### Chapter 3 Quiz

1 of 30 Which of the following is a flow variable? A. the value of the house in which you live B. the balance in your savings account C. your monthly consumption of hamburgers D. the number of hamburgers in your refrigerator at the beginning of the month 1 out of 1 Correct. The answer is C. As explained in Section 2-1, a flow is a quantity measured per unit time and a stock is a quantity measured at a given point in time. 2 of 30 Which of the following is not a stock variable? A. government debt B. the labor force C. the amount of money held by the public D. inventory investment 0 out of 1 Incorrect. The correct answer is D.

Inventory investment is a quantity measured per unit time, so it is a flow variable. See Section 2-1. 3 of 30 Gross domestic product (GDP) is A. a stock. B. a flow. C. both a stock and a flow. D. neither a stock nor a flow. 0 out of 1 Incorrect. The correct answer is B. GDP is a quantity measured per unit time, so it is a flow. See Section 2-1. 4 of 30 GDP measures A. expenditure on all final goods and services. B. total income of everyone in the economy. C. total value added by all firms in the economy. D. all of the above. 0 out of 1 Incorrect. The correct answer is D. See Section 2-1 for a discussion of what GDP measures. of 30 Suppose that a farmer grows wheat and sells it to a baker for $1, the baker makes bread and sells it to a store for $2, and the store sells it to the customer for $3. This transaction increases GDP by A. $1. B. $2. C. $3. D. $6. 1 out of 1 Correct. The answer is C. As explained in Section 2-1, GDP includes only the value of the final goods and services. Therefore, this transaction increases GDP by $3. 6 of 30 Which of the following is not included in GDP? A. the salary paid to a federal judge B. the value of housing services enjoyed by homeowners C. the value of automobile services enjoyed by car owners D. he value added by a shipping company that transports goods from the factory to retail stores 1 out of 1 Correct. The answer is C. In principle, GDP should include the imputed rent on automobiles, but in practice it does not. See Section 2-1. 7 of 30 In which case is total expenditure in an economy not equal to total income? A. If total saving is larger than total investment. B. If net exports are not zero. C. If inventory investment is negative. D. None of the above—they are always equal. 0 out of 1 Incorrect. The correct answer is D. As explained in Section 2-1, total expenditure in an economy always equals total income. of 30 All other things equal, GDP will rise if A. imports rise. B. exports fall. C. durable goods consumption rises. D. military spending falls. 0 out of 1 Incorrect. The correct answer is C. A rise in imports, a fall in exports, or a fall in military spending will decrease GDP. A rise in durable goods consumption will increase GDP. See Section 2-1. 9 of 30 Which of the following statements describes the difference between real and nominal GDP? A. Real GDP includes only goods; nominal GDP includes goods and services. B. Real GDP is measured using constant base-year prices; nominal GDP is measured using current prices.

C. Real GDP is equal to nominal GDP less the depreciation of the capital stock. D. Real GDP is equal to nominal GDP multiplied by the CPI. 1 out of 1 Correct. The answer is B. For a discussion of the differences between real and nominal GDP, see Section 2-1. 10 of 30 If production remains the same and all prices double, then real GDP A. and nominal GDP are both constant. B. is constant and nominal GDP is reduced by half. C. is constant and nominal GDP doubles. D. doubles and nominal GDP is constant. 1 out of 1 Correct. The answer is C. Real GDP is measured in constant prices, so it is unaffected by a price increase.

Nominal GDP is measured in current prices. If prices double, so will nominal GDP. See Section 2-1. 11 of 30 Real GDP equals A. nominal GDP minus net exports. B. nominal GDP divided by the GDP deflator. C. nominal GDP multiplied by the GDP deflator. D. GDP minus depreciation. 0 out of 1 Incorrect. The correct answer is B. As explained in Section 2-1, real GDP equals nominal GDP divided by the GDP deflator. 12 of 30 If production remains the same and all prices double relative to the base year, then the GDP deflator is A. 1/4. B. 1/2. C. 1. D. 2. 1 out of 1 Correct. The answer is D.

As explained in Section 2-1, the GDP deflator equals nominal GDP divided by real GDP. If prices double, nominal GDP will double and real GDP will be unchanged. Therefore, the GDP deflator will equal 2. 13 of 30 Consider the following table: APPLES ORANGES Year Production/Price Production/Price 1995 20/ $0. 50 10/$1. 00 2000 10/ $1. 00 10/$0. 50 If 1995 is the base year, what is the GDP deflator for 2000? A. 0 B. between 0 and 1 C. 1 D. greater than 1 Question not answered 14 of 30 To obtain the net national product (NNP), start with the gross national product (GNP) and subtract A. depreciation. B. epreciation and indirect business taxes. C. depreciation, indirect business taxes, and corporate profits. D. depreciation, indirect business taxes, corporate profits, and social insurance contributions. 0 out of 1 Incorrect. The correct answer is A. For an explanation of NNP, see Section 2-1. 15 of 30 To obtain national income, start with GNP and subtract A. depreciation. B. depreciation and the statistical discrepancy. C. depreciation, indirect business taxes, and corporate profits. D. depreciation, indirect business taxes, corporate profits, and social insurance contributions. 0 out of 1 Incorrect. The correct answer is B.

National income equals GNP minus depreciation and the statistical discrepancy. See Section 2-1. 16 of 30 Approximately what percentage of national income consists of compensation of employees? A. 10 percent B. 25 percent C. 70 percent D. 95 percent 1 out of 1 Correct. The answer is C. The components of national income are discussed in section 2-1. 17 of 30 Which of the following is not considered investment? A. A family builds a house in which it plans to live. B. A car dealer stores some of this year’s models for next year. C. An individual purchases several pieces of antique furniture. D. A firm buys a computer for word processing. out of 1 Incorrect. The correct answer is C. As discussed in Section 2-1, the reallocation of existing assets among different individuals is not investment for economy. 18 of 30 Suppose that Jones builds a new house, then she sells it to Smith, and then Smith sells it to Williams. The total net investment from these transactions is A. zero. B. 1 house. C. 2 houses. D. 3 houses. 1 out of 1 Correct. The answer is B. As explained in Section 2-1, building a new house counts as investment; selling an existing house does not. 19 of 30 The consumer price index (CPI) A. measures the price of a fixed basket of goods and services.

B. measures the price of a basket of goods and services that constantly changes as the composition of consumer spending changes. C. measures the amount of money that it takes to produce a fixed level of utility. D. is one of the many statistics in the National Income Accounts. 1 out of 1 Correct. The answer is A. The CPI measures the price of a fixed basket of goods and services. See Section 2-2. 20 of 30 Suppose that the typical consumer buys one apple and one orange every month. In the base year 1986, the price for each was $1. In 1996, the price of apples rises to $2, and the price of oranges remains at $1.

Assuming that the CPI for 1986 is equal to 1, the CPI for 1996 would be equal to A. 1/2. B. 1. C. 3/2. D. 2. 1 out of 1 Correct. The answer is C. The CPI measures the change in the price of the typical consumer’s basket of goods. Since the price of the basket was $2 in 1986, and it is $3 in 1996, the CPI for 1996 is equal to 3/2. See Section 2-2. 21 of 30 Consider the following table: | Consumption Goods| Nonconsumption Goods| Year| Production Price| Production Price| 1995| 20/$0. 50| 10/$1. 00| 2000| 10/$1. 00| 10/$0. 50| If 1995 is the base year, the CPI in 2000 is A. 0. B. 1/2. C. 1. D. 2. 0 out of 1

Incorrect. The correct answer is D. The CPI is a measure of the price of a fixed basket of consumption goods. Since the price of consumption goods doubled between 1995 and 2000, the 2000 CPI will equal 2. See Section 2-2. 22 of 30 Which of the following statements about the CPI and the GDP deflator is true? A. The CPI measures the price level; the GDP deflator measures the production of an economy. B. The CPI refers to a base year; the GDP deflator always refers to the current year. C. The weights given to prices are not the same. D. The GDP deflator takes the price of imported goods into account; the CPI does not. out of 1 Incorrect. The correct answer is C. For a discussion of the CPI and the GDP deflator, see Section 2-2. 23 of 30 All other things equal, if the price of foreign-made cars rises, then the GDP deflator A. and the CPI will rise by equal amounts. B. will rise and the CPI will remain the same. C. will remain the same and the CPI will rise. D. and the CPI will rise by different amounts. 1 out of 1 Correct. The answer is C. Goods and services produced abroad do not enter the GDP deflator, but are included in the CPI if the foreign goods are in the consumers’ basket. See Section 2-2. 24 of 30

General Motors increases the price of a model car produced exclusively for export to Europe. Which U. S. price index is affected? A. the CPI B. the GDP deflator C. both the CPI and the GDP deflator D. neither the CPI nor the GDP deflator 0 out of 1 Incorrect. The correct answer is B. The GDP deflator is affected because the cars are produced domestically. The CPI does not change because the cars are not consumed domestically. See Section 2-2. 25 of 30 Which of the following events will cause the unemployment rate to increase? A. an increase in population, with no change in the size of the labor force B. proportionally equal increase in the labor force and the number of unemployed workers C. an increase in the labor force with no change in the number of employed workers D. an increase in the number of employed workers with no change in the number of unemployed workers 1 out of 1 Correct. The answer is C. The unemployment rate is defined as the number of unemployed workers divided by the labor force. If the labor force increases and employment does not change, the unemployment rate will increase. See Section 2-3. 26 of 30 An example of a person who is counted as unemployed is a A. retired worker below the mandatory retirement age.

B. part-time worker who would like to work full-time. C. senator who resigns her job to run for president. D. student going to school full-time. 0 out of 1 Incorrect. The correct answer is C. For a discussion of who is considered unemployed, see Section 2-3. 27 of 30 Suppose that a factory worker turns 62 years old and retires from her job. Which statistic is not affected? A. number of unemployed B. unemployment rate C. labor force D. labor-force participation rate 1 out of 1 Correct. The answer is A. The factory worker willingly leaves her job so she is not considered to be unemployed.

See Section 2-3. 28 of 30 Suppose that the size of the labor force is 100 million and that the unemployment rate is 5 percent. Which of the following actions would reduce the unemployment rate the most? A. 1 million unemployed people get jobs B. 2 million unemployed people leave the labor force C. 3 million people join the labor force and they all get jobs D. 10 million people join the labor force and half of them get jobs 0 out of 1 Incorrect. The correct answer is B. The unemployment rate is equal to the number of unemployed workers divided by the size of the labor force.

If you calculate it for each of the above situations, you will see that it is most reduced when 2 million unemployed people leave the labor force. See Section 2-3. 29 of 30 Suppose that a Canadian citizen crosses the border each day to work in the United States. Her income from this job would be counted in A. U. S. GNP and Canadian GNP. B. U. S. GNP and Canadian GDP. C. U. S. GDP and Canadian GNP. D. U. S. GDP and Canadian GDP. 0 out of 1 Incorrect. The correct answer is C. Her income is counted as U. S. GDP and Canadian GNP. See Section 2-1 for the definitions of gross domestic product (GDP) and gross national product (GNP). 0 of 30 Suppose that an Italian working in the United States renounces his Italian citizenship and is granted U. S. citizenship. Which of the following will happen? A. Italian GDP will fall; U. S. GNP will rise. B. Italian GNP will fall; U. S. GNP will rise. C. Italian GDP will fall; U. S. GDP will rise. D. Italian GNP will fall; U. S. GDP will rise. 0 out of 1 Incorrect. The correct answer is B. The worker’s income was counted as Italian GNP and U. S. GDP. After the worker becomes a U. S. citizen, his income is counted as U. S. GNP and GDP. Therefore, Italian GNP falls and U. S. GNP rises. See Section 2-1.