58) A new technology is discovered that results in all new cars producing 50 percent less
pollution. The technology costs nothing to produce and cars do not change in price. As a
result of the technology, there is a reduction in the number of visits people make to the
doctor to complain of breathing diiculties. Which of the following is true?
A) Real GDP decreases as a result of fewer doctor services being provided.
B) Real GDP is not afected.
C) Nominal GDP increases to relect the improvement in the health of the population.
D) Real GDP decreases to relect the decrease in pollution.
E) Nominal GDP does not change and real GDP increases.
Skill: Level 2: Using deinitions
Section: Checkpoint 5.3
Status: Old
AACSB: Relective thinking
59) A country with a real GDP per person similar to real GDP per person in the United
States but with limited political freedom is generally considered to have
A) a lower standard of living than the United States.
B) a larger Human Development Index because the other country still needs to develop
more political freedom.
C) the same standard of living as the United States.
D) an understated GDP.
E) an overstated nominal GDP.
Skill: Level 2: Using deinitions
Section: Checkpoint 5.3
Status: Old
AACSB: Relective thinking
5.4 Appendix: Measuring Real GDP
1) Using the chained-dollar method to calculate real GDP, real GDP is calculated by
A) valuing the current output at last year’s real GDP prices.
B) valuing the current output at current year prices.
C) averaging the growth of output from one year to the next when the growth rates are
calculated using this year’s prices and using last year’s prices.
D) either A or C, depending which gives the larger value for real GDP.
E) averaging the value of current output valued using base year prices and current output
valued using current year prices.
Skill: Level 2: Using deinitions
Section: Chapter 5 Appendix
Status: Old
AACSB: Relective thinking
2) Janet calculated the GDP growth rates for France between 2012 and 2013. Using 2012
prices for both years, GDP increased 5 percent. Using 2013 prices for both years, GDP
increased 1 percent. Hence the chained-price method will calculate that between these
years, real GDP increased by
A) 1 percent.
B) 3 percent.
C) 5 percent.
D) 6 percent.
71
E) 4 percent.
Skill: Level 3: Using models
Section: Chapter 5 Appendix
Status: Old
AACSB: Analytical thinking
3) The table above gives some data about GDP in a country for two years. Using these the
chained-dollar method for calculating real GDP, real GDP increased by ________ percent
between these two years.
A) 4
B) 5
C) 6
D) 10
E) 2
Skill: Level 4: Applying models
Section: Chapter 5 Appendix
Status: Old
AACSB: Analytical thinking
72
4) Bananaland produces only bananas and sunscreen and the quantities and prices for
2012 and 2013 are given in the table above. The base year is 2012. Nominal GDP in 2012 is
equal to
A) $500.
B) $625.
C) $640.
D) $800.
E) $100.
Skill: Level 3: Using models
Section: Chapter 5 Appendix
Status: Old
AACSB: Analytical thinking
5) Bananaland produces only bananas and sunscreen and the quantities and prices for
2012 and 2013 are given in the table above. The base year is 2012. Nominal GDP in 2013 is
equal to
A) $500.
B) $800.
C) $640.
D) $625.
E) $200.
Skill: Level 3: Using models
Section: Chapter 5 Appendix
Status: Old
AACSB: Analytical thinking
6) Bananaland produces only bananas and sunscreen and the quantities and prices for
2012 and 2013 are given in the table above. The base year is 2012. Real GDP in 2012 is
equal to
A) $800.
B) $640.
C) $625.
D) $500.
E) $200.
Skill: Level 3: Using models
Section: Chapter 5 Appendix
Status: Old
AACSB: Analytical thinking
73
7) Bananaland produces only bananas and sunscreen and the quantities and prices for
2012 and 2013 are given in the table above. Between 2012 and 2013, which grew more
rapidly, nominal GDP or real GDP?
A) Nominal GDP grew more rapidly.
B) Real GDP grew more rapidly.
C) Both grew at the same rate.
D) Because real GDP and nominal GDP use diferent prices, it is not possible to determine
which grew most rapidly.
E) More information is needed to determine which grew more rapidly.
Skill: Level 3: Using models
Section: Chapter 5 Appendix
Status: Old
AACSB: Analytical thinking
8) Bananaland produces only bananas and sunscreen and the quantities and prices for
2012 and 2013 are given in the table above. The base year is 2012. In 2013, which is
larger, nominal GDP or real GDP?
A) Nominal GDP is larger.
B) Real GDP is larger.
C) Both are the same size.
D) The answer is ambiguous.
E) More information is needed to determine which is larger.
Skill: Level 3: Using models
Section: Chapter 5 Appendix
Status: Old
AACSB: Analytical thinking
9) Real GDP measures the value of goods and services produced in a given year using
A) base year prices.
B) prices of that same year.
C) no prices.
D) future prices.
E) government approved prices.
Skill: Level 1: Deinition
Section: Chapter 5 Appendix
Status: Old
AACSB: Relective thinking
74
10) In a small country, using prices of 2012, GDP in 2012 was $100 and GDP in 2013 was
$110. Using prices of 2013, GDP in 2012 was $200 and GDP in 2013 was $210. The
country’s BEA will calculate ________ percent as the growth in real GDP between those
years.
A) 10
B) 5
C) 15
D) 7.5
E) None of the above answers is correct.
Skill: Level 3: Using models
Section: Chapter 5 Appendix
Status: Old
AACSB: Analytical thinking
11) Using prices from 2012, GDP grew 10 percent between 2012 and 2013; using prices
from 2013, GDP grew 8 percent between 2012 and 2013. For its link back to the base year,
the BEA will use ________ percent as the growth in real GDP between 2012 and 2013.
A) 10
B) 8
C) 2
D) 18
E) 9
Skill: Level 3: Using models
Section: Chapter 5 Appendix
Status: Old
AACSB: Analytical thinking
5.5 Integrative Questions
1) Depreciation is
A) fall in the value of an exchange rate.
B) the decrease in the value of capital resulting from its use and obsolescence.
C) the decrease in the purchasing power of a dollar because of inlation.
D) part of consumption expenditure.
E) part of net domestic product at factor cost.
Skill: Level 2: Using deinitions
Section: Integrative
Status: Old
AACSB: Relective thinking
75
2) Comparing nominal GDP of 2012 to nominal GDP of twenty years ago
A) is an inaccurate measure of the change in total production.
B) has no economic meaning.
C) will be an accurate measure of the change in total production.
D) determines the extent to which the cost of living changed.
E) cannot be done because the two GDP measures use diferent prices.
Skill: Level 2: Using deinitions
Section: Integrative
Status: Old
AACSB: Relective thinking
3) If real GDP increases over time, the cost of living will
A) always remain constant.
B) always decrease.
C) always increase.
D) either remain constant or increase.
E) More information is needed to determine how the cost of living changes.
Skill: Level 3: Using models
Section: Integrative
Status: Old
AACSB: Relective thinking
4) If both the production of goods and services increase and prices rise, then the change in
nominal GDP
A) deinitely understates the change in production.
B) deinitely accurately relect the change in production.
C) deinitely overstates the change in production.
D) either understates or might accurately relect the change in production.
E) More information is needed to determine how the change in nominal GDP compares to
the change in production.
Skill: Level 3: Using models
Section: Integrative
Status: Old
AACSB: Analytical thinking
76
5) The nation’s supply of productive resources increases if
A) investment is greater than depreciation.
B) investment equals depreciation.
C) investment is less than depreciation.
D) Both answers A and B can be correct.
E) None of the above answers is correct because the relationship between investment and
depreciation has no bearing on the amount of the nation’s productive resources.
Skill: Level 3: Using models
Section: Integrative
Status: Old
AACSB: Analytical thinking
6) If a wealthy woman marries her butler, quits paying him and does not hire a new butler,
then
A) GDP deinitely decreases.
B) GDP deinitely does not change.
C) GDP deinitely increases.
D) GDP either does not change or increases.
E) There is not enough information given to reach a conclusion.
Skill: Level 2: Using deinitions
Section: Integrative
Status: Old
AACSB: Relective thinking
5.6 Essay: GDP, Income, and Expenditure
1) Deine and discuss GDP.
Skill: Level 1: Deinition
Section: Checkpoint 5.1
Status: Old
AACSB: Written and oral communication
77
2) Is every product produced in the United States included in U.S. gross domestic product?
Skill: Level 1: Deinition
Section: Checkpoint 5.1
Status: Old
AACSB: Written and oral communication
3) Deine and distinguish between inal goods and intermediate goods.
Skill: Level 1: Deinition
Section: Checkpoint 5.1
Status: Old
AACSB: Written and oral communication
4) What are the categories of total expenditure?
Skill: Level 2: Using deinitions
Section: Checkpoint 5.1
Status: Old
AACSB: Written and oral communication
5) Investment, as included in GDP, consists of what?
Skill: Level 1: Deinition
Section: Checkpoint 5.1
Status: Old
AACSB: Written and oral communication
78
6) “The amount of new stocks and bonds issued in a year adds to the country’s GDP.” Is this
assertion correct or incorrect? Explain your answer.
Skill: Level 2: Using deinitions
Section: Checkpoint 5.1
Status: Old
AACSB: Written and oral communication
7) Are stocks and bonds considered part of the investment component of GDP?
Skill: Level 1: Deinition
Section: Checkpoint 5.1
Status: Old
AACSB: Written and oral communication
8) How are changes in inventory treated in GDP?
Skill: Level 1: Deinition
Section: Checkpoint 5.1
Status: Old
AACSB: Written and oral communication
9) Use the idea of the circular low diagram to explain why the value of production equals
total income equals total expenditure.
Skill: Level 1: Deinition
Section: Checkpoint 5.1
Status: Old
AACSB: Written and oral communication
79
10) What is the relationship shown by the circular low among income, total expenditure,
and GDP?
Skill: Level 2: Using deinitions
Section: Checkpoint 5.1
Status: Old
AACSB: Written and oral communication
5.7 Essay: Measuring U.S. GDP
1) “To calculate GDP, economists begin with total income earned and then subtract total
expenditure by the four sectors of the economy.” Is the previous sentence true or false?
Explain your answer.
Skill: Level 2: Using deinitions
Section: Checkpoint 5.2
Status: Old
AACSB: Written and oral communication
2) What are the categories of expenditure used in the expenditure approach to measuring
GDP?
Skill: Level 1: Deinition
Section: Checkpoint 5.2
Status: Old
AACSB: Written and oral communication
3) The purchase and sale of three types of legal items are not included in this year’s GDP.
What are these three items?
Skill: Level 2: Using deinitions
Section: Checkpoint 5.2
Status: Old
AACSB: Relective thinking
80