Measuring a Nation’s Income
Multiple Choice – Section 00: Introduction
1. Macroeconomists study
a. the decisions of individual households and firms.
b. the interaction between households and firms.
c. economy-wide phenomena.
d. regulations imposed on firms and unions.
2. Which of the following headlines is more closely related to what microeconomists study than to
what macroeconomists study?
a. Unemployment rate falls from 7.5 percent to 7.3 percent.
b. Real GDP falls by 0.4 percent in the third quarter.
c. Inflation was 2.4 percent last year.
d. The price of gasoline rises due to rising oil prices.
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3. Which of the following questions is more likely to be studied by a microeconomist than a
macroeconomist?
a. Why do prices in general rise by more in some countries than in others?
b. Why do wages differ across industries?
c. Why do national production and income increase in some periods and not in others?
d. How rapidly is GDP currently increasing?
4. 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, and the profitability of automobile-
manufacturing firms
b. the price of beef, and wage differences between genders
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
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5. A macroeconomist is interested in
a. explaining how changes in sellers’ behavior affect prices of a particular good.
b. explaining price changes in a particular market.
c. explaining why the unemployment rate is higher.
d. All of the above are correct.
6. Which of the following is not a question addressed by macroeconomists?
a. Why is average income high in some nations but low in others?
b. What, if anything, can the government do to promote growth in incomes, low inflation, and stable
employment?
c. What is the impact of foreign competition on the U.S. auto industry?
d. Why do production and employment expand in some years and contract in others?
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7. Which of the following is not a question that macroeconomists address?
a. Why is average income high in some countries while it is low in others?
b. Why does the price of oil rise when war erupts in the Middle East?
c. Why do production and employment expand in some years and contract in others?
d. Why do prices rise rapidly in some periods of time while they are more stable in other periods?
8. The basic tools of supply and demand are
a. useful only in the analysis of economic behavior in individual markets.
b. useful in analyzing the overall economy, but not in analyzing individual markets.
c. central to microeconomic analysis, but seldom used in macroeconomic analysis.
d. central to macroeconomic analysis as well as to microeconomic analysis.
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9. Which of the following statistics is usually regarded as the best single measure of a society’s
economic well-being?
a. the unemployment rate
b. the inflation rate
c. gross domestic product
d. the trade deficit
10. GDP
a. is used to monitor the performance of the overall economy but is not the single best measure of
a society’s
economic well-being.
b. is used to monitor the performance of the overall economy and is the single best measure of a
society’s
economic well-being.
c. is not used to monitor the performance of the overall economy but is the single best measure of
a society’s
economic well-being.
d. is not used to monitor the performance of the overall economy and is not the single best
measure of a
society’s economic well-being.
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Multiple Choice – Section 01: The Economy’s Income and Expenditure
1. Gross domestic product measures
a. income and expenditures.
b. income but not expenditures.
c. expenditures but not income.
d. neither income nor expenditures.
2. Expenditures on a nation’s domestic production
a. are less than its domestic production.
b. are equal to its domestic production.
c. are greater than its domestic production.
d. could be less than, equal to, or greater than its domestic production.
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3. Income generated by a nation’s domestic production
a. is less than its domestic production.
b. is equal to its domestic production.
c. is greater than its domestic production.
d. could be less than, equal to, or greater than its domestic production.
4. For an economy as a whole,
a. wages must equal profit.
b. consumption must equal income.
c. income must equal expenditure.
d. consumption must equal saving.
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5. For an economy as a whole,
a. the market value of production must equal expenditure.
b. investment must equal the value of stocks and bonds purchased.
c. wages must equal income.
d. consumption must equal saving.
6. For the economy as a whole,
a. income must be greater than expenditure.
b. unemployment must rise when GDP rises.
c. expenditure must equal income.
d. consumption must be greater than investment.
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7. 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.
8. In the GDP accounts production equals
a. income.
b. income + saving.
c. income – government expenditures.
d. income – imports.
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9. Because every transaction has a buyer and a seller,
a. GDP is more closely associated with an economy’s income than it is with an economy’s
expenditure.
b. every transaction contributes equally to an economy’s income and to its expenditure.
c. the number of firms must be equal to the number of households in a simple circular-flow
diagram.
d. firms’ profits are necessarily zero in a simple circular-flow diagram.
10. For an economy as a whole, income must equal expenditure because
a. the number of firms is equal to the number of households in an economy.
b. individuals can only spend what they earn each period.
c. every dollar of spending by some buyer is a dollar of income for some seller.
d. every dollar of saving by some consumer is a dollar of spending by some other consumer.
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11. If an economy’s GDP falls, then it must be the case that the economy’s
a. income falls and saving rises.
b. income and saving both fall.
c. income falls and expenditure rises.
d. income and expenditure both fall.
12. If an economy’s GDP falls, then it must be the case that the economy’s
a. income and saving fall.
b. income and market value of all production both fall.
c. income falls and market value of all production rises.
d. income rises and market value of all production falls.
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13. If an economy’s GDP rises, then it must be the case that the economy’s
a. income rises and saving falls.
b. income and saving both rise.
c. income rises and expenditure falls.
d. income and expenditure both rise.
14. 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
unemployment rate of the economy’s labor force.
b. Money continuously flows from households to government and then back to households, and
GDP measures this flow of money.
c. GDP is to a nation’s economy as household income is to a household.
d. All of the above are correct.
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15. 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 the government purchases no goods or services.
d. always equal because every transaction has a buyer and a seller.
16. In a simple circular–flow diagram,
a. households spend all of their income.
b. all goods and services are bought by households.
c. expenditures flow through the markets for goods and services, while income flows through the
markets for the factors of production.
d. All of the above are correct.
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17. In a simple circular-flow diagram, firms use the money they get from a sale to
a. pay wages to workers.
b. pay rent to landlords.
c. pay profit to the firms’ owners.
d. All of the above are correct.
18. In a simple circular-flow diagram, firms
a. purchase resources from households.
b. purchase the output produced by households.
c. receive income by selling resources to households.
d. All of the above are correct.
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19. In a simple circular-flow diagram, households buy goods and services with the income they get
from
a. wages.
b. rents.
c. profits.
d. All of the above are correct.
20. In the actual economy, households
a. spend all of their income.
b. divide their income among spending, taxes, and saving.
c. buy all goods and services produced in the economy.
d. Both (a) and (c) are correct.
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21. Total income from the domestic production of final goods and services equals
a. only household expenditures for these goods.
b. only household and business expenditures for these goods.
c. only household and government expenditures for these goods.
d. the expenditures for these goods whoever buys them.
22. In the actual economy, goods and services are purchased by
a. households, but not firms or the government.
b. households and firms, but not the government.
c. households and the government, but not firms.
d. households, firms, and the government.
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23. According to the circular-flow diagram GDP
a. can be computed as the total income paid by firms or as expenditures on final goods and
services.
b. can be computed as the total income paid by firms, but not as expenditures on final goods and
services.
c. can be computed as expenditures on final goods and services, but not as the total income paid
by firms.
d. cannot be computed as either total income paid by firms or expenditures on final goods and
services.
24. According to the circular-flow diagram GDP
a. can be computed as either the revenue firms receive from the sales of goods and services or
the payments they make to factors of production.
b. can be computed as the revenue firms receive from the sales of goods and services but not as
the payments they make to factors of production.
c. can be computed as payments firms make to factors of production but not as revenues they
receive from the sales of goods and services.
d. cannot be computed as either the revenue firms receive or the payments they make to factors
of production.
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25. According to the circular-flow diagram, GDP
a. can be computed as payments firms make to factors of production plus revenues they receive
from the sales of goods and services.
b. can be computed as the revenue firms receive from the sales of goods and services minus the
payments they make to factors of production.
c. can be computed as either the revenue firms receive from the sales of goods and services or
as revenues they receive from the sales of goods and services.
d. can be computed as the payments firms make to factors of production, but not as revenues
they receive from the sales of goods and services.
Figure 23-1.
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26. Refer to Figure 23-1. Which of the following pairs correctly identify W and Y?
a. markets for factors of production and markets for goods and services
b. firms and households
c. expenditures and income
d. consumption and investment
27. Refer to Figure 23-1. Which of the following correctly identifies the flow of dollars?
a. W, X, Y and Z
b. K, M, L and N
c. C, K, M and D
d. A, L, N and B
28. Refer to Figure 23-1. Which of the following pairs correctly identify X and Z?
a. markets for factors of production and markets for goods and services
b. firms and households
c. GDP deflator and CPI
d. flow of dollars and flow of inputs and outputs
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Multiple Choice – Section 02: The Measurement of GDP
1. GDP is defined as the
a. value of all goods and services produced within a country in a given period of time.
b. 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. value of all final goods and services produced within a country in a given period of time.
d. 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.
2. Which of the following is a way to compute GDP?
a. add up the wages paid to all workers
b. add up the quantities of all final goods and services
c. add up the market values of all final goods and services
d. add up the difference between the market values of all final goods and services and then
subtract the costs of producing those goods and services