Examination 5

These multiple choice questions are from the exam bank. If you believe one or more answers are not correct, then speak with the instructor. He is human and makes mistakes.

Lesson 15 - Gross Domestic Product(GDP)

1. National income accountants can avoid multiple counting by:

A. including transfer payments in their calculations.
B. counting both intermediate and final goods.
C. only counting final goods.
D. only counting intermediate goods.

2. Gross domestic product (GDP) measures and reports output:

A. as an index number.
B. in percentage terms.
C. in dollar amounts.
D. in quantities of physical units (for example, kilograms, liters, and hectares).

3. Tom Atoe grows tomatoes for home consumption. This activity is:

A. excluded from GDP in order to avoid double counting.
B. excluded from GDP because an intermediate good is involved.
C. productive but is excluded from GDP because no market transaction occurs.
D. included in GDP because it reflects production.

4. Net exports are:

A. that portion of consumption and investment goods sent to other countries.
B. exports plus imports.
C. exports minus imports.
D. imports minus exports.

5. Nominal GDP was $130 and $150 in years 1 and 2 respectively. Real DDP was $100 and $110 in years 1 and 2 respectively. On the basis of this information we can conclude that:

A. the price level increased between years 1 and 2.
B. more intermediate goods were produced in year 1 than in year 2.
C. the increase in nominal GDP between years 1 and 2 understated the increase in production which occurred.
D. the price level declined between years 1 and 2.

6. What is depreciation of capital?

A. adjusting nominal GDP for inflation.
B. take into account that capital wears out and becomes old.
C. adjusting nominal GDP to obtain disposable income.
D. a measure to approximate the size of the hidden economy.

7. Real GDP measures:

A. current output at current prices.
B. current output at base year prices.
C. base year output at current prices.
D. base year output at current exchange rates.

8. If nominal GDP rises:

A. real GDP may either rise or fall.
B. we can be certain that the price level has risen.
C. real GDP must fall.
D. real GDP must also rise.

9. A large underground economy results in an:

A. understated GDP.
B. overstated GDP.
C. understated GDP price index.
D. overstated GDP price index.

10. The growth of GDP may understate changes in the economy's economic well-being over time if the:

A. distribution of income becomes increasingly unequal.
B. quality of products and services improves.
C. environment deteriorates because of pollution.
D. amount of leisure decreases.

11. As defined in national income accounting, investment includes:

A. business expenditures on machinery and equipment.
B. all consumption.
C. imports, but not exports.
D. all nonfood items.

12. Sometimes economists have two different methodologies to calculate a statistic. What do economists call it when these two statistics should equal each other, but they do not?

A. Deflation.
B. Consumer price index.
C. GDP price deflator.
D. Statistical discrepancy.

13. The amount of after-tax income received by households is measured by:

A. discretionary income.
B. national income.
C. disposable income.
D. personal income.

14. What is a problem with the GDP measure?

A. GDP accounts for environmental pollution but the estimate is not accurate.
B. GDP assumes GDP is shared equally in the economy.
C. GDP includes quality improvements, but it is not accurate.
D. GDP includes estimates of the hidden economy.

15. Approximately how large (by economists' best guess) is the hidden economy in the United States?

A. 10%
B. 25%
C. 50%
D. 100%


1. C 2. C 3. C 4. C 5. A 6. B
7. B 8. A 9. A 10. B 11. A 12. D
13. C 14. B 15. A      


Lesson 16 - Economic Growth

1. Growth is advantageous to a nation because it:

A. promotes faster population growth.
B. lessens the burden of scarcity.
C. eliminates the scarcity of econmics.
D. slows the growth of wants.

2. Given the annual rate of economic growth, the "rule of 70" allows one to:

A. determine the accompanying rate of inflation.
B. 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.

3. If the economy's real GDP doubles in 18 years, we can:

A. not say anything about the average annual rate of growth.
B. conclude that its average annual rate of growth is about 5.5 percent.
C. conclude that its average annual rate of growth is about 2 percent.
D. conclude that its average annual rate of growth is about 4 percent.

4. Recurring upswings and downswings in an economy's real GDP over time are called:

A. the failure of a market economy.
B. business cycles.
C. output yo-yos.
D. total product oscillations.

5. During a severe recession, we would expect output to fall the most in:

A. the health-care industry.
B. the clothing industry.
C. agriculture.
D. the construction industry.

6. The phase of the business cycle in which real GDP is at a minimum is called:

A. the peak.
B. a recession.
C. the trough.
D. the pits.

7. Market economies have been characterized by:

A. occasional instability of employment and price levels.
B. uninterrupted economic growth.
C. persistent full employment.
D. declining populations.

8. Kara voluntarily quit her job as an insurance agent to return to school full-time to earn an MBA degree. With degree in hand she is now searching for a position in management. Kara presently is:

A. cyclically unemployed.
B. structurally unemployed.
C. frictionally unemployed.
D. not a member of the labor force.

9. The unemployment rate of:

A. women greatly exceeds that of men.
B. whites is roughly equal to that of African-Americans.
C. white-collar workers exceeds that of blue-collar workers.
D. teenagers is much higher than that of adults.

10. The natural rate of unemployment:

A. is fixed over time.
B. is found by adding the cyclical and structural unemployment rates.
C. may change from one decade to another.
D. cannot be influenced by public policy.

11. Assuming the total population is 100 million, the civilian labor force is 50 million, and 47 million workers are employed, the unemployment rate is:

A. 3 percent.
B. 6 percent.
C. 7 percent.
D. 53 percent.

12. Assume the natural rate of unemployment in the U.S. economy is 5 percent and the actual rate of unemployment is 9 percent. According to Okun's law, the negative GDP gap as a percent of potential GDP is:

A. 4 percent.
B. 8 percent.
C. 10 percent.
D. 2 percent.

13. Cost-push inflation:

A. is caused by excessive total spending.
B. shifts the nation's production possibilities curve leftward.
C. moves the economy inward from its production possibilities curve.
D. is a mixed blessing because it has positive effects on real output and employment.

14. Who is least likely to be hurt by unanticipated inflation?

A. a disabled laborer who is living off accumulated savings
B. an owner of a small business
C. a secretary
D. a pensioned steelworker

15. A burst stock market bubble might adversely affect the economy by:

A. causing rapid inflation.
B. greatly reducing net exports.
C. causing a severe negative wealth effect and engendering pessimism about the economy's future.
D. raising interest rates.


1. B 2. C 3. D 4. B 5. D 6. C
7. A 8. C 9. D 10. C 11. B 12. B
13. C 14. B 15. C      


Lesson 17 - Macroeconomic Relationships

1. With an MPS of .4, the MPC will be:

A. 1.0 minus .4.
B. .4 minus 1.0.
C. the reciprocal of the MPS.
D. .4.

2. The consumption schedule shows:

A. that the MPC increases in proportion to GDP.
B. that households consume more when interest rates are low.
C. that consumption depends primarily on the level of business investment.
D. the amounts households intend to consume at various possible levels of aggregate income.

3. A decline in disposable income:

A. increases consumption by moving upward along a specific consumption schedule.
B. decreases consumption because it shifts the consumption schedule downward.
C. decreases consumption by moving downward along a specific consumption schedule.
D. increases consumption because it shifts the consumption schedule upward.

4. Which of the following is correct?

A. APC + APS = 1.
B. APC + MPS = 1.
C. APS + MPC = 1.
D. APS + MPS = 1.

5. The investment demand curve portrays an inverse (negative) relationship between:

A. investment and real GDP.
B. the real interest rate and investment.
C. the nominal interest rate and investment.
D. the price level and investment.

6. A high rate of inflation is likely to cause a:

A. high nominal interest rate.
B. low nominal interest rate.
C. low rate of growth of nominal GDP.
D. decrease in nominal wages.

7. Investment spending in the United States tends to be unstable because:

A. expected profits are highly variable.
B. capital goods are durable.
C. innovation occurs at an irregular pace.
D. all of these contribute to the instability.

8. The multiplier is:

A. 1/MPC.
B. 1/(1 + MPC).
C. 1/MPS.
D. 1/(1 - MPS).

9. If the MPC is .70 and gross investment increases by $3 billion, the equilibrium GDP will:

A. increase by $10 billion.
B. increase by $2.10 billion.
C. decrease by $4.29 billion.
D. increase by $4.29 billion.

10. The practical significance of the multiplier is that it:

A. equates the real interest rate and the expected rate of return on investment.
B. magnifies initial changes in spending into larger changes in GDP.
C. keeps inflation within tolerable limits.
D. helps to stabilize the economy.

11. The actual multiplier effect in the U.S. economy is less than the multiplier effect in the text examples because:

A. the real-world MPS is larger than the MPS in the examples.
B. in addition to saving, households use some of any increase in income to buy imported goods and to pay additional taxes.
C. the gap between the nominal interest rate and the real interest rate widens as the economy expands or contracts.
D. the MPC in the United States is greater than 1.

12. The multiplier is useful in determining the:

A. full-employment unemployment rate.
B. level of business inventories.
C. rate of inflation.
D. change in GDP resulting from a change in spending.

13. In annual percentage terms, investment spending in the United States is:

A. less variable than real GDP.
B. less variable than consumption spending.
C. less variable than the price level.
D. more variable than real GDP.

14. When consumption and saving are graphed relative to real GDP, an increase in personal taxes will shift:

A. both the consumption and saving schedules downward.
B. both the consumption and saving schedules upward.
C. the consumption schedule upward and the saving schedule downward.
D. the consumption schedule downward and the saving schedule upward.

15. The greater is the marginal propensity to consume, the:

A. smaller is the marginal propensity to save.
B. higher is the interest rate.
C. lower is the average propensity to consume.
D. lower is the price level.


1. A 2. D 3. C 4. A 5. B 6.A
7. D 8. C 9. A 10. B 11. B 12. D
13. D 14. A 15. A