13) When differences between nominal GDP and real GDP result due to price changes and
nothing else is compared, an index is created called the
A) inflation index.
B) consumer price index.
C) GDP deflator.
D) index of leading indicators.
14) Nominal GDP measures the value of goods and services using current-year prices.
15) Nominal GDP is measured by calculating real GDP at constant prices.
16) The GDP deflator measures how prices change over time.
17) Imagine that an economy produces two goods, flashlights and fishing lures. In 2011, the
economy produced 100 flashlights and 50 fishing lures, and the prices of flashlights and fishing
lures were $5 and $11, respectively. In 2012, the economy produced 120 flashlights and 60
fishing lures, and the prices of flashlights and fishing lures were $7 and $14, respectively.
respectively. What happened to nominal GDP from 2011 to 2012? What happened to real GDP?
18) Prior to 1996 the government measured real GDP using 1987 prices. What would the rapid
growth in computers and the fall in computer prices tend to do to the difference between true
GDP growth and measured real GDP growth, relative to using a later year?
19) Suppose someone told you that the chain-weighted price index for GDP in a country was
135. Why does this fact not convey much information to you?
20) Between 2009 and 2012, a country’s nominal GDP grew by 18% and its inflation rate (based
on the chain-weighted price index for GDP) was 11%. How fast did real GDP grow over this
period?
11.5 Fluctuations in GDP
1) “Recession” refers to a period when real GDP in the economy
A) declines for at least six months.
B) suffers due to political instability.
C) grows rapidly.
D) experiences a rise in living standards.
2) A period in which real GDP in the economy declines for at least six months is referred to as
A) long term growth.
B) a recession.
C) a positive fluctuation.
D) living standards.
3) Business cycles are
A) movements in stock prices.
B) the transfer of executives between firms.
C) used to describe fluctuations in GDP.
D) a description of the time required to bring a new product to market.
4) When real GDP falls for two consecutive quarters the economy is in a
A) depression.
B) recession.
C) peak.
D) trough.
5) The date at which a recession starts is called the
A) trough.
B) peak.
C) plateau.
D) depression.
6) The period of time in which the level of output moves from a trough to a peak is called a
A) recovery.
B) depression.
C) contraction.
D) plateau.
7) From World War II through 2010, the United States experienced ________ recessions.
A) 2
B) 5
C) 11
D) 15
8) A depression is
A) a severe recession.
B) a sustained economic upturn.
C) another word for a bull market.
D) the period of time following a peak in the business cycle.
9) How many quarters (3-month periods) must the “real” GDP decline to have the economy
considered to be in a recession?
A) 1
B) 2
C) 3
D) 4
10) The “expansion” of an economy occurs after
A) firms produce more goods.
B) people spend more money.
C) a trough.
D) an inflationary period.
11) The common term for a severe recession is a
A) downturn.
B) depression.
C) bottoming out.
D) economic adjustment.
Recall the Application about the time it took to recover from the recession of 2007-2009 to
answer the following question(s).
12) Recall the application. GDP did not return to its pre-recession peak until
A) the third quarter of 2009.
B) the first quarter of 2010.
C) the second quarter of 2011.
D) the fourth quarter of 2012.
13) Recall the application. Some economists believe that the economy was slow to recover from
the recession of 2007-2009 because this recession was brought on primarily by
A) a decrease in the demand for housing.
B) rapid inflation.
C) increasing oil prices.
D) a financial crisis.
14) In a business cycle, the date at which a recession starts is called a trough.
15) In a business cycle, the period following a trough is called an expansion.
16) From 1948 to 2010, the United States has experienced only 4 recessions.
17) Describe the recession phase of a business cycle, including when it begins and when it ends.
11.6 GDP as a Measure of Welfare
1) What is the best measure of the value of output of an economy?
A) GDP
B) GNP
C) NNP
D) the GDP deflator
2) One of the flaws of GDP is that it
A) includes only transactions that take place in formal businesses.
B) ignores transactions that do not take place in organized markets.
C) includes measures of the underground economy.
D) includes measures of changes of quality of life associated with producing output.
3) GDP understates the value of output produced by an economy because it
A) includes transactions that do not take place in organized markets, such as home-cooked
meals.
B) excludes value added from the underground economy, such as tips taken “under the table.”
C) includes environmental degradation caused by increased output production.
D) excludes the value of the wages and benefits of government employees.
4) Suppose that a tire factory produces $825,000 of output and causes $70,000 worth of pollution
as a result of production. The tire factory’s official contribution to GDP would be ________ and
its overall contribution to society would be ________.
A) $825,000; $895,000
B) $895,000; $825,000
C) $825,000; $755,000
D) $755,000; $825,000
Recall the Application about the link between happiness and GDP to answer the following
question(s). Comparing changes in happiness to changes in per capita income over the last
30 years, economists at Dartmouth College and Warwick University have measured levels
of happiness in the United States and United Kingdom based on income levels, ethnicity,
age, and gender.
5) This Application addresses the economic concept of
A) real versus nominal GDP.
B) fluctuations in GDP.
C) GDP as a measure of welfare.
D) measuring a nation’s national income.
6) According to the Application,
A) reported levels of happiness in the United States have increased over the past 30 years.
B) stable marriages account for no more happiness than marriages ending in divorce.
C) retired people report higher levels of happiness than people below the age of 40.
D) money does appear to buy happiness, ceteris paribus.
7) Recall the application. Large increases in per capita income in the United States over the past
30 years have
A) had the greatest impact on retired people.
B) not increased happiness levels.
C) led to a higher divorce rate.
D) lowered stress levels.
8) GDP ignores all of the following EXCEPT
A) household production.
B) the value of leisure time.
C) products produced in other countries that are sold in the United States.
D) changes in the environment that occur in the production of output.
9) GDP calculations tend to exclude all of the following EXCEPT
A) illegal transactions.
B) environmental quality.
C) work that people do for themselves in their own homes.
D) salaries paid to government employees.
10) Not including transactions from the underground economy will tend to ________ GDP, and
not including environmental changes caused by pollution will tend to ________ GDP.
A) overvalue; undervalue
B) undervalue; overvalue
C) overvalue; overvalue
D) undervalue; undervalue
11) GDP ignores transactions that take place in the underground economy.
12) If GDP included the value of leisure time, the value of U.S. GDP would most likely increase.
13) GDP measures underestimate the value of output produced by an economy because they
include services not transferred through markets.
14) Why is GDP only an imperfect valid measure of the value of output produced by an
economy?
15) Give some examples of transactions in markets which are not regulated or controlled.
16) List four things considered to be shortcomings in the determination of GDP in relation to the
use of GDP as a measure of welfare.