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Section 1
Answer the following multiple choice questions. (30)

1. Suppose an economy’s expenditures are equal to $7,000 billion. Income in the economy is:
a.    Less than $7,000 billion.
b.    More than $7,000 billion.
C.    Exactly $7,000 billion.
d.    Somewhere between $7,000 billion and $8,000 billion.

2. National income accounting:

a.    Provides a set of rules for determining macroeconomic policy.
B.    Provides a set of rules and definitions for measuring economic activity in the aggregate
economy.
c.    Is a useful tool for microeconomists.
d.    Can be used to measure a nation's output but not its production or consumption.

3. Real gross domestic product is best defined as:

a.    The market value of goods and services produced in an economy.
b.    All goods and services produced in an economy stated in the prices of a given year.
C.    The market value of all final goods and services produced in an economy stated in the prices of
a given year.
d.    The market value of goods and services produced in an economy stated in current-year prices.

4. The United States produces and sells millions of types of products. To add them up to a single
aggregate, each good is weighted by:
a.    Its cost of production.
B.    Its market price.
c.    Its utility to consumers.
d.    Its contribution to corporate profits.

5. To calculate nominal GDP:

a.    Sum the quantity of all final goods and services produced in an economy in a year.
b.    Sum the quantity of all goods and services sold in an economy in a year.
C.    Weight the output of each final good and service produced in an economy in a year by its price
that year and then sum the result.
d.    Weight the output of each good and service produced in an economy in a year by its price in
that year, and then sum the result.

6. To compute GDP, the quantity of each final good or service produced must first be weighted by:
A.    Its market price.
b.    Its cost of production.
c.    Its share of total output.
d.    Its contribution to corporate profits.

7. Which of the following is an example of an intermediate product?

a.    A pair of skis sold by a sporting goods retailer to a skier.
b.    A share of IBM stock.
C.    The lumber produced by Boise Cascade and sold to a builder of new houses.
d.    An antique car sold to the highest bidder.
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8. Which of the following is an example of a final good or service?
a.    Unemployment compensation.
B.    A CD player purchased as a gift.
c.    Steel used in the production of appliances.
d.    Vegetables purchased by local restaurants to make soup.

9. Double counting in the national income accounts will not occur if GDP is computed by summing
all:
A.    Sales of final output.
b.    Sales of final output and intermediate goods.
c.    Sales.
d.    Production costs.

10. Use the following information to answer the question. There are three firms in an economy: X,
Y, and Z. Firm X buys $200 worth of goods from Y, and $300 worth of goods from firm Z, and
produces 250 units of output at $4 per unit. Firm Y buys $150 worth of goods from firm X, and
$250 worth of goods from firm Z, and produces 300 units of output at $6 per unit. Firm Z buys $75
worth of goods from firm X, and $50 worth of goods from firm Y, and produces 500 units at $2 per
unit. Given this information, what is the economys GDP? Hint: remember that part of each firms
production is used by one of the other firms as a production input (an intermediate product).
a.    $1825.
b.    $2700.
C.    $2775.
d.    $3800.

11. Investment is the purchase of capital equipment, inventories, and:

A.    Structures.
b.    Nondurable goods.
c.    Depreciation.
d.    Import investment.

12.  Which of the following would be considered an investment expenditure?

a.    The Smiths buy a home that was built in 1990.
b.    The federal government pays the salary of a captain in the Air Force.
C.    Jacks Boat Storage buys a new boat lift.
d.    Chairs-R-Us buys a used lathe to manufacture chairs.

13.  For purposes of calculating GDP, which of the following payments is not included in the
government spending component?
A.    Social security payments.
b.    Wages paid by a local government to its road crew.
c.    Wages paid by a state government to the workers in its welfare department.
d.    The federal governments purchase of a submarine from a shipbuilder.

14.  Spending on capital equipment, inventories, and structures is referred to as:

a.    Consumption expenditure (C).
B.    Investment expenditure (I).
c.    Government expenditure (G).
d.    Expenditure on net exports (X - M)

15. The sale of illegal drugs:

a.    Is included in GDP under services.
b.    Is included in GDP under investment.
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c.    Is included in GDP as a component of home production (non-market activity).
D.    Is not included in GDP.

16. Which of the following would be counted in the calculation of GDP?

a.    The sale of a rare coin to a coin collector.
B.    Homes that are rebuilt after being completely destroyed by a hurricane.
c.    The sale of a 1966 Ford Fairmont.
d.    The sale of cocaine in the black market.

17. Which of the following would NOT be counted as a final good for inclusion in GDP?
a.    A piece of glass bought by a consumer to fix a broken window.
B.    A sheet of glass purchased by a commercial builder of a new home.
c.    A sheet of glass produced this year and ending up in the inventory of a retail store.
d.    A home that is built this year, but is not sold.

18. Which of the following economic activities would not be included in US GDP?
a.    Dick hires a nanny for $10 an hour to help his wife take care of their kids.
b.    Jose is a great hairdresser, often receiving $20 tips (which he reports on his income taxes).
c.    MaxiPress adds $8,000 worth of books to its inventory which remains unsold by the end of the
year.
D.    Rita has a job after school washing dishes 2 hours each evening in her parents diner. The other
dishwashers get $6 an hour, but her parents give her room and board instead.

19. Which of the following is not a part of US GDP?

a.    The value of an insurance policy on a new BMW sold by a U.S. company.
B.    The value of a BMW imported from Germany.
c.    The value of a BMW produced in the U.S.
d.    The commissions earned by a BMW dealership in the US.

20. If a used car dealer buys a car for $6,000 and resells it for $6,500, how much has been added to
GDP?
a.    Nothing.
B.    $500.
c.    $6,000
d.    $6,500.

21.  If U.S. imports of goods and services exceed exports:

a.    U.S. GDP is less than the sum of consumption, investment, and government purchases.
B.    U.S. GDP exceeds the sum of consumption, investment, and government purchases.
c.    U.S. net exports are positive.
d.    U.S. GDP equals the sum of consumption, investment, and government purchases.

  billions of
dollars
Consumption 4,900
Investment 1,300
Transfer payments 1,050
Government expenditures 1,200
Exports 1,050
Imports 950
Net foreign factor income 20

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 22. Use the table above to calculate GDP.
a.    6,200.
b.    7,400.
C.    7,500.
d.    8,450.

23. Use the table above to calculate net exports.

a.    -100.
B.    100.
c.    950.
d.    1050.

  In billions of dollars
Consumption 3600
Investment 800
Transfer payments 750
Government expenditures 1000
Exports 650
Imports 450
Net foreign factor income -30

24.  Calculate GDP using the table above.

a.    5570
B.    5600
c.    6050
d.    6320

25.  Calculate net exports using the table above.

a.    170
B.    200
c.    450
d.    650

  In trillions of dollars
GDP 5.0
Government purchases 1.0
Transfer payments 0.2
Exports 0.4
Imports 0.5
Net foreign factor income 0.4
24. Suppose the price index is 110 and a typical basket of goods and services costs
$3,300. What would this typical basket have cost in the base year?
a) $30 b) $3,000 c) $3,630 d) not enough information to tell

25. If the CPI changes from 110 in 1993 to 120 in 1994, what is the rate of inflation?
a) less than 10% b) 10% c) more than 10% d) insufficient information to tell
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26. The CPI (base year 1987) for 1990 is 120, for 1991 is 125 and for 1992 is 130. If the
base year is changed from 1987 to 1992, what does the CPI for 1990 become?
a) 90 b) 92.3 c) 108.3 d) 110

27. If GDP increases in nominal terms from $600 billion in 1994 to $780 billion in 1996
and the price index (1992=100) rises from 120 to 130, how much real growth (in 1992
dollars) in GDP occurred between 1994 and 1996?
a) $100b b) $138.5b c) $150b d) $180b

Suppose that in 1995 the price index (base year 1992) was 110 and income was $700
billion. The corresponding numbers for 1996 are 120 and $800 billion.

28. 1996 income expressed in 1992 dollars is

a) less than $600b b) $600b or more but not more than $700b
c) more than $700b but not more than $800b d) more than $800b

29. 1996 income expressed in 1995 dollars is

a) less than $600b b) $600b or more but not more than $700b
c) more than $700b but not more than $800b d) more than $800b

30. Inflation during 1996 was

a) less than 10% b) 10%
c) more than 10% but not more than 20% d) more than 20%

Section 1I
Answer the following questions. (70)

1. Find data on GDP and its components for Pakistan, and compute the percentage of GDP for the
following components for 2000, 2010, and the most recent year available. (20)
a. Personal consumption expenditures
b. Gross private domestic investment
c. Government purchases
d. Net exports

2. What components of GDP (if any) would each of the following transactions affect? Explain. (10)
a. A family buys a new refrigerator.
b. Aunt Jane buys a new house.
c. Ford sells a Mustang from its inventory.
d. You buy a pizza.
e. California repaves Highway 101.
f. Your parents buy a bottle of French wine.
g. Honda expands its factory in Marysville, Ohio

3. Complete the following table. (6)

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a. What year is the base year? How can you tell?
b. From year 1 to year 2, did real output rise or did prices rise? Explain?
c. From year 2 to year 3, did real output rise or did prices rise? Explain?

4. Suppose the following table records the total output and prices for an entire economy.
Further, suppose the base year in the following table is 2004. (10)

a. What is the value of nominal GDP in 2004?

b. What is the value of real GDP in 2004?
c. What is the value of nominal GDP in 2005?
d. What is the value of real GDP in 2005?
e. What is the value of the GDP deflator in 2004?
f. What is the value of the GDP deflator in 2005?
g. From 2000 to 2001, prices rose approximately what percentage?
h. Was the increase in nominal GDP from 2000 to 2001 mostly due to an increase in real
output or due to an increase in prices?

5.
a. Complete the following table. (10)

a. What is the largest expenditure component of GDP?

b. Does investment include the purchase of company shares and bonds? Why?
c. Do government purchases include government spending on unemployment
benefit? Why?
d. What does it mean to say that net exports are negative?

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6. As the chapter states, GDP does not include the value of used goods that are resold.
Why would including such transactions make GDP a less informative measure of economic
well-being? (4)

7. Suppose that a borrower and a lender agree on the nominal interest rate to be paid on a loan.
Then inflation turns out to be higher than they both expected.
a. Is the real interest rate on this loan higher or lower than expected? (5)
b. Does the lender gain or lose from this unexpectedly high inflation? Does the borrower gain or lose?
(5)