Name: Date:

SECTION I MULTIPLE CHOICE QUESTIONS

Question 1 A farmer produces oranges and sells them to Fresh Juice, which makes orange
juice. The oranges produced by the farmer are called expenditure of everyone in the
economy.
a. inventory goods.
b. transitory goods.
c. final goods.
d. intermediate goods.
Question 2 For an economy as a whole, income must equal expenditure because
a. the number of firms is equal to the number of households in an economy.
b. international law requires that income equal expenditure.
c. every dollar of spending by some buyer is a dollar of income for some seller.
d. every dollar of saving by some consumer is a dollar of spending by some other consumer.
Question 3 A steel company sells some steel to a bicycle company for $150. The bicycle
company uses the steel to produce a bicycle, which it sells for $250. Taken together,
these two transactions contribute
a. $150 to GDP.
b. $250 to GDP.
c. between $250 and $400 to GDP, depending on the profit earned by the bicycle company
when it sold the bicycle.
d. $400 to GDP.
Question 4 A Texas household receives a Social Security check for $1500, which it uses to
purchase a $40 pair of shoes made in Thailand by a Thai firm, a $1240 television made
by a Korean firm in Korea, and $220 on groceries from a local store. As a result, U.S.
GDP
a. increases by $220.
b. increases by $40.
c. increases by $280.
d. increases by $1500.
Question 5 In a simple circular-flow diagram,
a. households spend all of their income.
Name: Date:

b. all goods and services are bought by households.

c. expenditures flow through the markets for goods and services, while income flows through
the markets for the factors of production.
d. All of the above are correct.
Question 6 Changes in real GDP reflect
a. only changes in prices.
b. only changes in the quantities being produced.
c. both changes in prices and changes in the quantities being produced.
d. neither changes in prices nor changes in the quantities being produced.
Question 7 Spots, Inc. produces ink and sells it to Write on Target, which makes pens. The
ink produced by Spots, Inc. is called
a. an inventory good.
b. a transitory good.
c. a preliminary good.
d. an intermediate good.
Question 8 One bag of flour is sold for $1.00 to a bakery, which uses the flour to bake
bread that is sold for $3.00 to consumers. A second bag of flour is sold to a consumer
in a grocery store for $2.00. Taking these three transactions into account, what is the
effect on GDP?
a. GDP increases by $2.00.
b. GDP increases by $5.00.
c. GDP increases by $3.00.
d. GDP increases by $6.00.
Question 9 If in some year nominal GDP was $20 billion and the GDP deflator was 50,
what was real GDP?
a. $2.5 billion
b. $10 billion
c. $40 billion
d. $100 billion
 Name: Date:

Question 10 In the economy of Wrexington in 2008, real GDP was $25 billion and the GDP
deflator was 68. What was Wrexington’s nominal GDP in 2008?
a. $2.72 billion
b. $17 billion
c. $36.8 billion
d. $43 billion
Question 11 Suppose an economy produces only eggs and ham. In 2005, 100 dozen eggs
are sold at $3 per dozen and 50 pounds of ham are sold at $4 per pound. In 2004, the
base year, eggs sold at $1.50 per dozen and ham sold at $5 per pound. For 2005,
a. nominal GDP is $400, real GDP is $500, and the GDP deflator is 80.
b. nominal GDP is $400, real GDP is $500, and the GDP deflator is 125.
c. nominal GDP is $500, real GDP is $400, and the GDP deflator is 80.
d. nominal GDP is $500, real GDP is $400, and the GDP deflator is 125.
Question 12 Suppose an economy’s production consists only of corn and soybeans. In 2005,
20 bushels of corn are sold at $4 per bushel and 10 bushels of soybeans are sold at $2
per bushel. In 2004, the price of corn was $2 per bushel and the price of soybeans was
$1 per bushel. Using 2004 as the base year, it follows that, for 2005,
a. nominal GDP is $100, real GDP is $50, and the GDP deflator is 200.
b. nominal GDP is $50, real GDP is $100, and the GDP deflator is 50.
c. nominal GDP is $50, real GDP is $100, and the GDP deflator is 200.
d. nominal GDP is $100, real GDP is $50, and the GDP deflator is 50.
The table below contains data for the country of Dachsland, which produces only pretzels and
books. The base year is 2005.
Name: Date:

Year Price Quantity of Price of Quantity of

of Pretzels Pretzels Books Books

2005 $4.00 90 $1.50 150

2006 $4.00 100 $2.00 180
2007 $5.00 120 $2.50 200
2008 $6.00 150 $3.50 200
Question 13 Refer to above Table. In 2005, Dachsland’s
a. nominal GDP was greater than real GDP, and the GDP deflator was greater than 100.
b. nominal GDP was equal to real GDP, and the GDP deflator was equal to 1.
c. nominal GDP was less than real GDP, and the GDP deflator was less than 100.
d. nominal GDP was equal to real GDP, and the GDP deflator was equal to 100.
Question 14 Refer to above Table. In 2006, Dachsland’s
a. nominal GDP was $585, real GDP was $660, and the GDP deflator was 88.6.
b. nominal GDP was $585, real GDP was $670, and the GDP deflator was 87.3.
c. nominal GDP was $760, real GDP was $660, and the GDP deflator was 115.2.
d. nominal GDP was $760, real GDP was $670, and the GDP deflator was 113.4.
Question 15 Which of the following items is the one type of household expenditure that is
categorized as investment rather than consumption?
a. Spending on education
b. The purchase of stocks and bonds
c. The purchase of a new house
d. The purchase of durable goods such as stoves and washing machines
Question 16 Which of the following is included in the calculation of GDP?
a. The purchase of tutoring services from a tutor who holds citizenship outside the country
but resides within the country.
b. The purchase of a new edition of a foreign textbook that was produced in a different nation.
c. The purchase of ink and paper supplies by a textbook company for the production of new
textbooks.
d. The purchase of a used textbook from a friend who took the same class last year.
Name: Date:

Question 17 U.S. GDP and U.S. GNP are related as follows:

a. GNP = GDP + Value of exported goods − Value of imported goods.
b. GNP = GDP − Value of exported goods + Value of imported goods.
c. GNP = GDP + Income earned by foreigners in the U.S. − Income earned by U.S. citizens
abroad.
d. GNP = GDP − Income earned by foreigners in the U.S. + Income earned by U.S. citizens
abroad.
Question 18 The GDP deflator is the ratio of
a. real GDP to nominal GDP multiplied by 100.
b. real GDP to the inflation rate multiplied by 100.
c. nominal GDP to real GDP multiplied by 100.
d. nominal GDP to the inflation rate multiplied by 100.
Question 19 Social Security payments are
a. included in GDP because they represent current income.
b. included in GDP because they represent potential consumption.
c. excluded from GDP because they are not private pensions.
d. excluded from GDP because they do not reflect the economy's production.
Question 20 Most goods and services produced at home
a. and most goods and services produced illegally are included in GDP.
b. are included in GDP while most goods and services produced illegally are excluded from
GDP.
c. are excluded from GDP while most goods and services produced illegally are included in
GDP
d. and most goods and services produced illegally are excluded from GDP.
Question 21 Spots, Inc. produces ink and sells it to Write on Target, which makes pens. The
ink produced by Spots, Inc. is called
a. an inventory good.
b. a transitory good.
c. a preliminary good.
d. an intermediate good.
Name: Date:

Question 22 Which of the following statements is correct?

a. The value of intermediate goods is always included in GDP.
b. The value of intermediate goods is included in GDP only if those goods were produced in
the previous year.
c. The value of intermediate goods is included in GDP only if those goods are added to firms’
inventories to be used or sold at a later date.
d. The value of intermediate goods is never included in GDP.
Question 23 A Minnesota farmer buys a new tractor made in Iowa by a German company.
As a result,
a. U.S. investment and GDP increase, but German GDP is unaffected.
b. U.S. investment and German GDP increase, but U.S. GDP is unaffected.
c. U.S. investment, U.S. GDP, and German GDP are unaffected, because tractors are
intermediate goods.
d. U.S. investment, U.S. GDP, and German GDP all increase.
Question 24 GDP is not a perfect measure of well-being; for example,
a. GDP excludes the value of volunteer work.
b. GDP does not address the distribution of income.
c. GDP does not address environmental quality.
d. All of the above are correct.
Question 25 James owns two houses. He rents one house to the Johnson family for $10,000
per year. He lives in the other house. If he were to rent the house in which he lives, he
could earn $12,000 per year in rent by doing so. How much do the housing services
provided by the two houses contribute to GDP?
a. $0
b. $10,000
c. $12,000
d. $22,000
 Name: Date:

SECTION II SHORT-ANSWER QUESTIONS

Question 1 The table below contains data for the country of Batterland, which produces
only waffles and pancakes. The base year is 2006.
Year Price Quantity of Price Quantity of
of Waffles Waffles of Pancakes Pancakes

2005 $2 100 $1 100

2006 $2 120 $2 150
2007 $3 150 $3 200
2008 $4 180 $3 220
a. Calculate the Batterland’s nominal GDP in 2005 – 2008
b. Calculate the Batterland’s real GDP in 2005 – 2008
c. Calculate the Batterland’s GDP deflator in 2005 – 2008
d. Calculate the Batterland’s inflation rate from 2005 to 2006, from 2006 to 2007, from 2006
to 2007, and from 2007 to 2008.
e. Calculate the Batterland's output grew from 2005 to 2006, from 2006 to 2007, from 2006
to 2007, and from 2007 to 2008.
Question 2
Alexandria, a British citizen, owns and manages a fish and chips shop in Washington, D.C. She
buys fresh food produced by U.S. workers, pays utilities to a U.S. company, and employs only
U.S. citizens. What part, if any, of the restaurant's production is included in U.S. GDP? What part,
if any, of the restaurant's production is included in U.S. GNP?
Question 3
In 2010 a country had nominal GDP of 6 trillion euro and real GDP of 5 trillion euro. In 2011 it
had nominal GDP of 6.5 trillion euro and real GDP of 5.2 trillion euro. What was its inflation rate
in 2011? Show your work.
Question 4
Consumption is $7 trillion, investment is $1.5 trillion, government expenditures are $2 trillion,
government transfer payments are $1 trillion, exports are $1.50 trillion and imports are $1.25
trillion. What is GDP?
 Name: Date:

Question 5
In 2020, the economy produced 100 loaves of bread that sell for $2 each. In the year 2021, the
economy produced 200 loaves of bread that sell for $3 each. Calculate nominal GDP, real GDP,
and the GDP deflator for each year. (Use 2020 as the base year.) By what percentage does each of
these three statistics rise from one year to the next?
Question 6
The table below contains data for the country of Wrexington for the year 2008.
Household purchases of durable goods $1293
Household purchases of nondurable goods $1717
Household purchases of services $301
Household purchases of new housing $704
Purchases of capital equipment $310
Inventory changes $374
Purchases of new structures $611
Depreciation $117
Salaries of government workers $1422
Government expenditures on public works $553
Transfer payments $777
Foreign purchases of domestically produced $88
goods
Domestic purchases of foreign goods $120
a. What was Wrexington’s GDP in 2008?
b. What was Wrexington’s consumption in 2008?
c. What was Wrexington’s investment in 2008?
d. What were Wrexington’s government purchases in 2008?
e. What were Wrexington’s exports in 2008?
f. What were Wrexington’s net exports in 2008?
Question 7
In 2007, Corny Company grows and sells $2 million worth of corn to Tasty Cereal Company,
which makes corn flakes. Tasty Cereal Company produces $6 million worth of corn flakes in
2007, with sales to households during the year of $4.5 million. The unsold $1.5 million worth of
 Name: Date:

corn flakes remains in Tasty Cereal Company’s inventory at the end of 2007. The transactions just
described contribute how much to GDP for 2007?