Chapter 2 The Data of Macroeconomics

1. Which of the following is a flow variable?

A. the value of the house in which you live

B. the balance in your savings account
C. your monthly consumption of hamburgers
D. the number of hamburgers in your refrigerator at the beginning of the month

2. Which of the following is NOT a stock variable?

A. government debt
B. the labor force
C. the amount of money held by the public
D. inventory investment

3. A circular flow diagram traces the flows of inputs and outputs between:

A. households and the government.

B. households and firms.
C. households in one country and households in another country.
D. firms in one country and households in another country.

4. Gross domestic product (GDP) is:

A. a stock.
B. a flow.
C. both a stock and a flow.
D. neither a stock nor a flow.

5. GDP measures:

A. expenditure on all final goods and services.

B. total income of everyone in the economy.
C. total value added by all firms in the economy.
D. All of the answers are correct.

6. Suppose that a farmer grows wheat and sells it to a baker for €1, the baker makes bread
and sells it to a store for €2, and the store sells it to the customer for €3. This series of
transactions increases GDP by:
A. €1.
B. €2.
C. €3.
D. €6.

7. Which of the following is NOT included in GDP?

A. the salary paid to a judge

B. the value of housing services enjoyed by homeowners
C. the value of automobile services enjoyed by car owners
D. the value added by a shipping company that transports goods from the factory to retail
stores

8. In which case is total expenditure in an economy NOT equal to total income?

A. if total saving is larger than total investment

B. if net exports are not zero
C. if inventory investment is negative
D. None of the answers is correct—they are always equal.

9. All other things equal, GDP will rise if:

A. imports rise.
B. exports fall.
C. durable goods consumption rises.
D. military spending falls.

10. Suppose that a car was produced but not sold in 2013. The car could still be sold in
2014. According to the book, the car would be counted as part of:

A. 2013 GDP as investment.

B. 2014 GDP, as consumption.
C. 2014 GDP as investment.
D. neither 2013 or 2014 GDP.

11. Which of the following statements describes the difference between real and nominal
GDP?

A. Real GDP includes only goods; nominal GDP includes goods and services.
B. Real GDP is measured using constant base-year prices; nominal GDP is measured
using current prices.
C. Real GDP is equal to nominal GDP less the depreciation of the capital stock.
D. Real GDP is equal to nominal GDP multiplied by the CPI.

12. If production remains the same and all prices double, then real GDP:
A. and nominal GDP are both constant.
B. is constant and nominal GDP is reduced by half.
C. is constant and nominal GDP doubles.
D. doubles and nominal GDP is constant.

13. Real GDP equals:

A. nominal GDP minus net exports.
B. nominal GDP divided by the GDP deflator.
C. nominal GDP multiplied by the GDP deflator.
D. GDP minus depreciation.

14. If production remains the same and all prices double relative to the base year, then the
GDP deflator is:
A. 1/4.
B. 1/2.
C. 1.
D. 2.

15. Consider the following table:

APPLES ORANGES
Year Production/Price Production/Price
1995 20/$0.50 10/$1.00
2000 10/$1.00 10/$0.50

If 1995 is the base year, what is the GDP deflator for 2000?

A. 0
B. between 0 and 1
C. 1
D. greater than 1

16. To obtain the net national product (NNP), start with the gross national product (GNP)
and subtract:

A. depreciation.
B. depreciation and indirect business taxes.
C. depreciation, indirect business taxes, and corporate profits.
D. depreciation, indirect business taxes, corporate profits, and social insurance
contributions.

17. To obtain national income, start with GNP and subtract:

A. depreciation.
B. depreciation and the statistical discrepancy.
C. depreciation, indirect business taxes, and corporate profits.
D. depreciation, indirect business taxes, corporate profits, and social insurance
contributions.

18. Approximately what percentage of national income consists of compensation of

employees?

A. 10 per cent
B. 25 per cent
C. 70 per cent
D. 95 per cent

19. Which of the following is NOT considered investment?

A. A family builds a house in which it plans to live.

B. A car dealer stores some of this year’s models for next year.
C. An individual purchases several pieces of antique furniture.
D. A firm buys a computer for word processing.

20. Suppose that Jones builds a new house, then she sells it to Smith, and then Smith sells
it to Williams. The total net investment from these transactions is:

A. zero.
B. 1 house.
C. 2 houses.
D. 3 houses.

21. The size of the underground economy in Nigeria is approximately:

A. zero.
B. 50 per cent of GDP.
C. 10 per cent of GDP.
D. 20 per cent of GDP.
Feedback for correct answer: Correct! Feedback for incorrect answer: Incorrect! The
correct answer is: 50 per cent of GDP. The underground economy is developing
countries such as Thailand, Nigeria and Egypt is approximately as large as the official
economy.

22. The consumer price index (CPI):

A. measures the price of a fixed basket of goods and services relative to the price of that
same basket in some base year.
B. measures the price of a basket of goods and services that constantly changes as the
composition of consumer spending changes.
C. measures the amount of money that it takes to produce a fixed level of utility.
D. is one of the many statistics in the National Income Accounts.

23. Suppose that the typical consumer buys one apple and one orange every month. In the
base year 1986, the price for each was $1. In 1996, the price of apples rises to $2, and the
price of oranges remains at $1. Assuming that the CPI for 1986 is equal to 1, the CPI for
1996 would be equal to:

A. 1/2.
B. 1.
C. 3/2.
D. 2.

24. Which of the following statements about the CPI and the GDP deflator is TRUE?

A. The CPI measures the price level; the GDP deflator measures the production of an
economy.
B. The CPI refers to a base year; the GDP deflator always refers to the current year.
C. The weights given to prices are not the same.
D. The GDP deflator takes the price of imported goods into account; the CPI does not.

25. All other things equal, if the price of foreign-made cars rises, then the GDP deflator:

A. and the CPI will rise by equal amounts.

B. will rise and the CPI will remain the same.
C. will remain the same and the CPI will rise.
D. and the CPI will rise by different amounts.

26. Volkswagen increases the price of a car produced exclusively for export to North
America. Which German price index is affected?
A. the CPI
B. the GDP deflator
C. both the CPI and the GDP deflator
D. neither the CPI nor the GDP deflator

27. Which of the following events will cause the unemployment rate to increase?

A. an increase in population, with no change in the size of the labor force

B. a proportionally equal increase in the labor force and the number of unemployed
workers
C. an increase in the labor force with no change in the number of employed workers
D. an increase in the number of employed workers with no change in the number of
unemployed workers

28. An example of a person who is counted as unemployed is a:

A. retired worker below the mandatory retirement age.

B. part-time worker who would like to work full-time.
C. senator who resigns her job to run for president.
D. student going to school full-time.

29. Suppose that a factory worker turns 62 years old and retires from her job. Which
statistic is not affected?

A. number of unemployed
B. unemployment rate
C. labor force
D. labor-force participation rate

30. Suppose that the size of the labor force is 100 million and that the unemployment rate
is 5 per cent. Which of the following actions would reduce the unemployment rate the
most?

A. 1 million unemployed people get jobs

B. 2 million unemployed people leave the labor force
C. 3 million people join the labor force and they all get jobs
D. 10 million people join the labor force and half of them get jobs

31. Suppose that a German citizen crosses the border each day to work in Switzerland.
Her income from this job would be counted in:
a. Swiss GNP and German GNP.
b. Swiss GNP and German GDP.
c. Swiss GDP and German GNP.
d. Swiss GDP and German GDP.

32. Suppose that an Italian working in the United States renounces his Italian citizenship
and is granted U.S. citizenship. Which of the following will happen?

A. Italian GDP will fall; U.S. GNP will rise.

B. Italian GNP will fall; U.S. GNP will rise.
C. Italian GDP will fall; U.S. GDP will rise.
D. Italian GNP will fall; U.S. GDP will rise.
Answers
1c - As explained in Section 2-1, a flow is a quantity measured per unit time and a stock
is a quantity measured at a given point in time.

2d - Inventory investment is a quantity measured per unit time, so it is a flow variable.

See Section 2-1.

3b - The circular flow diagram traces out the flows of inputs and outputs between
households and firms.

4b - GDP is a quantity measured per unit time, so it is a flow. See Section 2-1.

5d - See Section 2-1 for a discussion of what GDP measures.

6c - As explained in Section 2-1, GDP includes only the value of the final goods and
services. Therefore, this series of transactions increases GDP by €3.

7c - In principle, GDP should include the imputed rent on automobiles, but in practice it
does not. See Section 2-1.

8d - As explained in Section 2-1, total expenditure in an economy always equals total

income.

9c - A rise in imports, a fall in exports, or a fall in military spending will decrease GDP.
A rise in durable goods consumption will increase GDP. See Section 2-1.

10a - Unsold durable goods in 2013 will be counted as part of inventory (and hence
investment) in 2013.

11b - For a discussion of the differences between real and nominal GDP, see Section 2-1.

12c - Real GDP is measured in constant prices, so it is unaffected by a price increase.

Nominal GDP is measured in current prices. If prices double, so will nominal GDP. See
Section 2-1.

13b - As explained in Section 2-1, real GDP equals nominal GDP divided by the GDP
deflator.

14d - As explained in Section 2-1, the GDP deflator equals nominal GDP divided by real
GDP. If prices double, nominal GDP will double and real GDP will be unchanged.
Therefore, the GDP deflator will equal 2.

15c - The GDP deflator is nominal GDP divided by real GDP. Nominal and real GDP are
both $15 in 2000, so the GDP deflator equals 1. See Section 2-1.
16a - For an explanation of NNP, see Section 2-1.

17b - National income equals GNP minus depreciation and statistical discrepancy. See
Section 2-1.

18c - The components of national income are discussed in section 2-1.

19c - As discussed in Section 2-1, the reallocation of existing assets among different
individuals is not investment for an economy.

20b - As explained in Section 2-1, building a new house counts as investment; selling an
existing house does not.

21b - The underground economy is developing countries such as Thailand, Nigeria and
Egypt is approximately as large as the official economy.

22a - The CPI measures the price of a fixed basket of goods and services relative to the
price of that same basket in some base year. See Section 2-2.

23c - The CPI measures the price of a fixed basket of goods and services relative to the
price of that same basket in the base year. Since the price of the basket was $2 in 1986,
and it is $3 in 1996, the CPI for 1996 is equal to 3/2. See Section 2-2.

24c - For a discussion of the CPI and the GDP deflator, see Section 2-2.

25c - Goods and services produced abroad do not enter the GDP deflator, but are
included in the CPI if the foreign goods are in the consumers’ basket. See Section 2-2.

26b - The GDP deflator is affected because the cars are produced domestically. The CPI
does not change because the cars are not consumed domestically. See Section 2-2.

27c - The unemployment rate is defined as the number of unemployed workers divided
by the labor force. If the labor force increases and employment does not change, the
unemployment rate will increase. See Section 2-3.

28c - For a discussion of who is considered unemployed, see Section 2-3.

29a - The factory worker willingly leaves her job so she is not considered to be
unemployed. See Section 2-3.

30b - The unemployment rate is equal to the number of unemployedworkers divided by

the size of the labor force. If you calculate it for each of the above situations, you will see
that it is most reduced when 2 million unemployed people leave the labor force. See
Section 2-3.
31c - Her income is counted as Swiss GDP and German GNP. See Section 2-1 for the
definitions of gross domestic product (GDP) and gross national product (GNP).

32b - The worker’s income was counted as Italian GNP and U.S. GDP. After the worker
becomes a U.S. citizen, his income is counted as U.S. GNP and GDP. Therefore, Italian
GNP falls and U.S. GNP rises. See Section 2-1.