151. If the nominal interest rate is 2% and the real interest rate is 1%, inflation is:
A. -1%.
B. 0%
C. 1%.
D. 2%.
152. If the real interest rate is 2% and inflation rate is 1%, what is the nominal interest rate?
A. 0%.
B. 1%
C. 2%.
D. 3%.
153. The value of the productive capacity of the assets of an economy, measured by the goods
and services it can produce both now and in the future rather than by the money prices of the
assets, is called:
A. gross private domestic investment.
B. net investment.
C. real wealth.
D. nominal wealth.
154. Which of the following is most likely to be asset price inflation?
A. A rise in the current price of assets caused by expectation of higher asset prices in the future
B. A rise in the current price of assets caused by an increase in the riskiness of financial assets
C. A rise in the price of assets caused by an increase in the underlying productivity of those
assets
D. A rise in the current price of assets caused by a shift in people’s time preference
155. If the market prices of publicly traded stocks and bonds rise, while the productive capacity
of those assets has not increased, which of the following has occurred?
A. Nominal wealth has increased
B. Real wealth has increased
C. Nominal wealth has increased, but real wealth has decreased
D. Tangible wealth must have declined in value
156. Suppose real estate prices rise by 40% in a four-year period, while goods and services rise
in price by 8% in the same time period. Population, the stock of houses, and other variables
important to real estate prices have remained almost constant. Which of the following is most
likely?
A. Real wealth has increased
B. Nominal wealth has declined
C. Asset inflation has occurred
D. GDP has increased by about 40% over the four-year period
157. If nominal wealth increases faster than real wealth:
A. real wealth must eventually decline.
B. real wealth will eventually rise faster in order to catch up.
C. asset inflation has occurred.
D. society is better off than if nominal wealth growth had matched real wealth growth.
158. When real wealth increases:
A. the economy can produce more goods and services than it did before.
B. asset inflation results as market prices rise.
C. society is worse off because asset prices have risen.
D. housing and other assets will experience a “bubble” in prices.
159. Day laborers who are in the United States illegally and work off the books are:
A. part of the non-market transactions that are omitted from GDP.
B. part of the underground economy which is not measured in GDP.
C. one of the items included in the genuine progress indicator.
D. production by non-citizens, which is included in GNP but not in GDP.
160. When someone stops mowing his lawn and hires a teenager for cash that is unreported,
what happens to GDP?
A. It rises because a non-market activity is now a legal market activity.
B. It rises because GDP includes the value of the additional leisure time that dad gets by hiring a
non-citizen.
C. It falls because production by non-citizens is counted in their home country, not in the United
States.
D. It probably does not change. Production has shifted from non-market to the underground
economy and neither is counted.
161. When someone stops mowing his own lawn and hires a lawn service to mow it for him,
what happens to GDP? (Assume that the lawn service reports its income to the IRS.)
A. Nothing; the same lawns are being mowed, so production has not changed.
B. It rises because GDP includes the value of the additional leisure time that the person gets by
hiring someone else.
C. It rises because when the person mows his own lawn it is non-market production that is not
counted.
D. It falls because hiring a lawn service reduced the amount of other goods that the person could
purchase.
162. One of the limitations of aggregate accounting is that:
A. it includes market transactions that should be excluded.
B. it doesn’t take depreciation into account.
C. it measures market activity, not social welfare.
D. there isn’t enough data available in most developed countries to have national income
accounts.
163. If economic activity increases, it follows that economic welfare:
A. increases as more goods and services become available.
B. decreases as more resources are depleted.
C. does not change since it does not depend on the level of economic activity.
D. may increase, decrease, or remain unchanged depending on the nature of the increase in
economic activity.
164. GDP is a good measure of:
A. relative welfare in various countries.
B. relative prices in various countries.
C. relative living standards in various countries.
D. market activities at market prices.
165. Which of the following economic activities would be included in U.S. gross domestic
product (GDP)?
A. Illegal drug sales
B. Pure services, such as haircuts
C. Illegal prostitution
D. Work performed and paid for in cash to avoid income tax
166. The size of underground economies differs across countries. In Greece it has been
estimated to be as big as 30% of GDP, in Spain 25%, in Italy 20%, and in the United States,
about 7%. Given this information, official GDP measures understate true economic activity the
most in:
A. Greece.
B. United States.
C. Italy.
D. Spain.
167. Real GDP can be used to accurately measure:
A. economic welfare over time.
B. the size of an economy’s underground economy.
C. the change in market production over time.
D. the change in market prices over time.
168. The distinction between consumption and investment is:
A. that only households consume and only businesses invest.
B. somewhat arbitrary, since investment includes housing investment, which does not increase
future productive capacity.
C. that investment always increases future productive capacity, while consumption does not.
D. arbitrary, since the same expenditure may be counted as a consumption item in one year and
an investment in another.
169. A genuine progress indicator (GPI) attempts to:
A. adjust GDP so that it more accurately measures changes in economic activity.
B. develop a new measure that focuses entirely on non-economic activity.
C. not incorporate any measure of economic activity.
D. adjust GDP so that it reflects more than just the level of economic activity.
170. In recent years, many environmentalists have proposed changes to GDP accounting that
would take into account the impact of economic activity on the environment. Which of the
following economic activities that affect the environment is currently included in GDP?
A. The effect of the depletion of oil reserves on energy expenditures
B. The effect of deforestation on global climate change and the income of future generations
C. The impact of corporate pollution on health care spending
D. Expenditures on pollution control technology
171. The genuine progress indicator provides a measure of social progress that:
A. ignores economic activity.
B. focuses entirely on economic activity.
C. is explicitly based on value judgments.
D. is explicitly not based on value judgments.
172. The World Values Survey, a group of international social scientists, who ranks the well-
being of society based on social indicators ranks Puerto Rico higher than the U.S. This approach
to measuring well-being is similar to the approach that the text calls:
A. nominal gross domestic product.
B. real gross domestic product.
C. disposable personal income.
D. genuine progress indicator.
173. Bhutan’s government publishes a “gross national happiness” measure that embraces
everything from protecting national resources to promoting a strong national culture and
ensuring democratic government. This approach to measuring progress is similar to the approach
that the text calls:
A. nominal gross domestic product.
B. real gross domestic product.
C. disposable personal income.
D. genuine progress indicator.
174. Why are economists so often skeptical of replacing GDP as a measure of well-being?
A. Economists see little wrong, other than measurement errors, in the way GDP is computed.
B. The alternatives involve value judgments about social goals that some or many economists
find controversial.
C. Economists think that the alternatives cannot take changes in price level into account in an
acceptable manner.
D. Economists believe that only market activity can be and should be measured.
175. Per capita gross domestic product (GDP) in the United States is roughly:
A. $15,000.
B. $45,000.
C. $60,000.
D. $75,000.
176. In comparing the per capita GDPs of two countries, purchasing power parity adjusts for
differences in:
A. exchange rates.
B. non-market activities.
C. populations.
D. prices.
177. Robert Summers and Alan Heston published data for 130 countries that used purchasing
power parity, rather than market exchange rates, to compare GDP across countries. As a result,
measured per capita incomes of developing countries rose relative to per capita incomes in
developed countries. This is most likely because:
A. prices of standard goods in developing countries are generally higher than those in developed
countries.
B. prices of standard goods in developing countries are generally lower than those in developed
countries.
C. non-market activity is more extensive in developing countries than in developed countries.
D. non-market activity is less extensive in developing countries than in developed countries.
178. Using purchasing power parity instead of exchange rates to calculate output will most
likely:
A. increase the relative value of output in developing countries.
B. lower the relative value of output in developing countries.
C. leave the relative value of output in developing countries unchanged.
D. show that prices in developing countries are higher than prices in developed countries.
179. If you know that a meal costing $40 in the United States would cost $2 in Bangladesh and
this is representative of the relative prices of most goods, you also know that:
A. purchasing power parity would decrease comparative GDP for Bangladesh.
B. purchasing power parity would increase comparative GDP for Bangladesh.
C. GDP using market prices would overstate the value of output for Bangladesh.
D. GDP using market prices would overstate the value of output for the United States.
180. Comparisons of per capita gross domestic product (GDP) between countries:
A. do not necessarily provide a good measure of relative living standards.
B. provide an accurate gauge by which to judge living standards.
C. provide information about both market and non-market productive capacities.
D. are misleading because GDP isn’t always consumption plus investment plus government
spending plus net exports.
181. If the prices used in two countries are exactly the same, then a comparison of the per capita
GDPs of the two countries provides:
A. no insight into living standards.
B. some insight into living standards depending on the extent of non-market activities in each
country.
C. some insight into living standards depending on the accuracy of purchasing power parity.
D. an exact comparison of living standards.
182. Comparisons of GDP levels across countries are least accurate when:
A. non-market activities are a small part of total economic activity.
B. prices differ across countries.
C. prices differ across countries and non-market activities are a large part of total economic
activity.
D. purchasing power parity prevails.