Quantities Year Price of Cereal Quantity of Cereal Price of Milk Quantity of Milk 2008 $4.00 90 $1.50 150 2009 $4.00 100 $2.00 180 2010 $5.00 120 $2.50 200 2011 $6.00 150 $3.50 200 22. Refer to Table 10-4. This country s inflation rate from 2010 to 2011 was a. 15.4%. b. 26.1%. c. 45.5%. d. 77.8%. Table 10-6 The table below contains data for the country of Batterland, which produces only waffles and pancakes. The base year is 2009. Prices and Quantities Year Price of Waffles Quantity of Waffles Price of Pancakes Quantity of Pancakes 2008 $2.00 100 $1.00 100 2009 $2.00 120 $2.00 150 2010 $2.00 150 $3.00 200 2011 $4.00 180 $3.00 220 23. Refer to Table 10-6. In 2009, this country's nominal GDP was a. $300. b. $390. c. $400. d. $540. ANS: D 24. Refer to Table 10-6. This country's inflation rate from 2010 to 2011 was a. 15.2%. b. 25.4%. c. 34.1%. d. 43.9%. 6
25. The information below for 2008 in millions was reported by the World Bank. On the basis of this information, which list below contains the correct ordering of GDP per person from highest to lowest? Country GDP (Constant US$) GDP(Current US$) Population Argentina $394,595 $328,465 39.88 Bolivia $11,373 $16,674 9.69 Peru $84,241 $129,109 28.84 a. Argentina, Bolivia, Peru b. Argentina, Peru, Bolivia c. Bolivia, Argentina, Peru d. Peru, Bolivia, Argentina 7