ECONOMICS CLASS STUDY GUIDE
Test Bank: II Topic: Shortcomings of GDP
GDP excludes most nonmarkettransactions. Therefore, GDP tends to
underestimate the rate of inflation in the economy.
overestimate the rate of inflation in the economy.
overestimate the amount of production of the economy.
D. underestimate the amount of production in the economy.
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Blooms: Remember Difficulty: 01 Easy
Learning Objective: 07-06List and explainsome limitations of the GDP measure.
Test Bank: II Topic: Shortcomings of GDP
GDP estimates account for which of the following items?
do-it-yourself activities
"psychic income" people derive from their work
C. householdspending for health and home insurance
D. improvements in product quality
AACSB: Knowledge Application Accessibility: Keyboard Navigation
Blooms: Remember Difficulty: 01 Easy
Learning Objective: 07-06List and explainsome limitations of the GDP measure.
Test Bank: II Topic: Shortcomings of GDP
GDP tends to underestimate the productive activity in the economy because it excludes the value of output from
public transfer payments to households.
the consumption of fixed capital.
C. the underground economy.
D. intermediate goods.
AACSB: Knowledge Application Accessibility: Keyboard Navigation
Blooms: Remember Difficulty: 01 Easy
Learning Objective: 07-06List and explainsome limitations of the GDP measure.
Test Bank: II Topic: Shortcomings of GDP
Gordon sells narcotics "on the street." This type of illegal activity
would be considered double counting in calculating GDP.
is estimated and included in GDP figures.
C. is excluded from GDP figures.
D. causes GDP to be overstated.
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Blooms: Remember Difficulty: 01 Easy
Learning Objective: 07-06List and explainsome limitations of the GDP measure.
Test Bank: II Topic: Shortcomings of GDP
The service a homeowner performs when she mows her yard is not includedin GDP because
A. this is a nonmarket transaction.
this is a nonproduction activity.
this is a noninvestment transaction.
multiple counting would be involved.
AACSB: Knowledge Application Accessibility: Keyboard Navigation
Blooms: Remember Difficulty: 01 Easy
Learning Objective: 07-06List and explainsome limitations of the GDP measure.
Test Bank: II Topic: Shortcomings of GDP
The "underground economy" is mostly made up of
unpaid work.
illegal activities.
do-it-yourself activities.
D. tax-evasion activities.
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Blooms: Remember Difficulty: 01 Easy
Learning Objective: 07-06List and explainsome limitations of the GDP measure.
Test Bank: II Topic: Shortcomings of GDP
The gross domestic product is not a good measure of the standard of living in a nation becauseit
includes the cost of health insurance.
excludes payments for pollution control equipment.
C. does not account for the size of the population.
D. does not account for the cost of police protection.
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Blooms: Remember Difficulty: 01 Easy
Learning Objective: 07-06List and explainsome limitations of the GDP measure.
Test Bank: II Topic: Shortcomings of GDP
Which of the followinggovernment agencies estimates and compiles the U.S. GDP accounts?
the American Economic Association
the Federal Reserve System
C. the Bureau of Economic Analysis
D. the Internal Revenue Service
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Blooms: Remember Difficulty: 01 Easy
Learning Objective: 07-06List and explainsome limitations of the GDP measure.
Test Bank: II Topic: Shortcomings of GDP
The U.S. Customs Service is a main source of data for
C.
Ig.
G.
D. Xn.
AACSB: Knowledge Application Accessibility: Keyboard Navigation
Blooms: Remember Difficulty: 01 Easy
Learning Objective: 07-06List and explainsome limitations of the GDP measure.
Test Bank: II Topic: Shortcomings of GDP
The U.S. Office of PersonnelManagement and the Census Bureau’s Survey of Government Finance are two of the main sources of data for
C.
Ig.
C. G.
D. Xn.
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Blooms: Remember Difficulty: 01 Easy
Learning Objective: 07-06List and explainsome limitations of the GDP measure.
Test Bank: II Topic: Shortcomings of GDP
A statistic called Gross Output (GO) sums togetherthe value of economicactivity taking place in each of the four stages of a productive economy, namely,
A. resourceextraction, production, distribution, and final output.
planning, implementation, review, and wrap-up.
addition, subtraction, multiplication, and division.
by land, by air, by sea, and by rivers and lakes.
AACSB: Knowledge Application Accessibility: Keyboard Navigation
Blooms: Remember Difficulty: 01 Easy
Learning Objective: 07-06List and explainsome limitations of the GDP measure.
Test Bank: II Topic: Shortcomings of GDP
True / False Questions
U.S. gross domestic product (GDP) measures the market value of all goods and servicesproduced by Americans in one year.
FA LSE
AACSB: Knowledge Application Accessibility: Keyboard Navigation
Blooms: Understand Difficulty: 02 Medium
Learning Objective: 07-01Explain how gross domestic product(GDP) is defined and measured.
Test Bank: II Topic: Assessing the Economys Performance
A product that was produced in 2016 and not sold until 2017 is counted as part of GDP in 2016.
TRUE
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Blooms: Understand Difficulty: 02 Medium
Learning Objective: 07-01Explain how gross domestic product(GDP) is defined and measured.
Test Bank: II Topic: Assessing the Economys Performance
The value added in an industryincludes the wages earned by workersin the industry.
TRUE
AACSB: Knowledge Application Accessibility: Keyboard Navigation
Blooms: Understand Difficulty: 02 Medium
Learning Objective: 07-01Explain how gross domestic product(GDP) is defined and measured.
Test Bank: II Topic: Assessing the Economys Performance
Personal consumption expenditures include expenditures for new houses.
FA LSE
AACSB: Knowledge Application Accessibility: Keyboard Navigation
Blooms: Understand Difficulty: 02 Medium
Learning Objective: 07-02 Describe how expenditures on goods and services can be summed to determineGDP.
Test Bank: II Topic: The Expenditures Approach
The value of a sale of a share of stock is considered to be an investment in national income accounting.
FA LSE
AACSB: Knowledge Application Accessibility: Keyboard Navigation
Blooms: Understand Difficulty: 02 Medium
Learning Objective: 07-02 Describe how expenditures on goods and services can be summed to determineGDP.
Test Bank: II Topic: The Expenditures Approach
Gross private domestic investment can be divided into replacement investment and netinvestment.
TRUE
AACSB: Knowledge Application Accessibility: Keyboard Navigation
Blooms: Understand Difficulty: 02 Medium
Learning Objective: 07-02 Describe how expenditures on goods and services can be summed to determineGDP.
Test Bank: II Topic: The Expenditures Approach
If gross investment is positive, it means that firm (or the economy) must be expanding.
FA LSE
AACSB: Knowledge Application Accessibility: Keyboard Navigation
Blooms: Understand Difficulty: 02 Medium
Learning Objective: 07-02 Describe how expenditures on goods and services can be summed to determineGDP.
Test Bank: II Topic: The Expenditures Approach
Changes in business inventories are included as part of investment in the national income accounts.
TRUE
AACSB: Knowledge Application Accessibility: Keyboard Navigation
Blooms: Understand Difficulty: 02 Medium
Learning Objective: 07-02 Describe how expenditures on goods and services can be summed to determineGDP.
Test Bank: II Topic: The Expenditures Approach
In an economy, the value of inventories fell by $50 billionfrom Year 1 to Year 2. In calculating total investment for Year 2, national income accountants would increase it by $50 billion.
FA LSE
AACSB: Knowledge Application Accessibility: Keyboard Navigation
Blooms: Understand Difficulty: 02 Medium
Learning Objective: 07-02 Describe how expenditures on goods and services can be summed to determineGDP.
Test Bank: II Topic: The Expenditures Approach
If the University of Missouri, a public school, builds a new laboratory, then it will be countedas part of Ig in GDP.
FA LSE
AACSB: Knowledge Application Accessibility: Keyboard Navigation
Blooms: Understand Difficulty: 02 Medium
Learning Objective: 07-02 Describe how expenditures on goods and services can be summed to determineGDP.
Test Bank: II Topic: The Expenditures Approach
Government purchases are the largest component of aggregate expenditures in the United States.
FA LSE
AACSB: Knowledge Application Accessibility: Keyboard Navigation
Blooms: Understand Difficulty: 02 Medium
Learning Objective: 07-02 Describe how expenditures on goods and services can be summed to determineGDP.
Test Bank: II Topic: The Expenditures Approach
When U.S. households buy new imported European and Japanese cars, the total value of the cars is counted as part of C in the GDP accounts.
TRUE
AACSB: Knowledge Application Accessibility: Keyboard Navigation
Blooms: Understand Difficulty: 02 Medium
Learning Objective: 07-02 Describe how expenditures on goods and services can be summed to determineGDP.
Test Bank: II Topic: The Expenditures Approach
Net exports are positive when exports are greater than imports.
TRUE
AACSB: Knowledge Application Accessibility: Keyboard Navigation
Blooms: Understand Difficulty: 02 Medium
Learning Objective: 07-02 Describe how expenditures on goods and services can be summed to determineGDP.
Test Bank: II Topic: The Expenditures Approach
In the expenditures approach, transfer payments such as unemployment compensation are includedin the G component of GDP.
FA LSE
AACSB: Knowledge Application Accessibility: Keyboard Navigation
Blooms: Understand Difficulty: 02 Medium
Learning Objective: 07-02 Describe how expenditures on goods and services can be summed to determineGDP.
Test Bank: II Topic: The Expenditures Approach
In 2014, China’sGDP was bigger than thatof the Unites States.
FA LSE
AACSB: Knowledge Application Accessibility: Keyboard Navigation
Blooms: Understand Difficulty: 02 Medium
Learning Objective: 07-02 Describe how expenditures on goods and services can be summed to determineGDP.
Test Bank: II Topic: The Expenditures Approach
National income (NI) is estimated as the sum of four categories of income (wages,rent, interest, profits) plus taxes on production and imports.
TRUE
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Blooms: Understand Difficulty: 02 Medium
Learning Objective: 07-03 Explain how GDP can be determined by summing up all of the incomesthat were derived from producing the economysoutput of goods and services.
Test Bank: II Topic: The IncomeApproach
Personal income (PI) is the income that households are free to spend or save as they please.
FA LSE
AACSB: Knowledge Application Accessibility: Keyboard Navigation
Blooms: Understand Difficulty: 02 Medium
Learning Objective: 07-04Describe the relationships among GDP, net domesticproduct, nationalincome, personal income, and disposable income.
Test Bank: II Topic: Other National Accounts
Disposable income (DI) includes transfer payments like Social Securitybenefits and unemployment benefits.
TRUE
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Blooms: Understand Difficulty: 02 Medium
Learning Objective: 07-04 Describe the relationships among GDP, net domestic product, national income, personal income, and disposable income.
Test Bank: II Topic: Other National Accounts
In an economy that is experiencing inflation and output growth, nominal GDP will rise faster than real GDP.
TRUE
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Blooms: Understand Difficulty: 02 Medium
Learning Objective: 07-05Discuss the natureand function of a GDP price index and describe the difference between nominal GDP and real GDP.
Test Bank: II Topic: Nominal GDP versus Real GDP
If nominal GDP in one year is $5,000 billion and the price index is 135, then the real GDP that year would be $3,704 billion.
TRUE
AACSB: Knowledge Application Accessibility: Keyboard Navigation
Blooms: Understand Difficulty: 02 Medium
Learning Objective: 07-05Discuss the natureand function of a GDP price index and describe the difference between nominal GDP and real GDP.
Test Bank: II Topic: Nominal GDP versus Real GDP
To adjust nominal GDP for a given year in order to obtainreal GDP, we multiply the nominal GDP by the price index.
FA LSE
AACSB: Knowledge Application Accessibility: Keyboard Navigation
Blooms: Understand Difficulty: 02 Medium
Learning Objective: 07-05Discuss the natureand function of a GDP price index anddescribe the difference between nominal GDP and real GDP.
Test Bank: II Topic: Nominal GDP versus Real GDP
The value of a price index in the base year is always 100.
TRUE
AACSB: Knowledge Application Accessibility: Keyboard Navigation
Blooms: Understand Difficulty: 02 Medium
Learning Objective: 07-05Discuss the natureand function of a GDP price index and describe the difference between nominal GDP and real GDP.
Test Bank: II Topic: Nominal GDP versus Real GDP
Do-it-yourself activities of people are a big part ofthe "underground economy."
FA LSE
AACSB: Knowledge Application Accessibility: Keyboard Navigation
Blooms: Remember Difficulty: 01 Easy
Learning Objective: 07-06List and explainsome limitations of the GDP measure.
Test Bank: II Topic: Shortcomings of GDP
When businesses have to install antipollution equipment to clean up their wastes, they are adding to GDP.
TRUE
AACSB: Knowledge Application Accessibility: Keyboard Navigation
Blooms: Remember Difficulty: 01 Easy
Learning Objective: 07-06List and explainsome limitations of the GDP measure.
Test Bank: II Topic: Shortcomings of GDP
GDP tends to understate economic welfare because it does not take into account increases in leisure.
TRUE
AACSB: Knowledge Application Accessibility: Keyboard Navigation
Blooms: Remember Difficulty: 01 Easy
Learning Objective: 07-06List and explainsome limitations of the GDP measure.
Test Bank: II Topic: Shortcomings of GDP
All activities included in GDP serve to enrich society.
FA LSE
AACSB: Knowledge Application Accessibility: Keyboard Navigation
Blooms: Remember Difficulty: 01 Easy
Learning Objective: 07-06List and explainsome limitations of the GDP measure.
Test Bank: II Topic: Shortcomings of GDP
Most activities in the so-calledunderground economy are illegal activities, such as drugs or gambling.
FA LSE
AACSB: Knowledge Application Accessibility: Keyboard Navigation
Blooms: Remember Difficulty: 01 Easy
Learning Objective: 07-06List and explainsome limitations of the GDP measure.
Test Bank: II Topic: Shortcomings of GDP
The statistic called Gross Output (GO) is bigger than GDP, becauseGO sums up the values in all stages of a productive economy, whereas GDP accounts only for the final stage.
TRUE
AACSB: Knowledge Application Accessibility: Keyboard Navigation
Blooms: Remember Difficulty: 01 Easy
Learning Objective: 07-06List and explainsome limitations of the GDP measure.
Test Bank: II Topic: Shortcomings of GDP
Chapter 08 EconomicGrowth Answer Key
Multiple Choice Questions
Economic growth is best defined as an increasein
A. either real GDP or real GDP per capita.
nominal GDP.
total consumption expenditures.
wealth in theeconomy.
AACSB: Knowledge Application Accessibility: Keyboard Navigation
Blooms: Remember Difficulty: 01 Easy
Learning Objective: 08-01 List two ways that economicgrowth is measured.
Test Bank: I Topic: Economic Growth
Real GDP per capita is found by
adding real GDP and population.
subtracting population from real GDP.
C. dividing real GDP by population.
D. dividing population by real GDP.
AACSB: Knowledge Application Accessibility: Keyboard Navigation
Blooms: Remember Difficulty: 01 Easy
Learning Objective: 08-01 List two ways that economicgrowth is measured.
Test Bank: I Topic: Economic Growth
Real GDP per capita
cannot grow more rapidlythan real GDP.
cannot grow more slowly than real GDP.
necessarily grows more rapidly than real GDP.
D. can grow either more slowly or more rapidly than real GDP.
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Blooms: Remember Difficulty: 01 Easy
Learning Objective: 08-01 List two ways that economicgrowth is measured.
Test Bank: I Topic: Economic Growth
Which of the following best measures improvements in the standardof living of a nation?
growth of nominal GDP
growth of real GDP
C. growth of real GDP per capita
D. growth of nationalincome
AACSB: Knowledge Application Accessibility: Keyboard Navigation
Blooms: Remember Difficulty: 01 Easy
Learning Objective: 08-01 List two ways that economicgrowth is measured.
Test Bank: I Topic: Economic Growth
If a nation'sreal GDP increases from 100 billion to 106 billion and its population jumps from 200 million to 212 million, its real GDP per capita will
A. remain constant.
fall by6 percent.
rise by 6 percent.
fall by 12 percent.
AACSB: Knowledge Application Accessibility: Keyboard Navigation
Blooms: Remember Difficulty: 01 Easy
Learning Objective: 08-01 List two ways that economicgrowth is measured.
Test Bank: I Topic: Economic Growth
For a nation'sreal GDP per capita to rise duringa year,
A. consumption spending must increase.
B. real GDP must increase more rapidlythan population.
population must increase more rapidly than real GDP.
investment spending must increase.
AACSB: Knowledge Application Accessibility: Keyboard Navigation
Blooms: Remember Difficulty: 01 Easy
Learning Objective: 08-01 List two ways that economicgrowth is measured.
Test Bank: I Topic: Economic Growth
Growth is advantageous to a nation becauseit
A. promotes faster population growth.
B. lessens the burden of scarcity.
eliminates the economizing problem.
slows the growth of wants.
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Blooms: Understand Difficulty: 02 Medium
Learning Objective: 08-01 List two ways that economicgrowth is measured. Learning Objective: 08-06 Discuss differing perspectives as to whether growth is desirable and sustainable.
Test Bank: I Topic: Economic Growth
Topic: Is Growth Desirable andSustainable?
For comparing changes in potential military strength and political preeminence, the most meaningfulmeasure of economic growth would be changes in
A. total nominal output.
B. total real output.
per capita output.
per family output.
AACSB: Knowledge Application Accessibility: Keyboard Navigation
Blooms: Remember Difficulty: 01 Easy
Learning Objective: 08-01 List two ways that economicgrowth is measured.
Test Bank: I Topic: Economic Growth
YearAlta (Real GDP)Zorn (Real GDP)Alta (Population)Zorn (Population)1$2,000$150,00020050022,100152,00020250532,200154,000210508 9.
Refer to the table. Between years 1 and 2, real GDP grew by percentin Alta.
3
4
C. 5
D. 10
AACSB: Knowledge Application
Blooms: Remember Difficulty: 01 Easy
Learning Objective: 08-01 List two ways that economicgrowth is measured.
Test Bank: I Topic: Economic Growth
Type: Table
YearAlta (Real GDP)Zorn (Real GDP)Alta (Population)Zorn (Population)1$2,000$150,00020050022,100152,00020250532,200154,000210508 10.
Refer to the table. Between years 1 and 2, real GDP per capita grew by approximately percent in Alta.
A. 3
B. 4
5
10
YearAlta (Real GDP)Zorn (Real GDP)Alta (Population)Zorn (Population)1$2,000$150,00020050022,100152,00020250532,200154,000210508 11.
AACSB: Knowledge Application
Blooms: Remember Difficulty: 01 Easy
Learning Objective: 08-01 List two ways that economicgrowth is measured.
Test Bank: I Topic: Economic Growth
Type: Table
Refer to the table. Between years 2 and 3,
A. Alta's real GDP grew more rapidly than Zorn's real GDP.
real GDP fell in Zorn.
population growth reduced Alta's real GDP growth to zero.
population fell in Alta.
YearAlta (Real GDP)Zorn (Real GDP)Alta (Population)Zorn (Population)1$2,000$150,00020050022,100152,00020250532,200154,000210508 12.
AACSB: Knowledge Application
Blooms: Remember Difficulty: 01 Easy
Learning Objective: 08-01 List two ways that economicgrowth is measured.
Test Bank: I Topic: Economic Growth
Type: Table
Refer to the table. Per capita GDP was about
A. $105 in year 3 in Alta.
B. $303 in year 3 in Zorn.
$200 in year 1 in Zorn.
$5 in year 2 in Alta.
AACSB: Knowledge Application
Blooms: Remember Difficulty: 01 Easy
Learning Objective: 08-01 List two ways that economicgrowth is measured.
Test Bank: I Topic: Economic Growth
Type: Table
Given the annual rate of economicgrowth, the "rule of 70" allows one to
determine the accompanying rate of inflation.
calculate the size of the GDP gap.
C. calculate the number of years required for real GDP to double.
D. determine the growth rate of per capita GDP.
AACSB: Knowledge Application Accessibility: Keyboard Navigation
Blooms: Remember Difficulty: 01 Easy
Learning Objective: 08-01 List two ways that economicgrowth is measured.
Test Bank: I Topic: Economic Growth
The number of years required for realGDPto double can be found by
dividing the annual growth rate by 0.07.
multiplying the annual growth rate by 70.
C. dividing 70 by the annual growth rate.
D. adding 14 to annual growth rate.
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Blooms: Remember Difficulty: 01 Easy
Learning Objective: 08-01 List two ways that economicgrowth is measured.
Test Bank: I Topic: Economic Growth
At an annual growth rate of 7 percent,real GDP will double in about
A. 11½ years.
B. 10 years.
13½ years.
9 years.
AACSB: Knowledge Application Accessibility: Keyboard Navigation
Blooms: Remember Difficulty: 01 Easy
Learning Objective: 08-01 List two ways that economicgrowth is measured.
Test Bank: I Topic: Economic Growth
If a nation's real GDP is growing by 5 percentper year, its real GDP will double in approximately
22 years.
20 years.
C. 14 years.
D. 8 years.
AACSB: Knowledge Application Accessibility: Keyboard Navigation
Blooms: Remember Difficulty: 01 Easy
Learning Objective: 08-01 List two ways that economicgrowth is measured.
Test Bank: I Topic: Economic Growth
If the economy's real GDP doubles in 18 years,we can
not say anythingabout the average annual rate of growth.
conclude that its average annual rate of growth is about 5.5 percent.
conclude that its average annual rate of growth is about 2.4 percent.
D. conclude that its average annual rate of growth is about 3.9 percent.
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Blooms: Remember Difficulty: 01 Easy
Learning Objective: 08-01 List two ways that economicgrowth is measured.
Test Bank: I Topic: Economic Growth
Between 1950 and 2015, U.S. real GDP grew at an averageannual rate of about
A. 2.0 percent.
B. 3.1 percent.
5.1 percent.
8.6 percent.
AACSB: Knowledge Application Accessibility: Keyboard Navigation
Blooms: Remember Difficulty: 01 Easy
Learning Objective: 08-01 List two ways that economicgrowth is measured.
Test Bank: I Topic: Economic Growth
Between 1950 and 2015, U.S. real GDP per capita grew atan average annual rate ofabout
5.5 percent.
4.2 percent.
3.2 percent.
D. 2.0 percent.
AACSB: Knowledge Application Accessibility: Keyboard Navigation
Blooms: Remember Difficulty: 01 Easy
Learning Objective: 08-01 List two ways that economicgrowth is measured.