The Economic Way of Thinking, 13e (Heyne)
Chapter 13 Measuring the Overall Performance of Economic Systems
1) Gross domestic product is the market value of
A) intermediate exchanges made within a country during the course of a year.
B) final goods and services produced within a country during the course of a year.
C) all monetary transactions within a country during the course of a year.
D) all the goods produced within a country during the course of a year over and above what is
required to maintain the population and the stock of capital.
E) everything produced within a country during the course of a year and lasting for at least 12
months.
2) What does U.S. GDP intend to measure?
A) The market value of final goods and services produced by U.S. citizens during the course of a
year
B) The market value of all goods and services produced by U.S. citizens during the course of a
year
C) The market value of final goods and services produced within the U.S. during the course of a
year
D) The market value of all goods and services produced within the U.S. during the course of a
year
3) Economists use GDP to determine
A) the economic performance of a country over time.
B) the well-being of a country’s citizens.
C) the financial stability of a nation.
D) the overall money supply within a nation.
E) all of the above.
4) As presented in the textbook, gross domestic product is the sum of annual
A) business profits (both incorporated and unincorporated) plus all tax receipts of federal, state,
and local governments.
B) consumption, saving, and investment.
C) expenditures for new final goods by consumers, investors, government.
D) total sales of all business firms.
E) wages and salaries paid or received.
5) GDP is used in an attempt to
A) calculate the profitability of a country.
B) measure the economic performance of a country.
C) determine the overall well-being of a country.
D) figure out the prices of all goods and services exchanged in the legal economy.
E) guide entrepreneurs toward more profitable investment decisions.
6) GDP is a measure of
A) the total happiness of the nation.
B) the total material well-being of a nation.
C) the total expenditures on newly-produced final goods and services.
D) the difference between the total market value and the total cost of final goods and services.
7) Fill in the blanks: Gross domestic product measures the ________ value of ________ goods
and services produced during a ________ time period.
A) inherent; market; fixed
B) final; intermediate; stable
C) intermediate; final; constant
D) market; final; given
8) National income accountants measure the value of final goods and services with
A) market prices.
B) fair prices.
C) objective values.
D) best-guess estimates as to what things are really worth.
9) In national income accounting, a “final good” is
A) a finished product.
B) something purchased with the goal of further resale.
C) something purchased by an ultimate user in the household, business, or government sector.
D) something that is impossible to determine.
10) Fill in the blank: National income accountants define a(n) ________ good as something
purchased with the goal of reselling it or further processing or remanufacturing it into another
sellable good.
A) scarce
B) intermediate
C) final
D) finished
E) completed
11) Fill in the blank: National income accountants define a(n) ________ good as something
purchased without the goal of reselling it or further processing or remanufacturing it into another
sellable good.
A) scarce
B) intermediate
C) final
D) finished
E) completed
12) Which of the following might be an intermediate good?
A) A box of Kellogg’s corn flakes
B) An iMac computer
C) A U-Haul rental vehicle
D) An economics textbook
E) Any of the above might be, depending upon who is purchasing it.
13) Which of the following might be a final good?
A) A box of Kellogg’s corn flakes
B) An iMac computer
C) A U-Haul rental vehicle
D) An economics textbook
E) Any of the above might be, depending upon who is purchasing it.
14) Consider the following scenario: The Kellogg’s facility buys corn and makes boxes of
cornflakes. The grocer buys the boxes and places them on the shelf. A mother then buys a box
for her family. Which of the following would be classified as a purchase of a final good?
A) The cornflakes purchased by the mother
B) The cornflakes purchased by the grocer
C) The corn purchased by Kellogg’s
D) All of the above.
E) None of the above.
15) Consider the following scenario: The Kellogg’s facility buys corn and makes boxes of
cornflakes. The grocer buys the boxes and places them on the shelf. A mother then buys a box
for her family. Which of the following would not be classified as a purchase of an intermediate
good?
A) The cornflakes purchased by the mother
B) The cornflakes purchased by the grocer
C) The corn purchased by Kellogg’s
D) All of the above.
16) Suppose we observe the following sequence of production and exchange: sand is used to
make silicon; silicon is used to make silicon chips; silicon chips are used to make computers;
computers are sold to retailers; retailers sell those computers to consumers. Which represents the
purchase of a final good?
A) The retailer’s purchase of computers
B) The consumer’s purchase of computers
C) Both A and B above.
D) None of the above.
17) As opposed to GDP, GNP tries to measure
A) the happiness of a nation.
B) the value of all intermediate goods produced in a nation.
C) the economic performance of a nation’s citizens regardless of where they happen to be
producing.
D) the economic performance of a country’s economy regardless of the nationality of the
producers.
18) Roughly how large is the difference between U.S. GDP and U.S. GNP?
A) Less than 0.1%
B) About 10%
C) About 20%
D) About 25%
E) About 55%
19) Gross domestic product can be thought of as a measure of
A) the national money supply.
B) national income.
C) national welfare.
D) the national value of all legal exchanges.
E) none of the above.
20) GDP will clearly increase if
A) the market value of illegal exchanges increases.
B) the money supply increases.
C) the market value of final goods and services increases.
D) taxes increase.
21) GDP is used by economists to measure
A) the market value of final goods and services produced over a particular time period.
B) the overall well-being of society enjoyed over a particular time period.
C) the overall efficiency of the macro economy over a particular time period.
D) the economic strength of the nation.
22) Does the gross domestic product account measure the market value of all goods and
services?
A) No, because that would include double-counting.
B) Yes, because the data is readily available.
C) Yes, except for illegally exchanged goods and services.
D) Yes, otherwise the gross domestic product accounting system is not a reliable indicator of
economic activity.
23) Fill in the blank: National income accountants who measure GDP try to avoid the
________ problem by only measuring the market value of all final goods and services produced
within a country.
A) double trouble
B) double indemnity
C) double counting
D) double jeopardy
E) double-your-pleasure
24) Consider the following simplified sequence of exchanges. A farmer sells wheat to a miller,
for 25 cents. The miller grinds the wheat into flour, and sells that to a baker, for 35 cents. The
baker turns the flour into a loaf of bread, which she sells to a grocer for 60 cents. The grocer then
sells you the loaf of bread for 85 cents. What can we conclude?
A) Your purchase of the bread avoided the use of a middleman.
B) The grocer’s profit means you lost on the deal.
C) GDP increases by 25 cents.
D) GDP increases by 85 cents.
E) GDP increases by $2.05.
25) Consider the following simplified sequence of exchanges. A farmer sells wheat to a miller,
for 25 cents. The miller grinds the wheat into flour, and sells that to a baker, for 35 cents. The
baker turns the flour into a loaf of bread, which she sells to a grocer for 60 cents. The grocer then
sells you the loaf of bread for 85 cents. What is the total value added?
A) 85 cents
B) $1.45
C) $1.80
D) $2.05
26) Consider the following simplified sequence of exchanges. A logger sells an oak tree to a
sawmill owner for $60. The sawmill mills it, and sells the boards to a woodworker for $80. The
woodworker makes an oak bookcase out of the boards, and sells it to a retailer for $300. The
retailer then sells you the bookcase for $500. As a result, GDP increases by
A) $200.
B) $300.
C) $440.
D) $500.
E) $940.
27) Consider the following simplified sequence of exchanges. A logger sells an oak tree to a
sawmill owner for $60. The sawmill mills it, and sells the boards to a woodworker for $80. The
woodworker makes an oak bookcase out of the boards, and sells it to a retailer for $300. The
retailer then sells you the bookcase for $500. What is the total value added?
A) $200
B) $300
C) $440
D) $500
E) $940
28) Consider the following simplified sequence of exchanges. A logger sells an oak tree to a
sawmill owner for $60. The sawmill mills it, and sells the boards to a woodworker for $80. The
woodworker makes an oak bookcase out of the boards, and sells it to a retailer for $300. The
retailer then sells you the bookcase for $250. As a result, GDP increases by
A) $50.
B) $250.
C) $550
D) $690.
E) none of the above.
29) Consider the following simplified sequence of exchanges. A logger sells an oak tree to a
sawmill owner for $60. The sawmill mills it, and sells the boards to a woodworker for $80. The
woodworker makes an oak bookcase out of the boards, and sells it to a retailer for $300. The
retailer then sells you the bookcase for $250. What is the total value added?
A) $50
B) $250
C) $550
D) $690
E) none of the above.
30) Suppose Dunkin’ Donuts buys coffee beans from a wholesaler for $1. They package the
beans up and sell them as their own “Dunkin’ Donut” beans for $10 at their store. How much
value is added to the economy?
A) $10
B) $11
C) $13
D) $15
31) An organic farm sells tomatoes for 50 cents each at the local farmers market. It only cost
them (in the accounting measure) 5 cents to produce each tomato. What happens to GDP with
the sale of each tomato?
A) It increases by 5 cents.
B) It increases by 45 cents.
C) It increases by 50 cents.
D) It increases by 55 cents.
E) It remains unchanged because organic farmers try not strive for profit.
32) Your college bookstore buys a used textbook for $25 and sells it to you for $125. What
happens to GDP?
A) It increases by $25.
B) It increases by $100.
C) It increases by $125.
D) It increases by $150.
33) With each 99 cent iTunes download, GDP
A) rises by 99 cents.
B) falls by 99 cents.
C) remains unchanged.
D) is impossible to measure with this sale because nothing physical has been produced.
34) The market price for a final good reflects
A) the objective value of the good.
B) the values added by earlier stages of production.
C) the seller’s profit.
D) the buyer’s loss.
E) both C and D.
35) Gross domestic product does not measure
A) the sum of the value added by producers at each stage of the production process.
B) the total income received by producers for the services they supply.
C) the total purchases of newly-produced final goods.
D) the total welfare of the noninstitutional population.
36) Which amount is not included in gross domestic product?
A) Payments to a physician for treatment of a respiratory condition caused by air pollution
B) The purchase price of a used car bought from a friend
C) Wages of government employees
D) Wages of people who clean up toxic chemical spills
E) Wages of people who sell used cars
37) The Bureau of Economic Analysis excludes from its calculation of GDP most of the goods
produced that are not sold in markets because
A) their production has no real costs.
B) their value is implicitly included in the prices of marketed goods.
C) there is no satisfactory way to measure their value.
D) they do not contribute to national welfare.
E) this would be inappropriate for an exchange economy.
38) This month Jones bought $10 of fresh hops for making home-brewed lager. In principle,
what happens to GDP?
A) Nothing, because it involves the production of homemade beer.
B) Nothing, because the hops are an intermediate good.
C) GDP increases by $10.
D) GDP increases by $10 as long as Jones is satisfied with the final product.
39) A ten-year-old goes to a baseball convention this week and purchases a newly-autographed
Barry Bonds baseball for $100. How would this affect GDP?
A) It wouldn’t.
B) GDP would increase by $10—reflecting the market price of the ball itself.
C) GDP would increase by $90—reflecting the market price of Bonds’ autograph.
D) GDP would increase by $100—reflecting the market price of the autographed ball.
E) GDP would have increased were the autographed ball purchased by somebody 16 years or
older.
40) A landlord rents his rat-infested apartment for $700 per month for a total of twelve months
this year. What happens to GDP?
A) It increases by $8,400.
B) It increases by the difference between the rent charged and the price of any maintenance and
repairs.
C) It decreases by $8,400.
D) Nothing.
41) Which of the following purchases is included in gross domestic product account?
A) Purchases of bibles from a Christian bookstore
B) Purchases of how-to manuals from a local hardware store
C) Purchases of anti-capitalist literature from a radical, student-managed bookstore
D) All of the above.
E) None of the above.
42) Suppose a tornado ravages a city, causing 5 million dollars in expenditures on new
construction and healthcare for the victims. Those new expenditures
A) would be added to the gross domestic product account.
B) would be subtracted from the gross domestic product account.
C) would be added to the gross domestic product account and subtracted from the national
income account.
D) would impact GDP in none of the above ways.
43) Suppose a terrorist group bombs a federal building, causing $ 1 million in expenditures on
new construction and healthcare for the victims. The new expenditures
A) would be subtracted from the gross domestic product account.
B) would be added to the gross domestic product account.
C) would be added to the gross domestic product account and subtracted from the national
income account.
D) would impact GDP in none of the above ways.
44) Suppose Amber Crombie and her husband Fitch spend $1400 this year on healthcare and
medicines for the chronic nasal congestion they suffer living next to smelly Lake Lillypad. How
does their expenditure affect GDP?
A) It doesn’t affect GDP at all.
B) GDP would decrease by $1400.
C) GDP would increase by $1400.
D) GDP would increase by $1400 only if the healthcare and medicines cured their chronic nasal
congestion; if it remains uncured, then GDP would remain unchanged.
45) You get bit by your neighbor’s dog, and incur $200 in emergency medical expenses. What
happens to GDP?
A) It increases by $200.
B) It decreases by $200.
C) It remains unchanged.
D) It depends upon whether you or the dog owner pays the medical bill.
46) If Mother Teresa had spent $190,000 on a leprosarium in Calcutta, how would her purchase
have directly affected U.S. GDP?
A) It would remain unchanged because the expenditure occurred outside the domestic economy.
B) It would remain unchanged because Mother Teresa was not acting out of her own selfish
interests.
C) It would have increased by $190,000.
D) It would have decreased by $190,000.
47) Suppose a ski resort decides to sell its lift tickets “below cost” all season long, charging $20
per day as opposed to $30 per day. In principle, how would each ticket sale affect GDP?
A) GDP would fall by $10.
B) GDP would rise by $10.
C) GDP would rise by $20.
D) GDP would rise by $30 after the appropriate cost-price adjustment has been made.
48) Suppose Ed Sike, whom you’ve met in chapter 8, loses one of his $10 bills. What directly
happens to GDP?
A) It increases by ten dollars.
B) It decreases by ten dollars.
C) It decreases by more than ten dollars due to an unavoidable multiplier process.
D) It remains unchanged.
49) Suppose a pickpocket steals your $20 bill and spends all of it on pizza and beer. What
happens to GDP?
A) GDP increases by twenty dollars.
B) GDP decreases by twenty dollars.
C) Because the positive balances out the negative, GDP remains unchanged.
D) GDP decreases because somebody has clearly been made worse off.
50) Suppose Regretta Sigh becomes the lucky winner of a $10,000,000 state lottery jackpot after
purchasing a single $1.00 lottery ticket. How does her lucky expenditure affect current GDP?
A) GDP rises by $1.00.
B) GDP rises by $9,999,999.
C) GDP rises by $10,000,000.
D) GDP rises by $10,000,001.
E) GDP rises by the present value of the total cash prize.
51) How is national output related to national income?
A) Income is greater than output during recoveries and booms.
B) Income is greater than output during recessions and depressions.
C) Output exceeds income by the amount of unsold goods.
D) They are always equal.
E) They are only equal when the economy is in equilibrium.
52) National output and national income are the same because
A) one seller’s profit is another seller’s loss.
B) one seller’s profit is another buyer’s loss.
C) the sale of goods and services generates income for the sellers.
D) the sale of goods and services generates tax revenues for the government.
53) Because the sale of goods and services generates income for the sellers,
A) GDP is unaffected by such exchanges.
B) national income will usually by greater than GDP.
C) national income will essentially equal GDP.
D) national income will increase, but GDP will decrease.
E) sales taxes must be subtracted from GDP.
54) National output and national income are essentially the same because
A) every purchase implies a sale.
B) every cost implies a benefit.
C) every profit implies a loss.
D) every gain implies a sacrifice.
55) How does the contribution to national output of a wheat farmer get counted in the gross
domestic product if the Bureau of Economic Analysis measures only the value of final goods
such as loaves of bread?
A) Agricultural production is not part of GDP.
B) It is counted separately by the Department of Internal Revenue.
C) It is included in the cost of materials purchased by those who sell loaves of bread.
D) It is not counted, which results in an underestimation of GDP.
E) Wheat is also a final good because it is more ultimate than bread.
56) Total expenditures for new final goods equals total output of new final goods in the income
and product accounts
A) because no one will produce what cannot be sold.
B) because prices will rise or fall to clear the market.
C) because unsold goods are assumed to be purchased by the firms that produced them.
D) only at equilibrium.
E) when all goods are sold in the year they are produced.
57) Suppose Ford Motor Company produced and sold $50 million 2015 model-year pickup
trucks during the last half of 2014. How would this affect GPD?
A) 2014 GDP would remain unchanged, and 2015 GDP would rise by $50 million.
B) 2014 GDP would rise by $50 million, and 2015 GDP would not be affected.
C) Both 2014 and 2015 GDP would rise by $25 million.
D) Trick question: 2015 model-year vehicles can’t be produced and sold in 2014.
58) Fred buys a fresh-off-the-assembly-line car from Wee-Rob-U Auto Sales. He paid $27,500,
even though Wee-Rob-U acquired it for $23,000. What happens to this year’s GDP?
A) Nothing.
B) It increases by $4,500.
C) It increases by $23,000.
D) It increases by $27,500.
E) It decreases by $4,500, because the dealer robbed Fred.
59) This year Gus purchased a used 1972 vehicle from Wee-Rob-U Auto Sales. The dealer paid
$500 for it yesterday, and sold it to Gus for $3500. In principle, what happens to GDP?
A) Nothing, because the vehicle was already accounted for in 1972.
B) Nothing, because Gus was ripped off.
C) It increases by $3000.
D) It increases by $3,500.
E) It increases by $6,500.
60) Clarity Dence pays $375 for a used acoustic guitar from the local music instrument dealer.
The dealer himself purchased it for $150. In principle, how would this exchange affect GDP?
A) Nothing happens to GDP, because the guitar is a used good.
B) GDP increases by $150.
C) GDP increases by $225.
D) GDP increases by $375.
E) GDP increases by $525.
61) Per capita GDP is simply GDP divided by
A) the population.
B) the price level.
C) the inflation rate.
D) the consumer price index.
E) none of the above.
62) GDP divided by the population gives us
A) the price level.
B) the GDP deflator.
C) per capita GDP.
D) real GDP.
E) none of the above.
63) Other things constant, if the population decreases and GDP remains unchanged,
A) real GDP necessarily decreases.
B) per capita GDP necessarily increases.
C) per capita GDP necessarily decreases.
D) real GDP necessarily increases.
64) An increase in nominal gross domestic product necessarily entails an increase in
A) both real output and the price level.
B) either real output or the price level (or both).
C) real output and employment.
D) the price level and employment.
65) A decrease in nominal gross domestic product necessarily entails a decrease in
A) both real output and the price level.
B) either real output or the price level (or both).
C) real output and employment.
D) the price level and employment.
66) Suppose the price level is unchanged and real GDP rises. Then
A) nominal GDP must decrease.
B) nominal GDP must remain unchanged.
C) nominal GDP must increase.
D) none of the above are true.
67) Suppose the price level increases and real GDP remains the same. Then
A) nominal GDP must decrease.
B) nominal GDP must remain unchanged.
C) nominal GDP must increase.
D) none of the above are true.
68) Suppose the price level decreases and real GDP remains the same. Then
A) nominal GDP must decrease.
B) nominal GDP must remain unchanged.
C) nominal GDP must increase.
D) none of the above are true.
69) Suppose the price level is unchanged and real GDP decreases. Then
A) nominal GDP must decrease.
B) nominal GDP must remain unchanged.
C) nominal GDP must increase.
D) none of the above are true.
70) Can nominal GDP increase even when real GDP decreases?
A) No, it is not possible.
B) Yes, but only if the price level decreases.
C) Yes, but only if the price level increases.
D) Yes, but only if the price level remains unchanged.
71) Can nominal GDP decrease when the price level remains the same?
A) No, it is not possible.
B) Yes, but only if real GDP decreases.
C) Yes, but only if real GDP increases.
D) Yes, but only if real GDP remains the same as well.
72) What explains any divergence between nominal and real GDP?
A) Constant prices
B) Changing prices
C) Constant output
D) Changing output
E) None of the above.
73) If we knew that nominal GDP was currently $7500 billion, and that current GDP in dollars of
1992 purchasing power was $5000 billion, what would we know about the GDP deflator?
A) It would be .667.
B) It would be 150.
C) Nothing until we had current information on the price level, such as consumer price index
figures.
D) Only that a dollar buys more currently than it bought in 1992.
E) Only that a dollar currently buys less than it bought in 1992.
74) Real GDP is
A) nominal GDP minus everything used to produce GDP.
B) nominal GDP minus services.
C) nominal GDP plus capital goods production.
D) nominal GDP valued at base-year prices.
E) the material component of ideal GDP.
75) Real GDP is
A) the most reliable measure of the overall welfare of the citizens in the domestic economy.
B) nominal GDP plus inflation.
C) always equal to national income, but not necessarily equal to national output.
D) all of the above.
E) none of the above.
76) Nominal GDP is
A) real GDP plus an expected inflationary premium.
B) real GDP multiplied by the implicit GDP deflator.
C) real GDP minus the implicit GDP deflator.
D) real GDP minus total tax revenues.
E) none of the above.
77) Which of the following accurately measures the welfare or happiness of society?
A) Nominal GDP
B) Real GDP
C) Both Nominal GDP and Real GDP
D) None of the above.
78) Which of the following allows an economist to conclude that the welfare or happiness of
society as a whole is clearly increasing?
A) A decrease in nominal GDP
B) A decrease in real GDP
C) An increase in nominal GDP
D) An increase in real GDP
E) None of the above.
79) What can economists conclude if they observe an increase in real GDP?
A) The price level must have fallen.
B) The real output of final goods and services must have risen.
C) National welfare must have risen.
D) Nominal GDP must have risen.
E) All of the above.
80) In the economic way of thinking, a rise in the real output of final goods and services can be
associated with
A) a fall in the price level.
B) a rise in nominal GDP.
C) a rise in the price level.
D) a fall in nominal GDP.
E) any of the above.
81) The implicit GDP deflator is
A) nominal GDP divided by real GDP.
B) nominal GDP times real GDP.
C) real GDP divided by nominal GDP.
D) the zero economic growth society.
82) If the GDP deflator rises from one year to the next, we know that
A) economic growth has occurred.
B) everyone in the economy is at least slightly worse off.
C) real GDP has declined.
D) the amount of double-counting in GDP has increased.
E) the average money price of the goods included in GDP has risen.
83) Inflation is
A) a decline in the total purchasing power of an economy.
B) a decrease in the amount of other goods that a unit of money will purchase.
C) a fall in people’s real incomes.
D) an increase in the cost of living.
E) all of the above.
84) Inflation can be defined as
A) a sustained rise in real output.
B) a sustained rise in nominal wages.
C) a sustained rise in the price level.
D) a sustained rise in the purchasing power of money.
85) Fill in the blanks: ________ is defined as a sustained ________ in the price level.
A) Inflation; fall
B) Deflation; fall
C) Deflation; rise
D) Answers A and C above are both true.
86) Fill in the blanks: ________ is defined as a sustained ________ in the purchasing power of
money.
A) Inflation; fall
B) Deflation; fall
C) Inflation; rise
D) Answers B and C above are both true.
87) An economy that experiences a rise in the price level over two consecutive quarters
necessarily experiences
A) a recession.
B) deflation.
C) disinflation.
D) none of the above.
88) An economy that experiences a fall in the price level over two consecutive quarters
necessarily experiences
A) a recession.
B) inflation.
C) deflation.
D) disinflation.