Chapter 2 TB (1)

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1.The economic statistic used to measure the level of prices is the:A) GDP.B) CPI.C) GNP.D) real GDP.

.The statistic used !" economists to measure the value of economic output is the:A) CPI.B) GDP.C) GDP deflator.D) unemplo"ment rate.

#.In a closed econom"$ GDP is all of the follo%in& except the total:A) e'penditure of ever"one in the econom".

B) income of ever"one in the econom".C) e'penditure on the econom"(s output of &oods and services.D) output of the econom".

.In a closed econom"$ the total income of ever"one in the econom" is e'actl" e*ual to thetotal:

A) e'penditure on the econom"(s output of &oods and services.B) consumption e'penditures of ever"one in the econom".C) e'penditures of all !usinesses in the econom".D) &overnment e'penditures.

+.A closed econom"(s ,,,,,, e*uals its ,,,,,,.A) consumption- incomeB) consumption- e'penditure on &oods and servicesC) e'penditure on &oods- e'penditures on servicesD) income- e'penditure on &oods and services

. All of the follo%in& are measures of GDP except the total:A) e'penditures of all !usinesses in the econom".

B) income from all production in the econom".C) e'penditures on all final &oods produced.D) value of all final production.

/.It is a national income accountin& rule that all e'penditure on purchases of products isnecessaril" e*ual to:

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A) profits of firms.B) %a&es of emplo"ees.C) income of the producers of the products.D) income of emplo"ees.

0.T%o e*uivalent %a"s to vie% a closed econom"(s GDP are as the:A) total pa"ments made to all %orers in the econom" or the total profits of all firms

and !usinesses in the econom".B) total e'penditures on all &oods produced in the econom" or the total income earned

from producin& all services in the econom".C) total profits of all firms and !usinesses in the econom" or the total consumption of

&oods and services !" all households in the econom".D) total income of ever"one in the econom" or the total e'penditure on the econom"(s

output of &oods and services.

2.In the circular flo% model$ the flo% of dollars from firms to households is paid ,,,,, andthe flo% of dollars from households to firms is paid ,,,,,.

A) as %a&es and profits- for &oods and servicesB) for value added- as imputed valuesC) in current dollars- in constant dollarsD) as interest and dividends- for depreciation and ta'es

13.4hich of the follo%in& is a flo% varia!le5A) %ealth

B) the num!er unemplo"edC) &overnment de!tD) income

11.4hich of the follo%in& is a stoc varia!le5A) %ealthB) consumptionC) investmentD) income

1. All of the follo%in& are a stoc except :A) a consumer(s %ealth.B) the &overnment !ud&et deficit.C) the num!er of unemplo"ed people.D) the amount of capital in the econom".


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1#. All of the follo%in& are a flo% except :A) the num!er of ne% automo!ile purchases.B) the num!er of people losin& their 6o!s.C) !usiness e'penditures on plant and e*uipment.

D) the &overnment de!t.

1.The amount of capital in an econom" is a7n) ,,,,,, and the amount of investment is a7n) ,,,,,,.

A) flo%- stoc B) stoc- flo%C) final &ood- intermediate &oodD) intermediate &ood- final &ood

1+.The maret value of all final &oods and services produced %ithin an econom" in a &iven period is called:A) industrial production.B) &ross domestic product.C) the GDP deflator.D) &eneral dura!le purchases.

1.GDP is the maret value of all ,,,,,, &oods and services produced %ithin an econom"in a &iven period.

A) used

B) intermediateC) consumer D) final

1/.To compute the value of nominal GDP:A) &oods and services are valued at maret prices.B) the sale of used &oods is included.C) production for inventor" is not included.D) &oods and services are valued !" %ei&ht.

10.Assume that total output consists of apples and oran&es and that apples cost 81 eachand oran&es cost 83.+3 each. In this case$ the value of GDP is:

A) 13 pieces of fruit.B) 8/.C) 80.D) 813.


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12. All of the follo%in& transactions that too place in 31 %ould !e included in GDP for31 except the purchase of a:

A) !oo printed in 31$ entitled The Year 3000.

B) 331 9eep Cheroee.C) "ear 31+ calendar printed in 31.D) ticet to see the movie 2001.

3.ince GDP includes onl" the additions to income$ not transfers of assets$ ,,,,,, are not included in the computation of GDP.

A) final &oodsB) used &oodsC) consumption &oodsD) &oods produced for inventor"

1.4hen a firm sells a product out of inventor"$ GDP:A) increases.B) decreases.C) is not chan&ed.D) increases or decreases$ dependin& on the "ear the product %as produced.

.4hen a firm sells a product out of inventor"$ investment e'penditures ,,,,,, andconsumption e'penditures ,,,,,,.

A) increase- decreaseB) decrease- increaseC) decrease- remain unchan&edD) remain unchan&ed- increase

#.Assume that a !aer" hires more %orers and pa"s them %a&es and that the %orers produce more !read. GDP increases in all of the follo%in& cases except %hen the !read:

A) is sold to households.B) is stored a%a" for later sale.C) &ro%s stale and is thro%n a%a".

D) is sold to other firms.

.4hen !read is !aed !ut put a%a" for later sale$ this is called:A) %aste.B) savin&.C) fi'ed investment.


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D) investment in inventor".

+.Assume that a rancher sells a ;cDonald(s *uarter<pound of meat for 81 and that;cDonald(s sells "ou a ham!ur&er made from that meat for 8. In this case$ the value

included in GDP should !e:A) 83.+3.B) 81.C) 8.D) 8#.

.Assume that a tire compan" sells tires to an automo!ile compan" for 833$ anothercompan" sells a compact disc pla"er for 8+33$ and the automo!ile compan" puts all ofthese items in or on a car that it sells for 83$333. In this case$ the amount from thesetransactions that should !e counted in GDP is:

A) 83$333.B) 83$333 less the automo!ile compan"(s profit on the car.C) 83$233.D) 83$233 less the profits of all three companies on the items that the" sold.

/.The value added on an item produced means:A) a firm(s profits on the item sold.B) the value of the la!or inputs in the production of an item.C) the value of a firm(s output less the value of its costs.D) the value of a firm(s output less the value of the intermediate &oods that the firm

purchases.

0.Assume that a firm !u"s all the parts that it puts into an automo!ile for 813$333$ pa"s its%orers 813$333 to fa!ricate the automo!ile$ and sells the automo!ile for 8$333. In thiscase$ the value added !" the automo!ile compan" is:

A) 813$333.B) 81$333.C) 83$333.D) 8$333.

2.In computin& GDP$A) e'penditures on used &oods are included.B) production added to inventories is e'cluded.C) the amount of production in the under&round econom" is imputed.D) the value of intermediate &oods is included in the maret price of the final &oods.


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#3.To avoid dou!le countin& in the computation of GDP$ onl" the value of ,,,,,, &oods areincluded.

A) finalB) used

C) intermediateD) investment

#1.Imputed values included in GDP are the:A) maret prices of &oods and services.B) estimated value of &oods and services that are not sold in the maretplace.C) price of &oods and services measured in constant prices.D) price of &oods and services measured in current prices.

#.An e'ample of an imputed value in the GDP is the:A) value<added of meals cooed at home.B) housin& services en6o"ed !" homeo%ners.C) services of automo!iles to their o%ners.D) value of ille&al dru&s sold.

##.In principle$ the GDP accounts should = !ut do not = have an imputation for:A) housin& services en6o"ed !" homeo%ners.B) rental services of automo!iles driven !" o%ners.C) meals cooed in restaurants.

D) housin& services en6o"ed !" renters.

#.The under&round econom":A) is included in the latest GDP accounts.B) includes onl" ille&al activities.C) includes domestic %orers for %hom emplo"ment insurance contri!utions are not

collected.D) e'cludes the ille&al dru& trade.

#+.>eal GDP is measured in ,,,,, dollars ,,,, time.A) current- at a point inB) current- over a period of C) constant- at a point inD) constant- over a period of


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#.Nominal GDP is measured in ,,,,, dollars ,,,,, time.A) current- at a point inB) current- over a period of C) constant- at a point inD) constant- over a period of

#/.Nominal GDP means the value of &oods and services is measured in ,,,,,, prices.A) currentB) realC) constantD) avera&e

#0.>eal GDP means the value of &oods and services is measured in ,,,,,, prices.A) current

B) actualC) constantD) avera&e

#2.Assume that apples cost 83.+3 in 33 and 81 in 332$ %hereas oran&es cost 81 in 33and 81.+3 in 332. If apples %ere produced in 33 and + in 332$ %hereas # oran&es%ere produced in 33 and in 332$ then real GDP 7in 33 prices) in 332 %as:

A) 8+.B) 8.+3.C) 82.+3.

D) 811.

3.The !est measure of the economic satisfaction of the mem!ers of a societ" is:A) nominal GDP.B) real GDP.C) the rate of inflation.D) the value of corporate profits.

1.If nominal GDP in 332 e*uals 81. trillion and real GDP in 332 e*uals 81.1 trillion$

%hat is the value of the GDP deflator5A) 3./2B) 1.3#C) 1./D) 1.#3


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.If the GDP deflator in 332 e*uals 1.+ and nominal GDP in 332 e*uals 81.+ trillion$%hat is the value of real GDP in 3325

A) 81. trillionB) 81.+ trillionC) 81.+ trillion

D) 81.0/+ trillion

#.The GDP deflator is e*ual to:A) the ratio of nominal GDP to real GDP.B) the ratio of real GDP to nominal GDP.C) real GDP minus national GDP.D) nominal GDP minus real GDP.

.Assume that apples cost 83.+3 in 33 and 81 in 332$ %hereas oran&es cost 81 in 33

and 81.+3 in 332. If apples %ere produced in 33 and + in 332$ %hereas # oran&es%ere produced in 33 and + in 332$ then the GDP deflator in 332$ usin& a !ase "ear of33$ %as appro'imatel":

A) 1.+.B) 1./.C) 1.2.D) .3.

+.If nominal GDP &re% !" + percent and real GDP &re% !" # percent$ then the GDPdeflator &re% !" appro'imatel" ,,,,,, percent.

A) B) #C) +D) 0

.If nominal GDP increased !" + percent and the GDP deflator increased !" # percent$ thenreal GDP ,,,,,, !" ,,,,,, percent.

A) increased - B) decreased- C) increased- 0

D) decreased- 0

/.Nominal GDP measures the value of &oods and services in ,,,,,, prices$ %hile realGDP measures the value of &oods and services in ,,,,,, prices.

A) forei&n- domesticB) domestic- forei&n


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C) current- constantD) constant- current

0.>eal GDP is a !etter measure of economic %ell<!ein& than nominal GDP$ !ecause real

GDP:A) e'cludes the value of &oods and services e'ported a!oard.B) includes the value of &overnment transfer pa"ments.C) measures chan&es in the *uantit" of &oods and services produced !" holdin& prices

constant.D) ad6usts the value of &oods and services produced for chan&es in the forei&n

e'chan&e rate.

2.Chain<%ei&hted measures of real GDP mae use of prices from:A) an unchan&in& !ase "ear.

B) a continuousl" chan&in& !ase "ear.C) a !ase "ear that is chan&ed appro'imatel" ever" + "ears.D) a !ase "ear that is chan&ed appro'imatel" ever" 13 "ears.

+3.A chain<%ei&hted measure of real GDP is an improvement over traditional measures !ecause the prices used to compute real GDP are:

A) never ver" out of date.B) al%a"s from the same !ase "ear.C) imputed.D) chained to the CPI.

+1.The national income accounts identit"$ for an open econom"$ is:A) Y ? C @ I @ G NX .

B) Y ? C @ I @ G @ NX .

C) Y ? C @ I @ G.

D) Y ? C @ I G.

+.If GDP 7measured in !illions of current dollars) is 81$33$ consumption is 8021$investment is 8#10$ and &overnment purchases are 8#/$ then net e'ports are:

A) 81.B) 81.C) 8.D) 8.

+#.If GDP 7measured in !illions of current dollars) is 81$33$ consumption is 8021$


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investment is 8#10$ and net e'ports are 8$ then &overnment purchases are:A) 8#/.B) 81$##.C) 8#21.D) 81$+0.

+.If real GDP &re% !" percent and population &re% !" percent$ then real GDP per person &re% !" appro'imatel" ,,,,,, percent.

A) B) #C) D) 0

++.In the national income accounts$ consumption e'penditures include all of the follo%in&

except household purchases of:A) dura!le &oods.B) nondura!le &oods.C) ne% residential housin&.D) services.

+.In the national income accounts$ the purchase of dura!les$ nondura!les$ and services !"households are classified as:

A) consumption.B) investment.

C) &overnment purchases.D) net e'ports.

+/.If total consumption 7measured in !illions of current dollars) e*uals 8#+./$ consumptionof dura!le &oods is 80$ and consumption of nondura!le &oods is 8112.$ thenconsumption of services is:

A) 81/..B) 8.#.C) 830.#.D) 8120.#.

+0.In the national income accounts$ &oods !ou&ht for future use are classified as %hich t"peof e'penditure5

A) servicesB) investmentC) &overnment purchases


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D) net e'ports

+2.If total investment 7measured in !illions of current dollars) e*uals 8/1$ !usiness fi'edinvestment is 8+$ and residential fi'ed investment is 8$ then inventor" investment

is:A) 8+.B) 8+.C) 81+.D) 81+.

3.In the national income accounts$ all of the follo%in& are classified as &overnment purchases except :

A) pa"ments made to the recipients of the pu!lic pension s"stem.B) services provided !" police officers.

C) purchases of militar" hard%are.D) services provided !" senators in tta%a.

1.In the national income accounts$ &overnment purchases are &oods and services purchased !":

A) the federal &overnment.B) the federal and provincial &overnments.C) provincial and municipal &overnments.D) federal$ provincial$ and municipal &overnments.

.In the national income accounts$ net e'ports e*ual:A) e'ported &oods minus imported &oods.B) e'ported &oods and services minus imported &oods and services.C) e'ported &oods minus imported services.D) e'ported &oods and services plus imported &oods and services.

#.If GDP 7measured in !illions of current dollars) is 8+$+ and the sum of consumption$investment$ and &overnment purchases is 8+$2$ %hile e'ports e*ual 8/#$ imports are:

A) 8/#.

B) 8/#.C) 8/3.D) 8/3.

. All of the follo%in& actions are investments in the sense of the term used !"macroeconomists except :


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A) IB;(s !uildin& a ne% factor".B) corner cand" store(s !u"in& a ne% computer.C) 9ohn impson(s !u"in& a ne%l" constructed home.D) andra 4u(s !u"in& 133 shares of IB; stoc.

+.The investment component of GDP includes all of the follo%in& except :A) purchases of corporate stoc.B) spendin& on ne% plants and e*uipment.C) purchases of ne% housin& !" households.D) chan&es in !usiness inventories.

.In 31$ the nominal GDP of Canada totaled a!out:A) 81 !illion.B) 813 trillion.

C) 81$33 !illion.D) 81+3 trillion.

/.In 31$ nominal GDP per person in Canada %as appro'imatel":A) 81$333.B) 8$333.C) 8#+$333.D) 8/$333.

0.In 31 in Canada$ the percenta&e of GDP that %as spent on consumption %asappro'imatel":A) + percent.B) +3 percent.C) ## percent.D) 1 percent.

2.In 31 in Canada$ total &overnment purchases per person 7in current dollars) amountedto appro'imatel":

A) 8$333.

B) 811$333.C) 81+$333.D) 8+$333.

/3.In 31$ Canadian spent a!out ,,,,, percent of per<capita GDP on imports.A) 1


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B) C) #D)

/1.GNP e*uals GDP ,,,,,, income earned domesticall" !" forei&ners ,,,,,, income thatnationals earn a!road.A) plus- plusB) minus- minusC) minus- plusD) plus- minus

/.Net national product e*uals GDP:A) plus net investment.B) minus net investment.

C) plus depreciation.D) minus depreciation.

/#.As a percenta&e of GNP 7in 31)$ depreciation 7also called capital consumptionallo%ances) amounts to appro'imatel" ,,,,,, percent.

A) 3B) 1C) 0D) #

/.National income e*uals net national product:A) minus depreciation.B) plus depreciation.C) minus indirect !usiness ta'es.D) plus indirect !usiness ta'es.

/+.The lar&est component of national income is:A) corporate profits.B) compensation of emplo"ees.

C) proprietors( incomes.D) net interest.

/.Disposa!le personal income:A) is computed !" su!tractin& personal ta' and nonta' pa"ments from personal incomeB) is &enerall" &reater than personal income.


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C) includes corporate profits !ut not dividends.D) does not include &overnment transfers to individuals.

//.Accordin& to the usual seasonal pattern of the Canadian econom"$ GDP is hi&hest in the

*uarter of the "ear that includes:A) 9anuar"$ e!ruar"$ and ;arch.B) April$ ;a"$ and 9une.C) 9ul"$ Au&ust$ and eptem!er.D) cto!er$ Novem!er$ and Decem!er.

/0.The CPI is determined !" computin&:A) an avera&e of prices of all &oods and services.B) the price of a !aset of &oods and services that chan&es ever" "ear$ relative to the

same !aset in a !ase "ear.

C) the price of a fi'ed !aset of &oods and services$ relative to the price of the same !aset in a !ase "ear.D) nominal GDP relative to real GDP.

/2.Prices of items included in the CPI are:A) avera&ed %ith the price of ever" item %ei&hted e*uall".B) %ei&hted accordin& to amount of the item produced in GDP.C) %ei&hted accordin& to *uantit" of the item purchased !" the t"pical household.D) chained to the !ase "ear !" the "ear<to<"ear &ro%th rate of the item.

03.Assume that apples cost 83.+3 in 33 and 81 in 332$ %hereas oran&es cost 81 in 33and 83.+3 in 332. If 13 apples and + oran&es %ere purchased in 33$ and + apples and13 oran&es %ere purchased in 332$ the CPI for 332$ usin& 33 as the !ase "ear$ is:

A) 3./+.B) 3.03.C) 1.D) 1.+.

01.The core inflation rate:

A) measures the chan&e in producer prices.B) is measured usin& a Paasche inde'.C) e'cludes food and ener&" prices.D) includes the price of e'ports and the price of imports.

0.;easurin& the rate of inflation usin& a maret !aset that e'cludes food and ener&"


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prices is preferred !" some anal"sts !ecause this measure$ called core inflation:A) provides a real$ rather than a nominal$ rate of inflation.B) &ives a !etter measure of on&oin&$ sustained price chan&es.C) is more consistent %ith measures of inflation used in other countries.D) fluctuates more than measures of inflation that include food and ener&" prices.

0#.An increase in the price of &oods !ou&ht !" firms and the &overnment %ill sho% up in:A) the CPI !ut not in the GDP deflator.B) the GDP deflator !ut not in the CPI.C) !oth the CPI and the GDP deflator.D) neither the CPI nor the GDP deflator.

0.An increase in the price of imported &oods %ill sho% up in:A) the CPI !ut not in the GDP deflator.

B) the GDP deflator !ut not in the CPI.C) !oth the CPI and the GDP deflator.D) neither the CPI nor the GDP deflator.

0+.nlie the GDP deflator$ the CPI includes the prices of:A) &oods purchased !" firms.B) &oods purchased !" &overnments.C) e'ported &oods.D) imported &oods.

0.Assume that the maret !aset of &oods and services purchased in 33 !" the avera&efamil" in Canada costs 81$333 in 33 prices$ %hereas the same !aset costs 81$333 in332 prices. Eo%ever$ the !aset of &oods and services actuall" purchased !" the avera&efamil" in 332 costs 83$333 in 332 prices$ %hereas this same !aset %ould have cost81+$333 in 33 prices. Given this data$ a Faspe"res inde' of 332 prices %ould !e:

A) 1.3+.B) appro'imatel" 1.3/.C) appro'imatel" 1.##.D) 1.+3.

0/.Assume that the maret !aset of &oods and services purchased in 33 !" the avera&efamil" in Canada costs 81$333 in 33 prices$ %hereas the same !aset costs 81$333 in31 prices. Eo%ever$ the !aset of &oods and services actuall" purchased !" the avera&efamil" in 31 costs 83$333 in 31 prices$ %hereas this same !aset %ould have cost81+$333 in 33 prices. Given this data$ a Paasche inde' of 31 prices relative to 33 prices %ould !e:


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A) 1.3+.B) appro'imatel" 1.3/.C) appro'imatel" 1.##.D) 1.+3.

00.The CPI is a:A) Faspe"res price inde'.B) Paasche price inde'.C) Faspe"res *uantit" inde'.D) Paasche *uantit" inde'.

02.The GDP deflator is a:A) Faspe"res price inde'.B) Paasche price inde'.

C) Faspe"res *uantit" inde'.D) Paasche *uantit" inde'.

23.4hen prices of different &oods are increasin& !" different amounts$ the price inde' that%ill rise the fastest is:

A) isher(s ideal inde'.B) the CPI.C) the GDP deflator.D) a Paasche inde'.

21.conomists have estimated that the CPI ,,,,,, inflation !" appro'imatel" ,,,,,, percenta&e point7s) per "ear.

A) overestimates- 3.+B) overestimates- .3C) underestimates- 3.+D) underestimates- .3

2.The num!er of households intervie%ed in the monthl" la!our force surve" conducted !"tatistics Canada is appro'imatel":

A) $33.B) +$33.C) $333.D) +$333.

2#.Accordin& to the definition used !" tatistics Canada$ a person is not in the la!our force


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if that person:A) is &oin& to school.B) is temporaril" a!sent from a 6o! !ecause of illness.C) has !een temporaril" laid off.D) is out of a 6o! and looin& for %or durin& the previous four %ees.

2.Accordin& to the definition used !" tatistics Canada$ people are considered to !eunemplo"ed if the":

A) are out of a 6o! !ut not looin& for %or.B) retired from the la!our force.C) have found a 6o! !ut are %aitin& for it to start.D) are in the militar" service.

2+.The la!our force e*uals the:

A) adult population.B) num!er of emplo"ed individuals.C) num!er of unemplo"ed individuals.D) num!er of emplo"ed and unemplo"ed individuals.

2.Assume that the adult population of Canada is 0 million$ total emplo"ment is 1/ million$and 1 million are unemplo"ed. Then the unemplo"ment rate$ as normall" computed$ isappro'imatel" ,,,,,, percent.

A) #.+B) +.+

C) .+D) /.+

2/.The la!our<force participation rate is the percenta&e of the:A) adult population that is emplo"ed.B) adult population that is in the la!our force.C) la!our force that is emplo"ed.D) la!our force that is unemplo"ed.

20.If the unemplo"ment rate is percent and the num!er of emplo"ed is million$ then thela!our force e*uals ,,,,,, million.A) .B) .3C) +.+D) The ans%er cannot !e determined %ith the information &iven.


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22.If an increasin& proportion of the adult population is retired$ then the la!our force participation rate:

A) %ill increase.B) %ill decrease.

C) %ill remain constant.D) ma" increase$ decrease$ or remain constant.

133.If the num!er emplo"ed increases %hile the num!er unemplo"ed does not chan&e$ theunemplo"ment rate:

A) %ill increase.B) %ill decrease.C) %ill not chan&e.D) ma" either increase or decrease.

131.Accordin& to the Fa!our orce urve"$ the num!er of 6o!s in Canada shran !" /333durin& the month of e!ruar" 31$ "et the unemplo"ment rate remained constant at /H.It is liel" that the unemplo"ment rate %as unaffected !ecause:

A) the participation rate rose.B) the participation rate fell.C) older %orers %ere retirin& in fe%er num!ers since their retirement savin&s %ere

hurt !" the financial crisis a fe% "ears earlier.D) increased num!ers of "oun&er %orers %ere shiftin& from part<time to full<time

emplo"ment.

13.un(s Fa% is the ,,,,,,, relationship !et%een real GDP and the ,,,,,,,,,.A) ne&ative- unemplo"ment rateB) ne&ative- inflation rateC) positive- unemplo"ment rateD) positive- inflation rate

13#.Accordin& to un(s la%$ if real GDP rises !" a!out percent in one "ear(s time$ theunemplo"ment rate %ill rise !" a!out,,,,,, percent.

A) +

B) C) D) 1

13.The version of un(s la% studied in Chapter assumes that %ith no chan&e inunemplo"ment$ real GDP normall" &ro%s !" a!out percent over a "ear. If the


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unemplo"ment rate rose !" 1 percent over a time period too !rief for normal &ro%th tooccur$ un(s la% %ould predict the correspondin& chan&e in real GDP to !e a:

A) rise of a!out 3.+ percent.B) rise of a!out percent.C) fall of a!out percent.

D) fall of a!out 3.+ percent.

13+.A farmer &ro%s %heat and sells it to a miller for 81- the miller turns the %heat into flourand sells it to a !aer for 8#- the !aer uses the flour to mae !read and sells the !read for8. The value added !" the miller is:

A) 81.B) 8.C) 8#.D) 8.

13.A %oman marries her !utler. Before the" %ere married$ she paid him 83$333 per "ear.Ee continues to %ait on her as !efore 7!ut as a hus!and rather than as a %a&e earner). heearns 81$333$333 per "ear !oth !efore and after her marria&e. The marria&e:

A) does not chan&e GDP.B) decreases GDP !" 83$333.C) increases GDP !" 83$333.D) increases GDP !" more than 83$333.

13/.A %oman marries her !utler. Before the" %ere married$ she paid him 83$333 per "ear.

Ee continues to %ait on her as !efore 7!ut as a hus!and rather than as a %a&e earner). heearns 81$333$333 per "ear !oth !efore and after her marria&e. If GDP %ere chan&ed sothat it trul" measured the sum of all final economic activit"$ the marria&e %ould:

A) decrease GDP.B) increase GDP.C) leave GDP unchan&ed.D) first decrease and then increase GDP.

130.A fi'ed<%ei&ht price inde' lie the CPI ,,,,,, the chan&e in the cost of livin& !ecause it ,,,,,, tae into account that people can su!stitute less e'pensive &oods for ones that

have !ecome more e'pensive.A) underestimates- does notB) overestimates- doesC) accuratel" estimates- doesD) overestimates- does not


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132.'hi!it: uantit" Consumed and Price of GoodBase Jear Fater Jear

Price of &ood A 133 33uantit" of &ood A 133 33Price of &ood B 133 133

uantit" of &ood B 133 133

In the e'hi!it$ the citiKens of countr" LJM come to desire more of &ood A. As a result$the *uantit" and price of the &ood !oth rise.a. Compute nominal GDP in the !ase "ear and later "ear. !. Compute real GDP in the !ase and later "ears 7in !ase<"ear prices).c. Compute the GDP deflator in the later "ear$ usin& "our ans%ers to parts a and !.d. Compute a fi'ed<%ei&ht price inde' for the later "ear$ usin& the !ase<"ear

*uantities as %ei&hts.e. 4hich price inde' rises faster$ the GDP deflator 7Paasche) inde' or the fi'ed<

%ei&ht inde' 7Faspe"res) inde'5

113.Assume t%o countries have the same nominal GDP 7measured in the same currenc" usin&the same accountin& rules). 'plain at least three reasons %h" "ou cannot assume thatcitiKens in each countr" en6o" appro'imatel" the same level of economic %ell<!ein&.

111.conomic statistics are not perfect. 'plain at least one %a" in %hich each of thefollo%in& statistics as currentl" calculated in Canada fails to completel" or accuratel"measure the correspondin& economic concept 7in parentheses):a. real GDP per person 7economic %ell<!ein&)

!. CPI 7cost of livin&)c. unemplo"ment rate 7involuntar" unemplo"ment)

11.There are a num!er of statistics computed to measure the price level$ such as the GDPdeflator and the CPI. The choice of %hich of these measures to use depends in man"cases on the specific *uestion in %hich "ou are interested. or each of the follo%in&situations$ state %hether the CPI or GDP deflator is a more appropriate measure to useand e'plain %h" the statistic is preferred.a. Jou are interested in looin& at the impact of hi&her prices of imported oil in the

overall cost of livin&.

!. The &overnment is interested in %hether increases in defense spendin& areaffectin& the price level.c. An economic consultin& firm is investi&atin& the impact on the a&&re&ate price

level of more computers and electronic technolo&" used in production.

11#.ne opposition ;P in tta%a has criticiKed the &overnment for main& an inade*uate


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effort to stimulate the econom" !ased on data from the la!our force surve" that sho%s theunemplo"ment rate has risen. A &overnment ;P counters that the num!er of emplo"ed%orers in the econom" has increased over the same period$ !ased on the same surve".'plain ho% !oth ;Ps can !e correct.

11.There are a num!er of measures of a&&re&ate economic activit"$ such as GDP$ GNP$national income$ personal income$ and disposa!le personal income. ach of thesemeasures can !e a &ood indicator dependin& on the issue under consideration. or each of the follo%in& issues$ &ive "our reasons for selectin& one of the measures 6ust mentionedas the !est indicator to use in stud"in& the issue:a. The proportion of income households save !. The relative share of earnin&s &oin& to la!our versus capitalc. The total output of ne% final &oods and services.

11+.>eal GDP per capita is an imperfect measure of economic %ell<!ein& !ecause it does notvalue home production or production in the under&round econom"$ amon& other factors.Give at least t%o e'amples that sho% %h" the omission of these t"pes of items %ill maea difference in evaluatin& economic %ell<!ein&. ne e'ample should e'plain ho% theomission distorts comparisons of economic %ell<!ein& across countries$ and the othere'ample should e'plain ho% the omission distorts comparisons of economic %ell<!ein&in the same countr" over time.

11.Based on the data in the ta!le$ e'plain %hat happened to output and prices in theeconom" !et%een 332 and 313.

332 313 Nominal GDP 78 !illions) 81$/33 81+$33>eal GDP 78 !illions 333 chain<%ei&hted) 81$133 811$233

11/.'plain %h" the value of GDP in 31 %ould or %ould not chan&e as a result of each ofthe follo%in& transactions:a. In 31$ the mith famil" purchases a ne% house that %as !uilt in

31. !. In 31$ the 9ones famil" purchases a house that %as !uilt in 331.c. In 31$ a construction compan" purchases %indo%s to put in the

mith famil" home that %as !uilt in 31.d. In 31$ ;r. 9ones paints all of the rooms of the 9ones famil" house purchased in 31.

e. In 31$ ;r. mith uses an online !roera&e service to purchase sharesof stoc in a construction compan".


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110.'plain %hich e'penditure cate&or" of GDP chan&es and the direction of the chan&e thatresults for each of the follo%in& transactions:a. A domestic !usiness purchases a domesticall" produced computer to

use in a !usiness office. !. A domestic !usiness produces a computer that is sold to a forei&n

compan".c. The federal &overnment purchases a domesticall" produced computerto use in a court house.

d. A domestic household purchases a domesticall" produced computer touse in a home.

e. A domestic household purchases a computer produced in a forei&ncountr" to use in a home.

112.Into %hich of the three cate&ories=emplo"ed$ unemplo"ed$ not in the la!our force= %ould an intervie%er for the Fa!our orce urve" place each of the follo%in& people5

'plain.a. 9ennifer Temple is %orin& as a second<&rade schoolteacher. !. ran Pea!od" is attendin& colle&e full time to earn a de&ree in

elementar" education.c. ;artin Eampton is %orin& as a hi&h school social science teacher$ !ut

is at home sic %ith the flu.d. "le Bro%n does not currentl" have a 6o!. Ee %ants to !e an

elementar" schoolteacher. Ee has the appropriate de&ree. Ee has notlooed for a position in the last month !ecause he doesn(t !elieveschools are currentl" hirin&.

e. Brenda De%e" does not currentl" have a 6o!. he has sent her resume

to several school districts in the past %ee in the hope of findin& ateachin& position.


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Answer Key

1.B.B#.A

.A+.D.A/.C0.D2.A

13.D11.A1.B1#.D1.B

1+.B1.D1/.A10.B12.B3.B1.C.B#.C.D+.C

.A/.D0.B2.D#3.A#1.B#.B##.B#.C#+.D#.B

#/.A#0.C#2.B3.B1.C.A#.A


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.B+.A.A/.C0.C

2.B+3.A+1.B+.D+#.A+.C++.C+.A+/.D+0.B+2.B

3.A1.D.B#.C.D+.A.C/.C0.A2.B/3.C/1.C/.D/#.B/.C/+.B/.A//.D/0.C/2.C03.D01.C0.B0#.B0.A0+.D0.D0/.C00.A


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02.B23.B21.A2.D2#.A

2.C2+.D2.B2/.B20.C22.B

133.B131.B13.A13#.D13.C

13+.B13.B13/.C130.D132.a. Base<"ear nominal GDP ? 3$333.

Fater<"ear nominal GDP ? +3$333. !. >eal GDP in !ase "ear ? 3$333.

>eal GDP in later "ear ? #3$333.c. GNP deflator in later "ear ? 1./.d. i'ed<%ei&ht inde' ? 1.+3.e. The Paasche inde'$ %ith current *uantit" %ei&hts$ rises faster in this case than the

!ase<"ear *uantit"<%ei&hted Faspe"res inde'.113.ome possi!le$ !ut not all$ e'planations include:

a. different price levels in the t%o countries %ould result in differentamounts of real GDP$ i.e.$ different *uantities of &oods and servicesavaila!le in each countr"-

!. different<siKed populations could result in different *uantities of &oodsand services availa!le per person in each countr"-

c. different levels of nonmaret production in the t%o countries %ould alter the *uantit" of &oods and services availa!le in each countr"-

d. different amounts of leisure time availa!le 7not captured in nominalGDP fi&ures) %ould cause economic %ell<!ein& to differ in the t%ocountries-

e. different distri!utions of income in the t%o countries could alter the*uantit" of &oods and services availa!le to the t"pical citiKen in eachcountr"-


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f. different *uantities of !oth positive and ne&ative e'ternalities associated%ith producin& GDP$ such as pollution and con&estion$ %hich are notmeasured in GDP$ %ould cause the different levels of economic %ell< !ein& !et%een the t%o countries.

111.a. The official measure of GDP does not include measurements of leisure time

availa!le$ nonmaret production$ production in the under&round econom"$ thedistri!ution of income$ or production e'ternalities 7e.&.$ pollution). !. The CPI does not allo% su!stitution a%a" from products %ith risin& prices and has

difficult" distin&uishin& !et%een price chan&es and *ualit" chan&es in productsincluded in the inde'.

c. The official unemplo"ment rate does not tae into account discoura&ed %orers$ part<time %orers %ho desire full<time emplo"ment$ and %orers emplo"ed in 6o!snot matchin& their sill level$ such as ta'i drivers %ith PhDs in ph"sics.

11.a. The CPI is the more appropriate statistic$ !ecause the price of imports isnot included in the GDP deflator.

!. The GDP deflator is the more appropriate statistic$ !ecause the CPI does

not include the prices of &oods and services purchased !" the &overnmentsector.c. The GDP deflator is more appropriate$ !ecause the CPI does not include

prices of &oods and services purchased !" !usinesses or the &overnmentsector.

11#.If the econom" has piced up$ more people are %orin&. But outloo of !etter prospectshas tempted a num!er of previousl" discoura&ed individuals to start looin& for %ora&ain. If the num!er of such individuals %ho leave the not in the la!our force cate&or" to !e listed as unemplo"ed is &reater than the num!er of individuals %ho have moved fromthe unemplo"ed to the emplo"ed cate&ories$ !oth ;Ps can !e correct.

11.a. Disposa!le personal income provides a measure of the income households have to

use for either consumption or savin& after the" pa" ta'es. !. National income provides a measure of the income &oin& to the factors of production.

c. GDP is the most complete measure of the value of ne%l" produced &oods andservices in the econom". In contrast$ personal income includes transfer pa"ments$%hich do not represent ne%l" produced &oods and services.

11+.Ans%ers %ill var"$ !ut one e'ample could sho% that measured GDP in one countr" could !e much lo%er than in another countr"$ !ut the amount of home production in the firstcountr" could !e ver" lar&e. In this case$ measured real GDP indicates a much lar&erdifference in economic %ell<!ein& than actuall" e'ists !et%een the countries.The other e'ample could e'plain ho% chan&es in the amount of home production in acountr" over time mae it difficult to compare economic %ell<!ein& over time. ore'ample$ if most people &re% their o%n food initiall" and then over time moved tocommercial a&riculture$ the increase in real GDP per person %ould overstate the increasein the amount of &oods and services availa!le in the countr"$ since the food &ro%n athome %as not counted in real GDP in the earlier period.

11.>eal GDP decreased$ indicatin& that the production of final &oods and services %as lo%er in 313 than in 332. Nominal GDP increased$ %hich indicates that prices$ on avera&e$


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%ere hi&her in 313 than in 332$ &iven that real GDP decreased.11/.a. GDP in 31 increases !" the purchase price of the house$ %hich is a ne%l" produced

&ood. !. GDP in 31 does not chan&e !ecause the house is not a ne%l" produced &ood$ since it%as !uilt in 331. Transactions involvin& used &oods are not included in GDP.

c. GDP in 31 does not chan&e directl" !ecause the %indo%s are intermediate &oods$not final &oods. The value of intermediate &oods is not included in GDP to avoid dou!lecountin&. The value of the %indo%s is implicitl" included in the price of the house.d. GDP in 31 does not chan&e !ecause home production is not included in GDP.e. GDP in 31 does not chan&e !ecause financial transactions do not represent the production of final &oods and services and are not included in GDP.

110.a. Investment spendin& increases !" the price of the computer. !. 'ports 7and net e'ports) increase !" the price of the computer.c. Government spendin& increases !" the price of the computer.d. Consumption spendin& increases !" the price of the computer.e. Consumption spendin& increases !" the price of the computer$ !ut imports also

increase !" the price of the computer$ so net e'ports decrease !" the price of thecomputer and there %ill !e no net chan&e in GDP.112.a. emplo"ed

!. not in the la!our forcec. emplo"edd. not in the la!our forcee. unemplo"ed


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Chapter 2 TB (1)