Chapter 4 Practice Test
Multiple Choice
Identify the choice that best completes the statement or answers the question.
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1. In a market economy, supply and demand determine
a. both the quantity of each good produced and the price at which it is sold.
b. the quantity of each good produced, but not the price at which it is sold.
c. the price at which each good is sold, but not the quantity of each good produced.
d. neither the quantity of each good produced nor the price at which it is sold.
2. A group of buyers and sellers of a particular good or service is called a(n)
a. coalition.
b. economy.
c. market.
d. competition.
3. Most markets in the economy are
a. markets in which sellers, rather than buyers, control the price of the product.
b. markets in which buyers, rather than sellers, control the price of the product.
c. perfectly competitive.
d. highly competitive.
4. In a competitive market, the quantity of a product produced and the price of the product are determined by
a. a single buyer.
b. a single seller.
c. one buyer and one seller working together.
d. all buyers and all sellers.
5. The highest form of competition is called
a. absolute competition.
b. cutthroat competition.
c. perfect competition.
d. market competition.
6. An example of a perfectly competitive market would be the
a. cable TV market.
b. soybean market.
c. breakfast cereal market.
d. shampoo market.
7. The quantity demanded of a good is the amount that buyers
a. are willing to purchase.
b. are willing and able to purchase.
c. are willing and able and need to purchase.
d. are able to purchase.
8. Which of these statements best represents the law of demand?
a. When buyers’ tastes for a good increase, they purchase more of the good.
b. When income levels increase, buyers purchase more of most goods.
c. When the price of a good decreases, buyers purchase more of the good.
d. When buyers’ demands for a good increase, the price of the good increases.
9. The following table contains a demand schedule for a good.
Price
Quantity Demanded
$10
$20
100
?
If the law of demand applies to this good, then “?” could be
a. 0.
b. 100.
c. 200.
d. 400.
____ 10. The sum of all the individual demand curves for a product is called
a. total demand.
b. consumer demand.
c. aggregate demand.
d. market demand.
Table 4-1
Price
$0.00
$0.50
$1.00
$1.50
$2.00
$2.50
Aaron’s
Quantity
Demanded
20
18
14
12
6
0
Angela’s
Quantity
Demanded
16
12
10
8
6
4
Austin’s
Quantity
Demanded
4
6
2
0
0
0
Alyssa’s
Quantity
Demanded
8
6
5
4
2
0
____ 11. Refer to Table 4-1. Whose demand does not obey the law of demand?
a. Aaron’s
b. Angela’s
c. Austin’s
d. Alyssa’s
Figure 4-1
Consumer 1
20
Consumer 2
price
30
18
27
16
24
14
21
12
18
10
15
8
12
6
9
4
6
2
price
3
D
2
4
6
8
10
D
12
14
16
quantity
5
10
15
20
25
30
35
40
quantity
____ 12. Refer to Figure 4-1. If these are the only two consumers in the market, then the market quantity demanded
at a price of $6 is
a. 12 units.
b. 14 units.
c. 19 units.
d. 21 units.
____ 13. An increase in demand is represented by
a. a movement downward and to the right along a demand curve.
b. a movement upward and to the left along a demand curve.
c. a rightward shift of a demand curve.
d. a leftward shift of a demand curve.
____ 14. A decrease in demand is represented by
a. a movement downward and to the right along a demand curve.
b. a movement upward and to the left along a demand curve.
c. a rightward shift of a demand curve.
d. a leftward shift of a demand curve.
____ 15. A movement downward and to the right along a demand curve is called
a. an increase in demand.
b. a decrease in demand.
c. a decrease in quantity demanded.
d. an increase in quantity demanded.
____ 16. If the demand for a good falls when income falls, then the good is called
a. a normal good.
b. a regular good.
c. a luxury good.
d. an inferior good.
____ 17. A higher price for bagels would result in a(n)
a. increase in the demand for bagels.
b. decrease in the demand for bagels.
c. increase in the demand for muffins.
d. decrease in the demand for muffins.
____ 18. Today, people changed their expectations about the future. This change
a. can cause a movement along a demand curve.
b. can affect future demand, but not today’s demand.
c. can affect today’s demand.
d. cannot affect either today’s demand or future demand.
____ 19. The law of supply states that, other things equal,
a. when the price of a good falls, the supply of the good rises.
b. when the price of a good rises, the quantity supplied of the good rises.
c. when the price of a good rises, the supply of the good falls.
d. when the price of a good falls, the quantity supplied of the good rises.
____ 20. A market supply curve is determined by
a. vertically summing individual supply curves.
b. horizontally summing individual supply curves.
c. finding the average quantity supplied by sellers at each possible price.
d. finding the average price at which sellers are willing and able to sell a particular quantity
of the good.
Table 4-3
Firm A’s
Quantity
Supplied
10
8
6
4
2
0
Price
$0
$2
$4
$6
$8
$10
Firm B’s
Quantity
Supplied
0
3
6
9
12
15
Firm C’s
Quantity
Supplied
0
4
8
12
8
4
Firm D’s
Quantity
Supplied
0
5
10
15
20
25
____ 21. Refer to Table 4-3. Which supply schedules obey the law of supply?
a. Firm A’s only.
b. Firm B’s, Firm C’s, and Firm D’s.
c. Firm A’s and Firm C’s.
d. Firm B’s and Firm D’s.
Figure 4-5
Firm A
20
Firm B
price
20
18
18
16
16
14
price
14
S
12
12
10
10
8
8
6
6
4
4
2
2
2
4
6
8
10
12
14
16
18
20
quantity
S
2
4
6
8
10
12
14
16
quantity
____ 22. Refer to Figure 4-5. If these are the only two sellers in the market, then the market quantity supplied at a
price of $6 is
a. 2 units.
b. 10 units.
c. 12 units.
d. 22 units.
____ 23. An increase in supply is represented by
a. a movement downward and to the left along a supply curve.
b. a movement upward and to the right along a supply curve.
c. a rightward shift of a supply curve.
d. a leftward shift of a supply curve.
____ 24. An increase in quantity supplied
a. results in a movement downward and to the left along a fixed supply curve.
b. results in a movement upward and to the right along a fixed supply curve.
c. shifts the supply curve to the left.
d. shifts the supply curve to the right.
____ 25. A movement along the supply curve might be caused by a change in
____ 26.
____ 27.
____ 28.
____ 29.
____ 30.
a. technology.
b. input prices.
c. expectations about future prices.
d. the price of the good or service that is being supplied.
The supply curve for cookbooks shifts
a. when a determinant of the supply of cookbooks other than technology changes.
b. when a determinant of the supply of cookbooks other than the price of cookbooks changes.
c. when any determinant of the supply of cookbooks changes.
d. only when the number of cookbook-sellers changes.
An advance in production technology will
a. increase a firm's costs and increase its supply.
b. increase a firm’s costs and decrease its supply.
c. decrease a firm’s costs and increase its supply.
d. decrease a firm’s costs and decrease its supply.
Today, producers changed their expectations about the future. This change
a. can cause a movement along a supply curve.
b. can affect future supply, but not today’s supply.
c. can affect today’s supply.
d. cannot affect either today’s supply or future supply.
A dress manufacturer recently has come to expect higher prices for dresses in the near future. We would
expect
a. the dress manufacturer to supply more dresses now than it was supplying previously.
b. the dress manufacturer to supply fewer dresses now than it was supplying previously.
c. the demand for this manufacturer's dresses to fall.
d. no change in the dress manufacturer's current supply; instead, future supply will be
affected.
Which of the following would shift the supply curve for gasoline to the right?
a. An increase in the demand for gasoline.
b. An increase in the price of gasoline.
c. An increase in the number of producers of gasoline
d. An increase in the price of oil, an input into the production of gasoline.
Figure 4-7
price
S
S'
quantity
____ 31. Refer to Figure 4-7. The shift from S to S’ is called
a. a decrease in supply.
b. a decrease in quantity supplied.
c. an increase in supply.
d. an increase in quantity supplied.
____ 32. Another term for equilibrium price is
a. dynamic price.
b. market-clearing price.
c. quantity-defining price.
d. balance price.
____ 33. In markets, prices move toward equilibrium because of
a. the actions of buyers and sellers.
b. government regulations placed on market participants.
c. increased competition among sellers.
d. buyers' ability to affect market outcomes.
____ 34. A surplus exists in a market if
a. there is an excess demand for the good.
b. the situation is such that the law of supply and demand would predict an increase in the
price of the good from its current level.
c. the current price is above its equilibrium price.
d. quantity demanded exceeds quantity supplied.
____ 35. The current price of neckties is $30, but the equilibrium price of neckties is $25. As a result,
a. the quantity supplied of neckties exceeds the quantity demanded of neckties at the $30
price.
b. the equilibrium quantity of neckties exceeds the quantity demanded at the $30 price.
c. there is a surplus of neckties at the $30 price.
d. All of the above are correct.
____ 36. If there is a shortage of farm laborers, we would expect
a. the wage of farm laborers to increase.
b. the wage of farm laborers to decrease.
c. the price of farm commodities to decrease.
d. a decrease in the demand for substitutes for farm labor.
Table 4-5
Price
$10
$8
$6
$4
$2
Quantity
Demanded
10
20
30
40
50
Quantity
Supplied
60
45
30
15
0
____ 37. Refer to Table 4-5. The equilibrium price and quantity, respectively, are
a. $2 and 50.
b. $6 and 30.
c. $6 and 60.
d. $12 and 30.
Figure 4-8
50
price
S
45
40
35
30
25
20
15
10
D
5
100 200 300 400 500 600 700 800
quantity
____ 38. Refer to Figure 4-8. At the equilibrium price,
a. 200 units would be supplied and demanded.
b. 400 units would be supplied and demanded.
c. 600 units would be supplied and demanded.
d. 600 units would be supplied, but only 200 would be demanded.
____ 39. Refer to Figure 4-8. At what price would there be an excess supply of 200 units of the good?
a. $15
b. $20
c. $30
d. $35
____ 40. Refer to Figure 4-8. At a price of $15,
a. there would be a surplus of 400 units.
b. there would be a shortage of 200 units.
c. there would be a shortage of 400 units.
d. there would be a shortage of 600 units.
Figure 4-14
Panel (a)
Panel (b)
price
price
S
S
Pe'
Pe
Pe
Pe'
D
Qe
Qe'
D'
quantity
D'
Qe'
Qe
D
quantity
Panel (c)
Panel (d)
price
price
S
S'
S'
Pe
Pe'
Pe'
Pe
D
Qe
Qe'
S
D
quantity
Qe'
Qe
quantity
____ 41. Refer to Figure 4-14. Panel (a) shows which of the following?
a. an increase in demand and an increase in quantity supplied
b. an increase in demand and an increase in supply
c. an increase in quantity demanded and an increase in quantity supplied
d. an increase in quantity demanded and an increase in supply
____ 42. Refer to Figure 4-14. Panel (b) shows which of the following?
a. a decrease in demand and a decrease in quantity supplied
b. a decrease in demand and a decrease in supply
c. a decrease in quantity demanded and a decrease in quantity supplied
d. a decrease in quantity demanded and a decrease in supply
____ 43. What will happen to the equilibrium price of new textbooks if more students attend college, paper becomes
cheaper, textbook authors accept lower royalties, and fewer used textbooks are sold?
a. Price will rise.
b. Price will fall.
c. Price will stay exactly the same.
d. The price change will be ambiguous.
____ 44. Which of the following events will definitely cause equilibrium price to rise?
a. demand increases and supply decreases
b. demand and supply both decrease
c. demand decreases and supply increases
d. demand and supply both increase
____ 45. Which of the following events would cause both the equilibrium price and equilibrium quantity of number
two grade potatoes (an inferior good) to increase?
a. an increase in consumer income
b. a decrease in consumer income
c. greater government restrictions on agricultural chemicals
d. fewer government restrictions on agricultural chemicals
Multiple Choice
Identify the choice that best completes the statement or answers the question.
____
1. Which of the following topics are more likely to be studied by a macroeconomist than by a microeconomist?
a. the effect of taxes on the prices of airline tickets, the profitability of automobile-
manufacturing firms, and employment trends in the food-service industry
b. the price of beef, wage differences between genders, and antitrust laws
c. how consumers maximize utility, and how prices are established in markets for
agricultural products
d. the percentage of the labor force that is out of work, and differences in average income
from country to country
____
2. For an economy as a whole,
a. income is greater than expenditure
b. expenditure is greater than income.
c. income is equal to expenditure.
d. GDP measures income more precisely than it measures expenditure.
____
3. Which of the following statements about GDP is correct?
a. GDP measures two things at once: the total income of everyone in the economy and the
total expenditure on the economy’s output of goods and services.
b. Money continuously flows from households to firms and then back to households, and
GDP measures this flow of money.
c. GDP is generally regarded as the best single measure of a society’s economic well-being.
d. All of the above are correct.
____
4. In a simple circular-flow diagram total income and total expenditure are
a. never equal because total income always exceeds total expenditure.
b. seldom equal because of the ongoing changes in an economy’s unemployment rate.
c. equal only when one dollar is spent on goods for every dollar that is spent on services.
d. always equal because every transaction has a buyer and a seller.
____
5. GDP is defined as
a. the market value of all goods and services produced within a country in a given period of
time.
b. the market value of all goods and services produced by the citizens of a country,
regardless of where they are living in a given period of time.
c. the market value of all final goods and services produced within a country in a given
period of time.
d. the market value of all final goods and services produced by the citizens of a country,
regardless of where they are living, in a given period of time.
____
6. To compute GDP, we
a. add up the wages paid to all workers.
b. add up the costs of producing all final goods and services.
c. add up the market values of all final goods and services.
d. take the difference between the market value of all final goods and services and the cost of
producing those final goods and services.
____
7. Which of the following transactions adds to U.S. GDP for 2006?
a. In 2006, Marvin Windows manufactures 20 windows that will eventually be installed in an
office building in Minneapolis. The windows remain in Marvin’s inventory at the end of
2006.
b. An Irish marketing consultant works in Boston during the summer of 2006 and earns
$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 2006 and they bought a house that,
according to reliable estimates, could be rented for $1,600 per month.
d. All of the above transactions adds to GDP for 2006.
____
8. Which of the following is not included in GDP?
a. unpaid cleaning and maintenance of houses
b. services such as those provided by lawyers and hair stylists
c. the estimated rental value of owner-occupied housing
d. production of foreign citizens living in the United States
____
9. Suppose an apartment complex converts to a condominium, so that the former renters are now owners of their
housing units.
a. The rent was included in GDP; the purchases of the condominiums are not included in
GDP.
b. The rent was included in GDP, and so are the purchases of the condominiums.
c. The rent was not included in GDP; the purchases of the condominiums are included in
GDP.
d. The rent was not included in GDP, and neither are the purchases of the condominiums.
____ 10. Over the last few decades, Americans have chosen to cook less at home and eat more at restaurants. This
change in behavior, by itself, has
a. reduced measured GDP.
b. not affected measured GDP.
c. increased measured GDP only to the extent that the value of the restaurant meals exceeded
the value of meals previously cooked at home.
d. increased measured GDP by the full value of the restaurant meals.
____ 11. 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 definitely 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.
____ 12. If a state made a previously-illegal activity such as gambling or prostitution legal, then, other things equal,
GDP
a. necessarily decreases.
b. necessarily increases.
c. doesn't change because both legal and illegal production are included in GDP.
d. doesn't change because these activities are never included in GDP.
____ 13. One bag of flour is sold for $1.50 to a bakery, which uses the flour to bake bread that is sold for $4.00 to
consumers. A second bag of flour is sold to a consumer in a grocery store for $2.00. Taking these three
transactions into account, what is the effect on GDP?
a. GDP increases by $1.50.
b. GDP increases by $3.50.
c. GDP increases by $6.00.
d. GDP increases by $7.50.
____ 14. A movie company makes 500,000 DVDs of one of its latest releases. It sells 300,000 of them before the end
of the second quarter, and holds the others in its warehouse. How will the 200,000 unsold DVDs be treated in
the GDP statistics?
a. Since the DVDs eventually will be bought by consumers, they are included as
consumption in the second quarter.
b. Since the DVDs were not purchased this quarter, they will be counted as an increase in
third-quarter GDP.
c. The DVDs will be counted as a change in inventory in the second quarter and so will be
included in second-quarter GDP.
d. The DVDs will be counted as a change in inventory in the second quarter, and when sold
in the third quarter will raise third-quarter GDP.
____ 15. Darla, a Canadian citizen, works only in the United States. The value that her labor contributes to U.S. output
is
a. included in both U.S. GDP and U.S. GNP.
b. included in U.S. GDP, but it is not included in U.S. GNP.
c. included in U.S. GNP, but it is not included in U.S. GDP.
d. included in neither U.S. GDP nor U.S. GNP.
____ 16. An Italian company operates a pasta restaurant in the U.S. The profits from this pasta restaurant are included
in
a. U.S. GNP and Italian GNP.
b. U.S. GDP and Italian GDP.
c. U.S. GDP and Italian GNP.
d. U.S. GNP and Italian GDP.
____ 17. Which of the following items is included in GDP?
a. the sale of stocks and bonds
b. the sale of used goods
c. the sale of services such as those performed by a doctor
d. All of the above are included in GDP.
____ 18. U.S. GDP and U.S. GNP are related as follows:
a. GNP = GDP - Income earned by foreigners in the U.S. + Income earned by U.S. citizens
abroad.
b. GNP = GDP + Income earned by foreigners in the U.S. - Income earned by U.S. citizens
abroad.
c. GNP = GDP + Value of exported goods - Value of imported goods.
d. GNP = GDP - Value of exported goods + Value of imported goods.
____ 19. The income that households and noncorporate businesses receive is called
a. personal income.
b. net national product.
c. disposable personal income.
d. national income.
____ 20. Disposable personal income is the income that
a. households have left after paying taxes and non-tax payments to the government.
b. businesses have left after paying taxes and non-tax payments to the government.
c. households and noncorporate businesses have left after paying taxes and non-tax payments
to the government.
d. households and businesses have left after paying taxes and non-tax payments to the
government.
____ 21. Retained earnings is the part of income that
a. households retain after paying taxes.
b. businesses retain after paying taxes.
c. corporations have earned but have not used to invest in plant, equipment, and inventories.
d. corporations have earned but have not paid out to their owners.
____ 22. Suppose the government reports that U.S. GDP was about $13 trillion dollars in the most recent quarter. What
is the correct interpretation of this number?
a. This number reflects the actual value of final goods and services produced in that quarter.
b. This number was obtained by taking the actual value of final goods and services produced
in that quarter, then seasonally adjusting that value.
c. This number was obtained by taking the actual value of final goods and services produced
in that quarter, then multiplying that value by 4.
d. This number was obtained by taking the actual value of final goods and services produced
in that quarter, then seasonally adjusting that value and multiplying it by 4.
____ 23. For the purpose of calculating GDP, investment is spending on
a. stocks, bonds, and other financial assets.
b. real estate and financial assets.
c. new capital equipment, inventories, and structures, including new housing.
d. capital equipment, inventories, and structures, excluding household purchases of new
housing.
____ 24. Government purchases include spending on goods and services by
a. the federal government only.
b. state and federal governments only.
c. local, state and federal governments.
d. local, state and federal governments, as well household spending by employees of those
governments.
____ 25. Consider two items that might be included in GDP: (1) The estimated rental value of owner-occupied
housing; and (2) purchases of newly-constructed homes. How are these two items accounted for when GDP is
calculated?
a. Both item (1) and item (2) are included in the consumption component of GDP.
b. Item (1) is included in the consumption component, while item (2) is included in the
investment component.
c. Item (1) is included in the investment component, while item (2) is included in the
consumption component.
d. Only item (2) is included in GDP and it is included in the investment component.
____ 26. Which of the following examples of household spending are categorized as investment rather than
consumption?
a. expenditures on new housing
b. expenditures on intangibles items such as medical care
c. expenditures on durable goods such as automobiles and refrigerators
d. All of the above are correct.
____ 27. The U.S. Air Force pays a Turkish citizen $30,000 to work on a U.S. base in Turkey. As a result,
a. U.S. government purchases increase by $30,000; U.S. net exports decrease by $30,000;
and U.S. GDP and GNP are unaffected.
b. U.S. government purchases increase by $30,000; U.S. GNP increases by $30,000; and
U.S. GDP and U.S. net exports are unaffected.
c. U.S. government purchases; and U.S. net exports, GDP, and GNP are unaffected.
d. U.S. government purchases increase by $30,000; U.S. net exports decrease by $30,000;
U.S. GNP increases by $30,000; and U.S. GDP is unaffected.
____ 28. The U.S. government pays an economist at the U.S. Department of Commerce $50,000 in salary in 2006. The
economist then retires. In 2007, the government pays him $30,000 in retirement benefits. Which of the
following is correct?
a. Each payment will be included in GDP as government purchases for the respective years.
b. The 2006 payment is included in 2006 GDP as government purchases, but the 2007
payment is not included in 2007 GDP.
c. The 2006 payment is included in 2006 GDP as government purchases, and the 2007
payment is included in 2007 GDP as government transfer payments.
d. The 2006 payment is included in 2006 GDP as government purchases, and the 2007
payment is allocated to previous years' GDP according to the amount of work performed
by the economist each year.
____ 29. Unemployment compensation is
a. part of GDP because it represents income.
b. part of GDP because the recipients must have worked in the past to qualify.
c. not part of GDP because it is a transfer payment.
d. not part of GDP because the payments reduce business profits.
____ 30. Which of the following sub-components of GDP can be either positive or negative?
a. inventory investment
b. spending on services
c. government purchases
d. All of the above are correct.
____ 31. In a certain economy in 2005, households spent $1,000 on goods and services; purchases of capital
equipment, inventories, and structures amounted to $350; government spent $450 on goods and services; and
the value of imports exceeded the value of exports by $50. It follows that 2005 GDP for this economy was
a. $1,750.
b. $1,850.
c. $1,950.
d. $2,100.
Table 23-2. The information in the table pertains to the country of Ophir.
Year
2004
2005
2006
Nominal GDP
$4000
$4100
$4200
GDP Deflator
100
105
110
____ 32. Refer to Table 23-2. From this information we can conclude that
a. real GDP was higher in 2006 than in 2005, and real GDP was higher in 2005 than in 2004.
b. real GDP was higher in 2005 than in 2004, and real GDP was higher in 2005 than in 2006.
c. real GDP was higher in 2004 than in 2005, and real GDP was higher in 2005 than in 2006.
d. real GDP was higher in 2004 than in 2006, and real GDP was higher in 2005 than in 2004.
____ 33. Refer to Table 23-2. Which of the following statements do we know to be correct?
a. Total spending in Ophir increased throughout the period.
b. Household spending in Ophir increased throughout the period.
c. The production of goods and services increased in Ophir throughout the period.
d. All of the above are correct.
____ 34. Refer to Table 23-2. The inflation rate in Ophir was
a. 5 percent between 2004 and 2005, and 4.76 percent between 2005 and 2006.
b. 5 percent between 2004 and 2005, and 5 percent between 2005 and 2006.
c. 50 percent between 2004 and 2005, and 50 percent between 2005 and 2006.
d. 100 percent between 2004 and 2005, and 105 percent between 2005 and 2006.
____ 35. Suppose a small economy produces only cheese and fish. In 2005, 20 units of cheese are sold at $5 each, and
8 units of fish are sold at $50 each. In 2004, the base year, the price of cheese was $10 per unit, and the price
of fish was $75 per unit. For 2005,
a. nominal GDP is $800, real GDP is $500, and the GDP deflator is 160.
b. nominal GDP is $500, real GDP is $800, and the GDP deflator is 160.
c. nominal GDP is $500, real GDP is $800, and the GDP deflator is 62.5.
d. nominal GDP is $800, real GDP is $500, and the GDP deflator is 62.5.
____ 36. If a small country has current nominal GDP of $25 billion and the GDP deflator is 125, what is real GDP?
a. $312.5 billion
b. $207.5 billion
c. $31.25 billion
d. None of the above is correct.
____ 37. Recessions are associated with which of the following?
a. increased bankruptcies
b. falling profits
c. falling output
d. All of the above are correct.
____ 38. The information below 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
Japan
Switzerland
United States
a.
b.
c.
d.
Nominal GDP in 2000
$4,800,000 million
$240,000 million
$9,800,000 million
Population in 2000
127 million
7.2 million
280 million
Japan, Switzerland, United States
Japan, United States, Switzerland
United States, Switzerland, Japan
United States, Japan, Switzerland
____ 39. GDP is not a perfect measure of well-being; for example,
a. GDP incorporates a large number of non-market goods and services that are of little value
to society.
b. GDP places too much emphasis on the value of leisure.
c. GDP fails to account for the quality of the environment.
d. All of the above are correct.
____ 40. International studies of the relationship between GDP per person and quality of life measures such as life
expectancy and literacy rates show that larger GDP per person is associated with
a. longer life expectancy and a lower percentage of the population that is literate.
b. longer life expectancy and a higher percentage of the population that is literate.
c. very nearly the same life expectancy and a lower percentage of the population that is
literate.
d. very nearly the same life expectancy and a higher percentage of the population that is
literate.
____ 41. Which of the following serves as an example of the underground or “shadow” economy?
a. A woman barters home repairs with her neighbor.
b. A teenager babysits regularly and fails to report her income.
c. A man sells illegal drugs.
d. All of the above are correct.
____ 42. The local Chevrolet dealership has an increase in inventory of 25 cars in 2006. In 2007, it sells all 25 cars.
Which of the following statements is correct?
a. The value of the cars in inventory will be counted as part of 2006 GDP, and the value of
the cars sold in 2007 will not increase 2007 GDP.
b. The value of the cars in inventory will not affect 2006 GDP, and the value of the cars sold
in 2007 will increase 2007 GDP.
c. The value of the cars in inventory will be counted as part of 2006 GDP, and the value of
the cars sold in 2007 will increase 2007 GDP.
d. The value of the cars in inventory will not affect 2006 GDP, and the value of the cars sold
in 2007 will not increase 2007 GDP.
e. The value of the cars in inventory will be counted as part of 2006 GDP, and the value of
the cars sold in 2007 will decrease 2007 GDP.
____ 43. Changes in real GDP reflect
a. only changes in prices.
b. only changes in the amounts being produced.
c. both changes in prices and changes in the amounts being produced.
d. neither changes in prices nor changes in the amounts being produced.
e. changes in prices divided by the changes in amounts.
____ 44. Changes in nominal GDP reflect
a. only changes in prices.
b. only changes in the amounts being produced.
c. both changes in prices and changes in the amounts being produced.
d. neither changes in prices nor changes in the amounts being produced.
e. changes in prices minus changes in amounts being produced.
____ 45. Which of the following correctly orders U.S. income measures from largest to smallest?
a. disposable personal income, gross national product, national income, net national product,
personal income
b. personal income, net national product, national income, gross national product, disposable
personal income
c. gross national product, net national product, national income, personal income, disposable
personal income
d. disposable personal income, personal income, national income, net national product, gross
national product
____ 46. U.S. GDP and U.S. GNP are related as follows:
a. GNP = GDP + Value of exported goods - Value of imported goods.
b. GNP = GDP - Value of exported goods + Value of imported goods.
c. GNP = GDP + Income earned by foreigners in the U.S. - Income earned by U.S. citizens
abroad.
d. GNP = GDP - Income earned by foreigners in the U.S. + Income earned by U.S. citizens
abroad.
____ 47. An Italian company operates a pasta restaurant in the U.S. The value of the output produced by this pasta
restaurant is included in
a. U.S. GNP and Italian GNP.
b. U.S. GNP and Italian GDP.
c. U.S. GDP and Italian GNP.
d. U.S. GDP and Italian GDP.
____ 48. National income is defined as
a. the total income of a nation’s permanent residents minus losses from depreciation.
b. the income that households and noncorporate businesses receive.
c. the total income earned by a nation’s permanent residents in the production of goods and
services.
d. the income that households and noncorporate businesses have left after satisfying all their
obligations to the government.
Multiple Choice
Identify the choice that best completes the statement or answers the question.
____
1. The consumer price index is used to
a. convert nominal GDP into real GDP.
b. turn dollar figures into meaningful measures of purchasing power.
c. characterize the types of goods and services that consumers purchase.
d. measure the quantity of goods and services that the economy produces.
____
2. When the consumer price index rises, the typical family
a. has to spend more dollars to maintain the same standard of living.
b. can spend fewer dollars to maintain the same standard of living.
c. finds that its standard of living is not affected.
d. can offset the effects of rising prices by saving more.
____
3. The inflation rate you are likely to hear on the nightly news is calculated from
a. the GDP deflator.
b. the CPI.
c. the Dow Jones Industrial Average.
d. the unemployment rate.
____
4. Which of the following is correct?
a. The GDP deflator is better than the CPI at reflecting the goods and services bought by
consumers.
b. The CPI is better than the GDP deflator at reflecting the goods and services bought by
consumers.
c. The GDP deflator and the CPI are equally good at reflecting the goods and services bought
by consumers.
d. The GDP deflator is more commonly used as a gauge of inflation than the CPI is.
____
5. In the calculation of the CPI, coffee is given greater weight than tea if
a.
b.
c.
d.
consumers buy more coffee than tea.
the price of coffee is higher than the price of tea.
it costs more to produce coffee than it costs to produce tea.
coffee is more readily available than tea is to the typical consumer.
____
6. In calculating the CPI, a fixed basket of goods and services is used. The quantities of the goods and services
in the fixed basket are determined by
a. surveying consumers.
b. surveying sellers of the goods and services.
c. working backward from the rate of inflation to arrive at imputed values for those
quantities.
d. arbitrary choices made by federal government employees.
____
7. Consider a small economy in which consumers buy only two goods: apples and pears. In order to compute
the consumer price index for this economy for two or more consecutive years, we assume that
a. the number of apples bought by the typical consumer is equal to the number of pears
bought by the typical consumer in each year.
b. neither the number of apples nor the number of pears bought by the typical consumer
changes from year to year.
c. the percentage change in the price of apples is equal to the percentage change in the price
of pears from year to year.
d. neither the price of apples nor the price of pears changes from year to year.
____
8. The inflation rate is calculated
a. by determining the change in the price index from the preceding period.
b. by determining the change in the price index from the base year.
c. by determining the percentage change in the price index from the preceding period.
d. by determining the percentage change in the price index from the base year.
____
9. If 2004 is the base year, then the inflation rate for 2005 equals
a.
b.
c.
d.
____ 10. Suppose a basket of goods and services has been selected to calculate the CPI and 2002 has been chosen as
the base year. In 2002, the basket’s cost was $75.00; in 2004, the basket’s cost was $79.50; and in 2006, the
basket’s cost was $85.86. The value of the CPI was
a. 100 in 2002.
b. 106 in 2004.
c. 114.48 in 2006.
d. All of the above are correct.
____ 11. Suppose the price index was 110 in 2004, 120 in 2005, and 125 in 2006. Which of the following statements is
correct?
a. The economy experienced inflation between 2004 and 2005 and between 2005 and 2006.
b. The inflation rate was positive between 2004 and 2005, and it was negative between 2005
and 2006.
c. The inflation rate was higher between 2005 and 2006 than it was between 2004 and 2005.
d. All of the above are correct.
____ 12. If the CPI was 110 this year and 100 last year, then
a. the cost of the CPI basket of goods and services increased by 110 percent this year.
b. the price level increased by 10 percent this year.
c. the inflation rate for this year was 10 percent higher than the inflation rate for last year.
d. All of the above are correct.
____ 13. The price index was 128.96 in 2006, and the inflation rate was 24 percent between 2005 and 2006. The price
index in 2005 was
a. 104.
b. 104.96.
c. 152.96.
d. 159.91.
____ 14. For an imaginary economy, the consumer price index was 62.50 in 2004, 100.00 in 2005, and 160.00 in 2006.
Which of the following statements is correct?
a. If the basket of goods that is used to calculate the CPI cost $80 in 2004, then that basket of
goods cost $128 in 2005.
b. If the basket of goods that is used to calculate the CPI cost $90 in 2005, then that basket of
goods cost $150 in 2006.
c. The overall level of prices increased by 97.5 percent between 2004 and 2006.
d. All of the above are correct.
Table 24-1
The table below pertains to Pieway, an economy in which the typical consumer’s basket consists of 10
bushels of peaches and 15 bushels of pecans.
Year
2005
2006
Price of
Peaches
$11 per bushel
$9 per bushel
Price of
Pecans
$6 per bushel
$10 per bushel
____ 15. Refer to Table 24-1. The cost of the basket in 2005 was
a. $200.
b. $210.
c. $240.
d. $245.
____ 16. Refer to Table 24-1. The cost of the basket in 2006 was
a. $200.
b. $210.
c. $240.
d. $245.
____ 17. Refer to Table 24-1. If 2005 is the base year, then the CPI for 2005 was
a. 83.3.
b. 100.
c. 120.
d. 200.
____ 18. Refer to Table 24-1. If 2005 is the base year, then the CPI for 2006 was
a. 83.3.
b. 100.
c. 120.
d. 240.
____ 19. Which of the following is not an example of a price index computed by the Bureau of Labor Statistics?
a. the Los Angeles price index
b. the energy price index
c. the producer price index
d. the stock price index
____ 20. Suppose that in 2010, the producer price index increases by 2 percent. As a result, economists most likely
will predict that
a. GDP will increase in 2011.
b. the producer price index will increase by more than 2 percent in 2011.
c. interest rates will decrease in the future.
d. the consumer price index will increase in the future.
____ 21. By far the largest category of goods and services in the CPI basket is
a. housing.
b. transportation.
c. education & communication.
d. food & beverages.
____ 22. Categories of U.S. consumer spending, ranked from largest to smallest, are
a. housing, food & beverages, education & communication, and transportation.
b. education & communication, housing, food & beverages, and transportation.
c. food & beverages, housing, transportation, and medical care.
d. housing, transportation, food & beverages, and medical care.
____ 23. The three problems with using the consumer price index as a measure of the cost of living are
a. widely acknowledged and easy to solve.
b. widely acknowledged and difficult to solve.
c. nearly unacknowledged and easy to solve.
d. nearly unacknowledged and difficult to solve.
____ 24. One of the widely acknowledged problems with using the consumer price index as a measure of the cost of
living is that the CPI
a. fails to account for consumer spending on housing.
b. accounts only for consumer spending on food, clothing, and energy.
c. fails to account for the fact that consumers spend larger percentages of their incomes on
some goods and smaller percentages of their incomes on other goods.
d. fails to account for the introduction of new goods.
____ 25. Suppose lawn mowers are part of the market basket used to compute the CPI. Suppose also that the quality of
lawn mowers improves while the price of lawn mowers stays the same. If the Bureau of Labor Statistics is
able to precisely adjust the CPI for the improvement in quality, then, other things equal,
a. the CPI will rise.
b. the CPI will fall.
c. the CPI will stay the same.
d. lawn mowers will no longer be included in the market basket.
____ 26. Which of these events would cause the consumer price index to overstate the increase in the cost of living?
a. Car makers benefit from a new technology that allows them to sell higher-quality cars to
consumers with no increase in price.
b. Energy prices decrease, and consumers respond by buying more gas and electricity.
c. A new good is introduced that renders cellular telephones inferior and obsolete.
d. All of the above are correct.
____ 27. The CPI differs from the GDP deflator in that
a. the CPI is an inflation index, while the GDP deflator is a price index.
b. substitution bias is not a problem with the CPI, but it is a problem with the GDP deflator.
c. increases in the prices of foreign produced goods that are sold to U.S. consumers show up
in the GDP deflator but not in the CPI.
d. increases in the prices of domestically produced goods that are sold to the U.S.
government show up in the GDP deflator but not in the CPI.
____ 28. A decrease in the price of domestically produced industrial robots will be reflected in
a. both the GDP deflator and the consumer price index.
b. neither the GDP deflator nor the consumer price index.
c. the GDP deflator but not in the consumer price index.
d. the consumer price index but not in the GDP deflator.
____ 29. In the United States, if the price of imported oil rises so that the prices of gasoline and heating oil rise, then
the
a. GDP deflator rises much more than does the consumer price index.
b. consumer price index rises much more than does the GDP deflator.
c. GDP deflator and the consumer price index rise by about the same amount.
d. consumer price index rises slightly more than does the GDP deflator.
____ 30. If the price of Italian shoes imported into the United States increases, then
a. both the GDP deflator and the consumer price index will increase.
b. neither the GDP deflator nor the consumer price index will increase.
c. the GDP deflator will increase, but the consumer price index will not increase.
d. the consumer price index will increase, but the GDP deflator will not increase.