MACROECONOMICS 9TH

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Chapter 05 National Income Accounting

MULTIPLE CHOICE

1. The national income accounting system provides a measure of:

a. only the total amount of profits made by the business firms.
b. the total value of all inputs used in production.
c. government budget surplus and deficit.
d. the net exports of a nation.
e. the output of an entire economy.
ANS: E DIF: Easy REF: 1 OBJ: ch. 05, 1
NAT: Analytic | Measuring the Economy TOP: Measures of Output and Income
MSC: Knowledge

2. National income accounting can best be characterized as:

a. a set of rules used to summarize economic activity over a given period of time.
b. a method for comparing different political systems.
c. a microeconomic model of the economy used by the Federal Reserve bank.
d. a statistical measure of the income received by consumers as opposed to businesses.
e. a standardized economic report authored by politicians.
ANS: A DIF: Easy REF: Ch 5, 1 OBJ: ch. 05, 1
NAT: Reflective Thinking | Measuring the Economy
TOP: Measures of Output and Income MSC: Comprehension

3. Identify the correct statement.

a. National income accounting measures only the flow of output between the different
sectors of the economy.
 b. National income accounting summarizes the level of production in an economy over a
decade.
c. National income accounting explains diagrammatically the flows of goods and services
and of money expenditures (income).
d. National income accounting summarizes and categorizes the productive activity in an
economy over a year.
e. National income accounting measures the total money supply in the economy.
ANS: D DIF: Moderate REF: 1 OBJ: ch. 05, 1
NAT: Analytic | Measuring the Economy TOP: Measures of Output and Income
MSC: Knowledge

4. Which of the following would be included in the calculation of the GDP for the year 2010?
a. Purchase of a 2004 model Volkswagen sedan in 2010
b. Swapping of baseball cards among two college students
c. Car repairs done by a person on his/her own
d. Fresh lemonade sold at a local diner
e. A lamp sold at a garage sale
ANS: D DIF: Moderate REF: 1.a OBJ: ch. 05, 1
NAT: Reflective Thinking | Measuring the Economy
TOP: Measures of Output and Income MSC: Application

5. Which of the following must be included in the calculation of GDP?

a. The sale of a used car to an auto dealer
b. Bartering lawn care services for car washes
c. A father staying at home to attend to his child
d. The sale of an illegal cable box
e. Payment made for a SAT preparation class
ANS: E DIF: Moderate REF: Ch 5, 1.a OBJ: ch. 05, 1
NAT: Reflective Thinking | Measuring the Economy
TOP: Measures of Output and Income MSC: Comprehension

6. Productive activity in the underground economy:

a. results in an overstatement of actual income and production in the national accounting
system.
b. consists of unrecorded cash transactions.
c. is estimated and included in the national income accounting system.
d. poses no problem for the measurement of gross domestic product.
e. does not affect GDP but is included in the value-added computations.
ANS: B DIF: Easy REF: 1.a OBJ: ch. 05, 1
NAT: Reflective Thinking | Measuring the Economy
TOP: Measures of Output and Income MSC: Comprehension

7. Which of the following would not be included in the calculation of GDP?

a. Vegetables grown and consumed by a nonfarm family
b. The purchase of a new Porsche
c. The sale of meat at the local grocery store
d. The government purchase of an F-14 fighter plane
e. The payment made to an accountant for the preparation of tax forms
ANS: A DIF: Moderate REF: Ch 5, 1.a OBJ: ch. 05, 1
NAT: Reflective Thinking | Measuring the Economy
 TOP: Measures of Output and Income MSC: Comprehension

8. If the value of intermediate goods and services are included in GDP, then:
a. GDP would be understated.
b. GDP would act as a true indicator of economic welfare.
c. there would be double-counting.
d. there would be undercounting.
e. GDP would be able to give a clearer picture of the economy.
ANS: C DIF: Easy REF: 1.a OBJ: ch. 05, 1
NAT: Analytic | Measuring the Economy TOP: Measures of Output and Income
MSC: Knowledge

9. Which of the following will be categorized as an intermediate good in national income accounting?
a. The value of oregano used as a seasoning for pizzas
b. The crops consumed by a farmer’s family members
c. The present value of a car produced a couple of years before
d. A clunker sold during the current year
e. The value of an antique piece of jewelry handed down over generations in a family
ANS: A DIF: Moderate REF: 1.a OBJ: ch. 05, 1
NAT: Reflective Thinking | Measuring the Economy
TOP: Measures of Output and Income MSC: Application

10. To avoid double counting in calculating GDP,

a. net exports should be excluded.
b. the value of intermediate goods and services should be excluded.
c. the capital consumption allowance should be excluded.
d. business investment should be excluded.
e. government purchases should be excluded.
ANS: B DIF: Easy REF: 1.a OBJ: ch. 05, 1
NAT: Analytic | Measuring the Economy TOP: Measures of Output and Income
MSC: Knowledge

11. The term value added is used to describe:

a. the increase in the value of a product that occurs at each stage of production.
b. the amount subtracted from the value of goods because of inflation.
c. the total value of all intermediate goods used in the production of the final good.
d. the amount paid in the final sale of a product or service.
e. the amount subtracted from the value of resources because of depreciation.
ANS: A DIF: Moderate REF: 1.a OBJ: ch. 05, 1
NAT: Analytic | Measuring the Economy TOP: Measures of Output and Income
MSC: Knowledge

12. A soft-drink bottling company supplies six-packs of orange flavored soda to retailers for a price of $2
each. If the components in each six-pack costs the bottling company $1.50, the value added to each
six-pack by the bottling company is:
a. $2.00.
b. $1.50.
c. $1.25.
d. $1.00.
e. $0.50.
 ANS: E DIF: Moderate REF: Ch 5, 1.a OBJ: ch. 05, 1
NAT: Reflective Thinking | Measuring the Economy
TOP: Measures of Output and Income MSC: Application

NARRBEGIN: Table 5.1

The table given below reports the value of sales at each stage of production of an economics book.
Table 5.1
The Production of an Economics Book
Production Stage Sales Value
Purchase of Timber $1.25
Processing of Timber into Paper $7.75
Printing $24.50
Retail Sales of Economics Book $38.00

NARREND

13. Refer to Table 5.1. What is the value-added by processing timber into paper?
a. $6.50
b. $38
c. $7.75
d. $1.25
e. $24.50
ANS: A DIF: Moderate REF: 1.a OBJ: ch. 05, 1
NAT: Reflective Thinking | Measuring the Economy
TOP: Measures of Output and Income MSC: Application

14. Refer to Table 5.1. What is the contribution to GDP from the production of an economics book?
a. $13.50
b. $7.75
c. $24.50
d. $38
e. $71.50
ANS: D DIF: Moderate REF: 1.a OBJ: ch. 05, 1
NAT: Reflective Thinking | Measuring the Economy
TOP: Measures of Output and Income MSC: Application

15. Refer to Table 5.1. Compute the market price of an economics book.
a. $13.50
b. $7.75
c. $24.50
d. $38
e. $71.50
ANS: D DIF: Moderate REF: 1.a OBJ: ch. 05, 1
NAT: Reflective Thinking | Measuring the Economy
TOP: Measures of Output and Income MSC: Application

NARRBEGIN: Table 5.2

The figure given below shows the various stages of production of a Corvette, a sports car produced by
General Motors Company (GMC):
Table 5.2
 The Production of a Corvette
Production Stage Sales Value
Steal Co. sells the raw material to Motor Inc. $1,500

Motor Inc. sells the engine to GMC $2,350

Dealer buys car form GMC $19,700
Dealer sells car (retail) $36,000

NARREND

16. According to Table 5.2, the value added by the dealer is:
a. $2,350.
b. $16,300.
c. $19,700.
d. $36,000.
e. $59,550.
ANS: B DIF: Moderate REF: Ch 5, 1.a OBJ: ch. 05, 1
NAT: Reflective Thinking | Measuring the Economy
TOP: Measures of Output and Income MSC: Application

17. According to Table 5.2, the contribution to GDP from the production of this car is
a. $2,350.
b. $16,300.
c. $19,700.
d. $36,000.
e. $59,550.
ANS: D DIF: Moderate REF: Ch 5, 1.a OBJ: ch. 05, 1
NAT: Reflective Thinking | Measuring the Economy
TOP: Measures of Output and Income MSC: Application

18. Identify the impact of an increase in the inventory stock during a year.
a. Consumption spending will decrease thereby reducing the GDP.
b. The GDP of the country should decrease by the amount of the increase in inventory.
c. The capital investment in the country will increase.
d. Neither the capital investment nor the GDP will change.
e. The GDP of the country should increase by the amount of the increase in inventory.
ANS: E DIF: Easy REF: 1.a OBJ: ch. 05, 1
NAT: Analytic | Measuring the Economy TOP: Measures of Output and Income
MSC: Knowledge

19. When estimating GDP, changes in the level of inventory are calculated because:
a. it indicates the level of employment in the economy.
b. it provides information about a firm’s expectations.
c. it is a good indicator of the competitiveness of the economy.
d. it shows the level of business spending by firms.
e. it determines the value of goods produced in a year but not sold in that year.
ANS: E DIF: Easy REF: Ch 5, 1.a OBJ: ch. 05, 1
NAT: Analytic | Measuring the Economy TOP: Measures of Output and Income
MSC: Knowledge

20. Which of the following accounts for the largest percentage of output in the United States?
 a. The government
b. Business firms
c. Households
d. Banks
e. The rest of the world
ANS: B DIF: Easy REF: 1.a.1 OBJ: ch. 05, 2
NAT: Analytic | Measuring the Economy TOP: Measures of Output and Income
MSC: Knowledge

21. What is the approximate percent of GDP produced by private firms in the United States?
a. 4 percent
b. 11 percent
c. 25 percent
d. 57 percent
e. 75 percent
ANS: E DIF: Easy REF: 1.a.1 OBJ: ch. 05, 2
NAT: Analytic | Measuring the Economy TOP: Measures of Output and Income
MSC: Knowledge

NARRBEGIN: Table 5.3

The table given below reports the sales value at each stage of production of the soft drink Pepsi.
Table 5.3
Production Stage Sales Value
Sugar cane $0.05
Processed sugar $0.10
Wholesale Pepsi $0.40
Pepsi in a vending machine $0.60

NARREND

22. Refer to Table 5.3. The value added by the wholesaler is equal to:
a. $0.05.
b. $0.40.
c. $0.20.
d. $1.15.
e. $0.06.
ANS: C DIF: Moderate REF: 1.a OBJ: ch. 05, 1
NAT: Reflective Thinking | Measuring the Economy
TOP: Measures of Output and Income MSC: Application

23. Refer to Table 5.3. If this Pepsi were the only good produced in the economy, what would GDP by the
expenditures approach be equal to?
a. $0.05
b. $0.20
c. $0.40
d. $1.15
e. $0.60
ANS: E DIF: Moderate REF: 1.a OBJ: ch. 05, 3
NAT: Reflective Thinking | Measuring the Economy
TOP: Measures of Output and Income MSC: Application
24. Refer to Table 5.3. Compute GDP according to the income approach if Pepsi is assumed to be the only
good produced in the economy.
a. $1.05
b. $0.05
c. $0.20
d. $0.60
e. $0.40
ANS: D DIF: Challenging REF: 1.a OBJ: ch. 05, 3
NAT: Reflective Thinking | Measuring the Economy
TOP: Measures of Output and Income MSC: Application

25. Consider GDP calculated according to the expenditures approach. Which of the following components
of GDP would need to decrease for GDP to increase?
a. Imports
b. Consumption
c. Exports
d. Investment
e. Government spending
ANS: A DIF: Moderate REF: Ch 5, 1.a OBJ: ch. 05, 3
NAT: Reflective Thinking | Measuring the Economy
TOP: Measures of Output and Income MSC: Comprehension

26. Consider a hypothetical economy, whose GDP was $10,000, consumption equaled $9,800, investment
equaled $125, goods exported equaled $255, and goods imported equaled $500, in 2010. Calculate the
government spending in this economy during the year.
a. $120
b. $380
c. $245
d. $200
e. $320
ANS: E DIF: Moderate REF: 1.a.2 OBJ: ch. 05, 3
NAT: Reflective Thinking | Measuring the Economy
TOP: Measures of Output and Income MSC: Application

27. Which of the following components of GDP accounts for the bulk of national expenditures in the
United States?
a. Government purchases
b. Imports
c. Consumption
d. Investment
e. Exports
ANS: C DIF: Easy REF: 1.a.2 OBJ: ch. 05, 3
NAT: Analytic | Measuring the Economy TOP: Measures of Output and Income
MSC: Knowledge

28. Bill Gates’ recent purchase of a new Rolls-Royce automobile produced in Great Britain will:
a. increase the gross domestic product of the United States.
b. have no effect on either country’s GDP.
c. decrease Great Britain’s GDP.
d. increase the net exports component of U.S. gross domestic product.
e. have to be subtracted from the U.S. GDP.
 ANS: E DIF: Moderate REF: 1.a.2 OBJ: ch. 05, 3
NAT: Reflective Thinking | Measuring the Economy
TOP: Measures of Output and Income MSC: Application

29. GDP according to the income method is the sum of:

a. wages, rent, interest, and profits.
b. consumption, gross investment, depreciation, and net exports.
c. depreciation, net factor income from abroad, and indirect business taxes.
d. gross investment, wages, profits, rent, and indirect business taxes.
e. consumption, profits, interest, rent, and net exports.
ANS: A DIF: Easy REF: 1.a.3 OBJ: ch. 05, 4
NAT: Analytic | Measuring the Economy TOP: Measures of Output and Income
MSC: Knowledge

30. The stock of unused goods held by a firm is called:

a. depreciation.
b. indirect taxes.
c. value added.
d. excess capacity.
e. inventory.
ANS: E DIF: Easy REF: 1.a OBJ: ch. 05, 4
NAT: Analytic | Measuring the Economy TOP: Measures of Output and Income
MSC: Knowledge

31. The total expenditure on goods and services in a country must be the same as the total income earned
from selling goods and services because:
a. the government annual budget has to balance.
b. net exports in an economy is usually zero.
c. one sector’s expenditures are another sector’s income.
d. total investment in an economy always equals total saving.
e. the sum of consumption spending and saving is zero.
ANS: C DIF: Easy REF: 3 OBJ: ch. 05, 4
NAT: Analytic | Measuring the Economy TOP: Measures of Output and Income
MSC: Knowledge

32. If ‘C’ denotes consumption expenditure, ‘I’ denotes investment expenditure, ‘G’ denotes government
expenditure and ‘X’ denotes net exports, then C + I + G + X equals:
a. net national product.
b. disposable personal income.
c. national income.
d. personal income.
e. gross domestic product.
ANS: E DIF: Easy REF: 1.a.2 OBJ: ch. 05, 4
NAT: Analytic | Measuring the Economy TOP: Measures of Output and Income
MSC: Knowledge

33. A reduction in the value of capital goods over time due to their use in production is called:
a. amortization.
b. erosion.
c. consumption.
 d. investment.
e. depreciation.
ANS: E DIF: Easy REF: 1.a.3 OBJ: ch. 05, 4
NAT: Analytic | Measuring the Economy TOP: Measures of Output and Income
MSC: Knowledge

34. Which of the following is included in GDP computation according to the income method?
a. Consumption
b. Profits
c. Investment
d. Government spending
e. Imports
ANS: B DIF: Easy REF: 1.a.3 OBJ: ch. 05, 4
NAT: Analytic | Measuring the Economy TOP: Measures of Output and Income
MSC: Knowledge

35. The term capital consumption allowance is defined as:

a. the amount of net interest in the economy each year.
b. the estimated value of depreciation and obsolescence in investment goods.
c. the difference between exports and imports.
d. the disposition of disposable personal income.
e. the difference between earnings not received and receipts not earned.
ANS: B DIF: Easy REF: 1.a.3 OBJ: ch. 05, 4
NAT: Analytic | Measuring the Economy TOP: Measures of Output and Income
MSC: Knowledge

36. The difference between gross and net investment is referred to as:
a. a personal tax.
b. the income earned but not received.
c. a capital consumption allowance.
d. an indirect business tax.
e. a statistical discrepancy.
ANS: C DIF: Easy REF: Ch 5, 1.a OBJ: ch. 05, 4
NAT: Analytic | Measuring the Economy
TOP: Measures of Output and Income MSC: Knowledge

37. The purchase of a new machine to replace the one that is worn out is:
a. not included in GDP.
b. included in gross investment.
c. considered a personal consumption expenditure.
d. not included in GNP.
e. an increase in inventories.
ANS: B DIF: Challenging REF: Ch 5, 1.b OBJ: ch. 05, 4
NAT: Analytic | Measuring the Economy TOP: Measures of Output and Income
MSC: Knowledge

38. Which of the following is true of indirect business taxes?

a. They are included in corporate profits.
b. They are not included in the GDP.
c. They reduce the value of total economic output.
 d. They are collected by business firms that act as agents for the government.
e. They are the same as personal income taxes.
ANS: D DIF: Easy REF: 1.a.3 OBJ: ch. 05, 4
NAT: Analytic | Measuring the Economy TOP: Measures of Output and Income
MSC: Knowledge

39. Which of the following can be a valid reason for Canada’s GDP exceeding its GNP in 2001?
a. Net factor income from abroad in Canada was negative.
b. Canada’s GNP measurements were flawed.
c. Canada’s indirect business taxes were exceptionally high.
d. The World Bank underestimated Canada’s net exports.
e. Canada’s residents received more foreign aid than they could spend.
ANS: A DIF: Challenging REF: 1.b.1 OBJ: ch. 05, 4
NAT: Reflective Thinking | Measuring the Economy
TOP: Measures of Output and Income MSC: Comprehension

40. Which of the following is subtracted from GNP when calculating net national product?
a. Interest
b. Capital consumption allowance
c. Rent
d. Indirect business taxes
e. Consumption
ANS: B DIF: Easy REF: 1.b.2 OBJ: ch. 05, 4
NAT: Analytic | Measuring the Economy TOP: Measures of Output and Income
MSC: Knowledge

41. The difference between GNP and NNP is equal to:

a. the statistical discrepancy in calculation.
b. the capital consumption allowance.
c. the difference between government spending and transfer payments.
d. the value of net exports.
e. the change in inventory.
ANS: B DIF: Easy REF: Ch 5, 1.b OBJ: ch. 05, 4
NAT: Analytic | Measuring the Economy TOP: Measures of Output and Income
MSC: Knowledge

42. If net investment spending in a nation is zero, we can conclude that:

a. gross investment exceeds the capital consumption allowance.
b. the capital consumption allowance exceeds gross investment.
c. imports equal exports.
d. gross investment equals the capital consumption allowance.
e. no investment goods were produced in the economy.
ANS: D DIF: Moderate REF: 1.b.2 OBJ: ch. 05, 4
NAT: Analytic | Measuring the Economy TOP: Measures of Output and Income
MSC: Knowledge

43. National income is the sum of:

a. personal income and personal tax payments.
b. proprietors’ income, rental income, compensation of employees, corporate profits, and
interest receipts net of indirect business taxes and the capital consumption allowance.
 c. wages, transfer payments, interest paid to businesses, and tax revenue.
d. NNP and the capital consumption allowance.
e. consumption, investment, government spending, and net exports.
ANS: B DIF: Easy REF: 1.b.3 OBJ: ch. 05, 4
NAT: Analytic | Measuring the Economy TOP: Measures of Output and Income
MSC: Knowledge

44. Which of the following is not included in national income?

a. Corporate profits
b. Interest earnings
c. Capital consumption allowance
d. Rental income
e. Stockbroker commissions
ANS: C DIF: Easy REF: 1.b.3 OBJ: ch. 05, 4
NAT: Analytic | Measuring the Economy TOP: Measures of Output and Income
MSC: Knowledge

NARRBEGIN: Scenario 5.1

Scenario 5.1
Suppose that personal income is $250 billion. Furthermore, assume that retained corporate earnings are
$2 billion, social security taxes are $15 billion, social security benefit checks equal $16 billion, the
capital consumption allowance is $32 billion, and corporate taxes amount to $40 billion.
NARREND

45. Refer to Scenario 5.1. Gross national product of this nation will be:
a. $177 billion.
b. $259 billion.
c. $291 billion.
d. $343 billion.
e. $323 billion.
ANS: E DIF: Moderate REF: 1.b.1 OBJ: ch. 05, 4
NAT: Reflective Thinking | Measuring the Economy
TOP: Measures of Output and Income MSC: Application

46. Refer to Scenario 5.1. What will be the value of net national product in this country?
a. $209 billion
b. $219 billion
c. $283 billion
d. $291 billion
e. $323 billion
ANS: D DIF: Moderate REF: 1.b.2 OBJ: ch. 05, 4
NAT: Reflective Thinking | Measuring the Economy
TOP: Measures of Output and Income MSC: Application

47. Refer to Scenario 5.1. The national income of this nation will be:
a. $236 billion
b. $249 billion
c. $251 billion
d. $279 billion
e. $290 billion
 ANS: C DIF: Moderate REF: 1.b.3 OBJ: ch. 05, 4
NAT: Reflective Thinking | Measuring the Economy
TOP: Measures of Output and Income MSC: Application

NARRBEGIN: Table 5.4

The table given below reports the value of different economic variables of a country during a year.
Table 5.4
GNP Data
(Adjusted for net factor income from abroad)
Net Investment $400
Capital Consumption Allowance $800
Indirect Business Taxes $600
U.S. Exports $200
U.S. Imports $300
Government Purchases $150
Consumption Spending $2,030

NARREND

48. Refer to Table 5.4. Compute the GNP of the country.

a. $2,680
b. $2,480
c. $3,280
d. $3,880
e. $4,480
ANS: C DIF: Moderate REF: 1.b.1 OBJ: ch. 05, 4
NAT: Reflective Thinking | Measuring the Economy
TOP: Measures of Output and Income MSC: Application

49. Refer to Table 5.4. Calculate the NNP for this country.
a. $2,680
b. $2,480
c. $3,280
d. $3,880
e. $4,480
ANS: B DIF: Moderate REF: 1.b.2 OBJ: ch. 05, 4
NAT: Reflective Thinking | Measuring the Economy
TOP: Measures of Output and Income MSC: Application

50. Refer to Table 5.4. What will be the value of gross investment?
a. $400
b. $1,200
c. $1,000
d. $1,800
e. Indeterminate
ANS: B DIF: Moderate REF: 1.b.2 OBJ: ch. 05, 4
NAT: Reflective Thinking | Measuring the Economy
TOP: Measures of Output and Income MSC: Application

51. Refer to Table 5.4. Calculate the national income of this country.
a. $1,880
 b. $2,480
c. $3,280
d. $3,880
e. $4,280
ANS: B DIF: Moderate REF: 1.b.3 OBJ: ch. 05, 4
NAT: Reflective Thinking | Measuring the Economy
TOP: Measures of Output and Income MSC: Application

52. Personal income is equal to:

a. NI minus personal income tax.
b. NI minus net factor income from abroad.
c. NI plus income currently earned but not received - income currently received but not
earned.
d. NI minus indirect business taxes.
e. NI plus income currently received but not earned - income currently earned but not
received.
ANS: E DIF: Challenging REF: 1.b.4 OBJ: ch. 05, 4
NAT: Analytic | Measuring the Economy TOP: Measures of Output and Income
MSC: Knowledge

53. Which of the following would not be included as part of personal income?
a. Welfare benefits
b. Food stamps distributed by the government
c. Social security benefits
d. Indirect business taxes
e. Corporate dividend payments to stockholders
ANS: D DIF: Challenging REF: 1.b.4 OBJ: ch. 05, 4
NAT: Reflective Thinking | Measuring the Economy
TOP: Measures of Output and Income MSC: Comprehension

54. Personal income is equal to:

a. national income plus business profits.
b. disposable personal income minus personal taxes.
c. national income minus transfer payments.
d. national income plus welfare benefits minus corporate retained earnings.
e. disposable personal income plus transfer payments.
ANS: D DIF: Moderate REF: Ch 5, 1.b OBJ: ch. 05, 4
NAT: Analytic | Measuring the Economy TOP: Measures of Output and Income
MSC: Knowledge

55. Which of the following represents the amount of income that is actually available to people for
consumption and saving?
a. Net national product
b. National income
c. Disposable personal income
d. Gross national product
e. Personal income
ANS: C DIF: Easy REF: 1.b.5 OBJ: ch. 05, 4
NAT: Analytic | Measuring the Economy TOP: Measures of Output and Income
MSC: Knowledge
 NARRBEGIN: Table 5.5
The table given below reports the value of the different economic variables of a nation during a year.
Table 5.5
GNP Data
(Adjusted for net factor income from abroad)
Consumption Spending $1,150
Gross Investment $320
Exports $420
Capital Consumption Allowance $60
Government Purchases $200
Social Security Benefits $365
Imports $540
Personal Income Tax $225

NARREND

56. Refer to Table 5.5. For the economy described in the table above, personal income is:
a. $1,235.
b. $1,375.
c. $1,325.
d. $1,600.
e. $1,855.
ANS: E DIF: Moderate REF: 1.b.4 OBJ: ch. 05, 4
NAT: Reflective Thinking | Measuring the Economy
TOP: Measures of Output and Income MSC: Application

57. Refer to Table 5.5. For the economy described in the table above, disposable personal income is:
a. $1,440.
b. $1,630.
c. $1,550.
d. $1,610.
e. $1,870.
ANS: B DIF: Moderate REF: 1.b.5 OBJ: ch. 05, 4
NAT: Reflective Thinking | Measuring the Economy
TOP: Measures of Output and Income MSC: Application

58. Which of the following is true of nominal GDP?

a. It acts as an indicator of the general price level in the economy.
b. It measures the real level of output in the economy.
c. It measures national output based on the current year’s prices.
d. It tends to rise by a smaller amount than real GDP when the general price level increases.
e. It measures changes in the output of intermediate goods and services.
ANS: C DIF: Easy REF: 2.a OBJ: ch. 05, 5
NAT: Analytic | Measuring the Economy TOP: Nominal and Real Measures
MSC: Knowledge

59. Which of the following is true of real GDP?

a. It measures a nation’s output in terms of current year prices.
b. It measures a nation’s output in constant year prices.
c. It measures the degree of change in the general price level in an economy.
 d. It measures the change in the value of an economy’s output.
e. It measures the value of both intermediate and final goods and services produced in an
economy.
ANS: B DIF: Easy REF: 2.a OBJ: ch. 05, 5
NAT: Analytic | Measuring the Economy TOP: Nominal and Real Measures
MSC: Knowledge

60. If nominal GDP of a country increased and real GDP remained unchanged in a particular year, which
of the following is most likely to have taken place?
a. Output increased and the price level increased.
b. Output increased and the price level decreased.
c. Output remained contant and the price level increased.
d. Output decreased and the price level decreased.
e. Output increased and the price level remained constant.
ANS: C DIF: Moderate REF: Ch 5, 2.b OBJ: ch. 05, 5
NAT: Reflective Thinking | Inflation TOP: Nominal and Real Measures
MSC: Comprehension

61. If both real GDP and nominal GDP of a country increased at the same rate in a particular year, which
of the following is most likely to have taken place?
a. Output increased and the price level increased
b. Output increased and the price level decreased
c. Output decreased and the price level increased
d. Output decreased and the price level decreased
e. Output increased and the price level remained constant
ANS: E DIF: Moderate REF: Ch 5, 2.b OBJ: ch. 05, 5
NAT: Reflective Thinking | Inflation TOP: Nominal and Real Measures
MSC: Comprehension

62. Consider a small country producing only two commodities (coffee beans and corn). Following are the
price and output of these two commodities in the year 2008:
Price Quantity
$12 500 lbs. of coffee beans
$6 600 bushels of corn
Assuming the price level in the economy remains same while the output of both these products
increase by 10 percent in 2009, calculate the value of real GDP in this country for the year 2009?
a. $9,600
b. $10,560
c. $1,056
d. $6,900
e. $10, 960
ANS: B DIF: Challenging REF: 2.a OBJ: ch. 05, 5
NAT: Reflective Thinking | Inflation TOP: Nominal and Real Measures
MSC: Application

63. Consider a small country producing only two commodities (coffee beans and corn). Following are the
price and output of these two commodities in the year 2008:
Price Quantity
$12 500 lbs. of coffee beans
$6 600 bushels of corn
 Assuming that the output of these two commodities remains constant, while the price of each rises by
10 percent in 2009, compute the value of real GDP in 2009.
a. $12,000
b. $10,560
c. $9,600
d. $8,400
e. $6,560
ANS: C DIF: Challenging REF: 2.a OBJ: ch. 05, 5
NAT: Reflective Thinking | Inflation TOP: Nominal and Real Measures
MSC: Comprehension

64. Which of the following industrial countries experienced a relatively slower growth of real GDP in the
latter half of the 1990s?
a. Canada
b. United States
c. Italy
d. France
e. Japan
ANS: E DIF: Moderate REF: 2.a OBJ: ch. 05, 5
NAT: Analytic | Measuring the Economy TOP: Nominal and Real Measures
MSC: Knowledge

NARRBEGIN: Table 5.6

The table given below lists the price per unit and output of computers and calculators (the only two
goods produced by a nation) for the years 1995 and 2003.
Table 5.6
Production Data
Prices per Unit Quantity
Production 1995 2003 1995 2003
Computers $2,000 $1,600 100 100
Calculators $60 $70 900 900

NARREND

65. Refer to Table 5.6. Calculate the nominal GDP for 1995.
a. $223,000
b. $254,000
c. $448,000
d. $520,000
e. $110,000
ANS: B DIF: Moderate REF: 2.a OBJ: ch. 05, 5
NAT: Reflective Thinking | Measuring the Economy TOP: Nominal and Real Measures
MSC: Application

66. Refer to Table 5.6. What is the nominal GDP for 2003?
a. $223,000
b. $254,000
c. $376,000
d. $448,000
e. $520,000
 ANS: A DIF: Moderate REF: 2.a OBJ: ch. 05, 5
NAT: Reflective Thinking | Measuring the Economy TOP: Nominal and Real Measures
MSC: Application

67. Refer to Table 5.6. What is the constant-dollar real GDP growth from 1995 to 2003 using 1995 as the
base year?
a. 50 percent
b. zero percent
c. -75 percent
d. 100 percent
e. 14 percent
ANS: B DIF: Challenging REF: 2.a OBJ: ch. 05, 5
NAT: Reflective Thinking | Measuring the Economy TOP: Nominal and Real Measures
MSC: Application

68. Refer to Table 5.6. What is the constant-dollar real GDP growth from 1995 to 2003 using 2003 as the
base year?
a. 50 percent
b. zero percent
c. -75 percent
d. 100 percent
e. 14 percent
ANS: B DIF: Challenging REF: 2.a OBJ: ch. 05, 5
NAT: Reflective Thinking | Measuring the Economy TOP: Nominal and Real Measures
MSC: Application

69. The price index for the current year is 180. This means that, on average, prices in the current year are:
a. 80 percent of prices in the base year.
b. $1.80 higher than prices in the base year.
c. 180 percent higher than prices in the base year.
d. $0.80 higher than prices in the base year.
e. 80 percent higher than prices in the base year.
ANS: E DIF: Moderate REF: Ch 5, 2.b OBJ: ch. 05, 6
NAT: Analytic | Inflation TOP: Nominal and Real Measures
MSC: Application

70. Suppose the price index is 100 in the base year and the price of a pound of oranges in that year is
$1.96. Now, if the price index changes to 105 in the following year, how much would a pound of
oranges cost?
a. $2.45
b. $0.25
c. $1.96
d. $2.06
e. $1.50
ANS: D DIF: Challenging REF: 2.b.1 OBJ: ch. 05, 6
NAT: Reflective Thinking | Inflation TOP: Nominal and Real Measures
MSC: Application

71. Suppose the current price of DVDs is $16, while its base-year price is $11.50. The value of the price
index for the current year is approximately:
a. 139
 b. 39
c. 25
d. 160
e. 172
ANS: A DIF: Moderate REF: 2.b.1 OBJ: ch. 05, 6
NAT: Reflective Thinking | Inflation TOP: Nominal and Real Measures
MSC: Application

NARRBEGIN: Table 5.7

The table given below reports the price of soda over four consecutive years.
Table 5.7
Price Data
Year Base-Year Soda Price Current Soda Price
1 (base year) $0.30 $0.30
2 $0.30 $0.45
3 $0.30 $0.55
4 $0.30 $0.65

NARREND

72. Refer to Table 5.7. Compute the price index for the base year.
a. 130
b. 30
c. 80
d. 100
e. 120
ANS: D DIF: Moderate REF: 2.b.2 OBJ: ch. 05, 6
NAT: Reflective Thinking | Inflation TOP: Nominal and Real Measures
MSC: Application

73. Refer to Table 5.7. Compute the price index for the third year.
a. 150
b. 183
c. 100
d. 118
e. 130
ANS: B DIF: Moderate REF: 2.b OBJ: ch. 05, 6
NAT: Reflective Thinking | Inflation TOP: Measures of Output and Income
MSC: Application

74. Refer to Table 5.7. By what percentage did the price of soda increase from the third to the fourth year?
a. 15 percent
b. 30 percent
c. 35 percent
d. 18 percent
e. 65 percent
ANS: D DIF: Moderate REF: 2.b.2 OBJ: ch. 05, 6
NAT: Reflective Thinking | Inflation TOP: Measures of Output and Income
MSC: Application
 75. In terms of price indexes, what is a COLA?
a. A measure of the quality of living
b. A consumer price adjustment
c. An increase in wages designed to match consumer price increases
d. An estimate of gross domestic product
e. A measure of producer surplus
ANS: C DIF: Moderate REF: 2.b.2 OBJ: ch. 05, 6
NAT: Analytic | Inflation TOP: Nominal and Real Measures
MSC: Knowledge

76. The consumer price index:

a. tracks the value of output over time.
b. is not tied to cost-of-living adjustments.
c. doubles every five years in the economy.
d. is a weighted average of consumer prices.
e. is a broader price index measure than the implicit GDP deflator.
ANS: D DIF: Easy REF: 2.b.2 OBJ: ch. 05, 6
NAT: Analytic | Inflation TOP: Nominal and Real Measures
MSC: Knowledge

77. The producer price index was earlier known as _____.

a. the retail price index
b. the commodity market index
c. the Fischer index
d. the wholesale price index
e. the cost of living index
ANS: D DIF: Easy REF: 2.b.2 OBJ: ch. 05, 6
NAT: Analytic | Measuring the Economy TOP: Measures of Output and Income
MSC: Knowledge

TRUE/FALSE

1. National income accounting fills in the dollar values in the circular flow.

ANS: T DIF: Easy REF: 1 OBJ: ch. 05, 1

NAT: Analytic | Measuring the Economy TOP: Measures of Output and Income
MSC: Knowledge

2. The circular flow diagram validates the fact that the different sectors in the economy are independent.

ANS: F DIF: Easy REF: Ch 5, 3 OBJ: ch. 05, 1

NAT: Reflective Thinking | Measuring the Economy
TOP: Measures of Output and Income MSC: Comprehension

3. The circular flow diagram shows the flow of money and goods and services between households,
firms, government, and foreign countries.

ANS: T DIF: Easy REF: 3 OBJ: ch. 05, 1

NAT: Analytic | Measuring the Economy TOP: Nominal and Real Measures
MSC: Knowledge
 4. GDP is based on the market value of goods and services produced in an economy and not on the value
of only final goods and services.

ANS: F DIF: Easy REF: 1.a OBJ: ch. 05, 1

NAT: Reflective Thinking | Measuring the Economy
TOP: Measures of Output and Income MSC: Knowledge

5. In-kind wages are not included in GDP.

ANS: F DIF: Moderate REF: 1.a OBJ: ch. 05, 1

NAT: Analytic | Measuring the Economy TOP: Measures of Output and Income
MSC: Knowledge

6. The services of a husband or wife as a homemaker and cash gains from a lottery are included in the
calculation of gross domestic product.

ANS: F DIF: Challenging REF: 1.a OBJ: ch. 05, 1

NAT: Reflective Thinking | Measuring the Economy
TOP: Measures of Output and Income MSC: Application

7. The sale of live cattle to a slaughterhouse constitutes a final transaction that is counted as part of the
gross domestic product.

ANS: F DIF: Moderate REF: Ch 5, 1.a OBJ: ch. 05, 1

NAT: Reflective Thinking | Measuring the Economy
TOP: Measures of Output and Income MSC: Comprehension

8. The value added approach involves adding up the value of the final product and the value of
intermediate goods used in the production process.

ANS: F DIF: Moderate REF: 1.a OBJ: ch. 05, 1

NAT: Analytic | Measuring the Economy TOP: Measures of Output and Income
MSC: Knowledge

9. According to the expenditures approach, gross domestic product represents the sum of consumption
spending, government spending, net exports, and net investment.

ANS: T DIF: Easy REF: 1.a.2 OBJ: ch. 05, 3

NAT: Analytic | Measuring the Economy TOP: Measures of Output and Income
MSC: Knowledge

10. Other things remaining unchanged, a decline in imports is associated with an increase in gross
domestic product.

ANS: T DIF: Moderate REF: 1.a.2 OBJ: ch. 05, 3

NAT: Analytic | Measuring the Economy TOP: Measures of Output and Income
MSC: Knowledge

11. Wheat produced in the U.S. but sold in Japan would not be included while calculating the U.S. GDP.

ANS: F DIF: Moderate REF: Ch 5, 1.a OBJ: ch. 05, 3

NAT: Reflective Thinking | Measuring the Economy
TOP: Measures of Output and Income MSC: Comprehension
12. Depreciation must be subtracted from the calculation of gross domestic product.

ANS: F DIF: Moderate REF: 1.a.3 OBJ: ch. 05, 4

NAT: Analytic | Measuring the Economy TOP: Measures of Output and Income
MSC: Knowledge

13. Personal income and property taxes paid by individuals are not included in the income approach of
gross domestic product calculation.

ANS: F DIF: Moderate REF: 1.a.3 OBJ: ch. 05, 4

NAT: Analytic | Measuring the Economy TOP: Measures of Output and Income
MSC: Knowledge

14. Gross national product in terms of the income method is equal to national income plus indirect
business taxes minus the capital consumption allowance.

ANS: F DIF: Easy REF: 1.b.1 OBJ: ch. 05, 4

NAT: Analytic | Measuring the Economy TOP: Measures of Output and Income
MSC: Knowledge

15. The output produced by domestically owned firms in foreign countries is included in the U.S. GDP but
not in the U.S. GNP.

ANS: F DIF: Moderate REF: Ch 5, 1.a OBJ: ch. 05, 4

NAT: Analytic | Measuring the Economy TOP: Measures of Output and Income
MSC: Knowledge

16. When indirect business taxes are subtracted from GDP we get net national product of a nation.

ANS: F DIF: Moderate REF: 1.b.2 OBJ: ch. 05, 4

NAT: Analytic | Measuring the Economy TOP: Measures of Output and Income
MSC: Knowledge

17. FICA taxes and corporate retained earnings are subtracted from national income when personal
income is computed.

ANS: T DIF: Moderate REF: 1.b.4 OBJ: ch. 05, 4

NAT: Analytic | Measuring the Economy TOP: Measures of Output and Income
MSC: Knowledge

18. The income that is available to individuals for consumption or investment is called disposable income.

ANS: F DIF: Easy REF: 1.b.5 OBJ: ch. 05, 4

NAT: Analytic | Measuring the Economy TOP: Measures of Output and Income
MSC: Knowledge

19. To arrive at a more accurate measure of real output changes in an economy, nominal GDP figures
should be adjusted for inflation.

ANS: T DIF: Easy REF: 2.a OBJ: ch. 05, 5

NAT: Analytic | Inflation TOP: Nominal and Real Measures
MSC: Knowledge

20. A price index is a measure of the average level of prices in an economy.

 ANS: T DIF: Easy REF: 2.b OBJ: ch. 05, 5
NAT: Analytic | Inflation TOP: Nominal and Real Measures
MSC: Knowledge

21. If the price level in any country increases by 15 percent during a year, then the price index for that year
will be 85 as compared to the base year.

ANS: F DIF: Moderate REF: 2.b.1 OBJ: ch. 05, 6

NAT: Reflective Thinking | Inflation TOP: Nominal and Real Measures
MSC: Application

22. The value of a price index in the base year will always be zero.

ANS: F DIF: Easy REF: 2.b.1 OBJ: ch. 05, 6

NAT: Analytic | Inflation TOP: Nominal and Real Measures
MSC: Knowledge

23. The market basket of goods and services used to calculate the consumer price index [CPI] by the
Department of Labor in the U.S. changes only every two years.

ANS: T DIF: Easy REF: EI OBJ: ch. 05, 6

NAT: Analytic | Inflation TOP: Nominal and Real Measures
MSC: Knowledge

24. The consumer price index [CPI] is considered the best measure of the cost of living of individuals in a
country.

ANS: F DIF: Easy REF: EI OBJ: ch. 05, 6

NAT: Analytic | Inflation TOP: Nominal and Real Measures
MSC: Application

25. The consumer price index [CPI] measures price changes at an earlier stage of production than the
producer price index [PPI], hence, increases in the CPI are usually followed by increases in the PPI.

ANS: F DIF: Easy REF: 2.b.2 OBJ: ch. 05, 6

NAT: Analytic | Inflation TOP: Nominal and Real Measures
MSC: Knowledge

26. Since there are smaller fluctuations in the equilibrium prices of final goods than in the prices of
intermediate goods, the producer price index is more volatile than the consumer price index.

ANS: T DIF: Easy REF: 2.b.2 OBJ: ch. 05, 6

NAT: Analytic | Inflation TOP: Nominal and Real Measures
MSC: Knowledge

27. Most countries tend to follow only one price index to measure the price level in an economy because
all prices rise or fall at the same time or by the same amount.

ANS: F DIF: Moderate REF: 2.b.2 OBJ: ch. 05, 6

NAT: Analytic | Measuring the Economy TOP: Nominal and Real Measures
MSC: Knowledge