Unit 2 Practice Test/Review Quiz

Which of the following is true regarding GDP?

• Transfer payment are not included in GDP because government expenditures are not counted

• GDP, adjusted for inflation, measures economic growth over time

• Household production, like home auto repair, is counted in GDP

• Intermediate goods are not counted because GDP does not include imports from foreign countries

• GDP includes the purchase and sale of all goods and services in a country in one year

Answer explanation

GDP, adjusted for inflation, measures economic growth over time is the correct answer.

• Transfer payments are excluded from GDP, but government expenditures are counted. Transfer payments (like Social Security) are not included because they are not payments for goods or services.

• Household production, such as home auto repair, is not included in GDP because it involves non-market transactions.

• Intermediate goods are excluded from GDP to avoid double-counting, but imports are still factored in when calculating net exports (GDP accounts for exports minus imports).

• GDP includes only final goods and services produced in a country, not the purchase and sale of all goods. For instance, second-hand goods or purely financial transactions are excluded.

Which of the following is included in the calculation of the US GDP?

• The money that consumers save when using coupons

• A plane produced in the US but sold in Mexico

• Online purchases of used products

• The benefit society receives from a cleaner environment

• A computer produced in China by a US owned company

Answer explanation

A plane produced in the US but sold in Mexico is the correct answer.

• The money that consumers save using coupons is not included because it does not represent new production or a market transaction.

• Online purchases of used products are excluded since used goods are not counted in GDP; they were already counted when first sold as new.

• Non-market benefits like the benefit society receives from a cleaner environment are not included in GDP because they do not involve a market transaction.

• A computer produced in China by a US-owned company is excluded from US GDP because it was produced outside the US, even though the company is US-owned.

The value of which of the following is counted in the US GDP?

• Transfer payments to the elderly

• Undeclared wages paid to illegal aliens

• Foreign countries buying US treasury bills

• Salary bonuses given to investment bankers

• The change in value of real estate in the US

Answer explanation

Salary bonuses given to investment bankers is the correct answer.

• Transfer payments to the elderly (such as Social Security) are not included in GDP because they are not payments for goods or services produced.

• Undeclared wages paid to illegal aliens are part of the underground economy and are not counted in GDP since they are not officially reported.

• Foreign countries buying US treasury bills is a financial transaction, not the purchase of goods or services, and therefore not included in GDP.

• The change in value of real estate is not directly included in GDP, as GDP only accounts for the production of new goods and services, not changes in asset values.

When calculating GDP, investment is best defined as

• Spending by the central bank on government securities

• Spending on stocks, bonds, and financial assets

• Business spending on capital goods

• Changes in private and business savings

• Policies that lead to long run economic growth

Answer explanation

Business spending on capital goods is the correct answer.

• Spending by the central bank on government securities is a monetary policy action and is not included in GDP as investment.

• Spending on stocks, bonds, and financial assets represents financial transactions, which are not included in GDP as investment.

• Changes in private and business savings are not considered investment in GDP; investment refers to spending on physical capital, not saving behavior.

• Policies that lead to long-run economic growth may affect investment, but they are not counted as direct investment in GDP.

In GDP, investment specifically refers to business spending on capital goods like machinery, equipment, and buildings used to produce goods and services.

If a country's nominal percent change in GDP is positive, which of the following must be true?

• The Real GDP increased

• Both the price level and real GDP increased

• The inflation rate was negative

• The price level increased

• The real GDP and/or the price level has increased

Answer explanation

The real GDP and/or the price level has increased is the correct answer.

• A positive nominal GDP change means that either prices (price level), output (real GDP), or both have increased. Nominal GDP is not adjusted for inflation, so it can rise due to higher prices, increased output, or a combination of the two.

• Real GDP may have increased, but it's not guaranteed unless inflation is accounted for, which is not the case with nominal GDP.

• Both the price level and real GDP could increase, but it's possible that only one of these increases, not necessarily both.

• A negative inflation rate (deflation) is not required for nominal GDP to increase.

• The price level could increase, but again, it's possible that real GDP increases instead or in addition.

Thus, nominal GDP rises if either or both real GDP and the price level have increased.

Gross Domestic Product is equivalent to the sum of:

• Consumer spending, consumption of fixed capital, government purchases and exports

• Consumer spending, investment spending, government purchases and net exports

• Consumer spending, investment spending, government purchases, exports, and imports

• Consumer spending, investment spending, government purchases, and exports

Answer explanation

Consumer spending, investment spending, government purchases, and net exports is the correct answer.

Explanation:

• Gross Domestic Product (GDP) is calculated using the expenditure approach, which is the sum of:

  • Consumer spending (C): Expenditures by households on goods and services.

  • Investment spending (I): Business spending on capital goods, residential construction, and inventory changes.

  • Government purchases (G): Spending by the government on goods and services.

  • Net exports (NX): The value of exports minus the value of imports (exports - imports).

Thus, GDP = C + I + G + (Exports - Imports), which aligns with the second option.

Which of the following will be included in the current year's calculation of GDP?

• The purchase of a vintage surfboard from thrift store

• The purchase of a used car from a friend

• $.50 cash earned but not reported by your neighbor for babysitting

• Purchase of lifeguard equipment at a summer camp

Answer explanation

Purchase of lifeguard equipment at a summer camp is the correct answer.

• The purchase of a vintage surfboard from a thrift store is not included because used goods are not counted in GDP; they were already counted when first sold as new.

• The purchase of a used car from a friend is also not included for the same reason—used goods transactions are excluded.

• Cash earned but not reported, such as babysitting money, is part of the underground economy and is not included in GDP because it is not officially recorded.

• The purchase of new lifeguard equipment is included because it reflects current production and the sale of new goods, which is counted in GDP.

Which of the following is true regarding nominal and real GDP?

• The only thing that can increase nominal GDP is an increase in inflation

• The only thing that can increase real GDP is an increase in output

• The only thing that can increase nominal GDP is an increase in output

• The only thing that can increase real GDP is an increase in nominal GDP

Answer explanation

The only thing that can increase real GDP is an increase in output is the correct answer.

Explanation:

• Nominal GDP measures a country's economic output without adjusting for inflation. It can increase due to:

  • An increase in output (more goods and services produced).

  • An increase in prices (inflation).

  Therefore, it is not solely dependent on inflation; thus, the first and third statements are false.

• Real GDP is adjusted for inflation, reflecting the actual output of goods and services. The only way real GDP increases is through an increase in the physical output of goods and services, making the second statement true.

• The fourth statement is incorrect because an increase in nominal GDP does not necessarily imply an increase in real GDP, as it could be due to inflation rather than an actual increase in output.

4o mini

If real GDP is increasing at 5% per year and nominal GDP is increasing at 10% per year, which of the following is necessarily true?

• The price level is increasing

• Unemployment is increasing

• The economy is in a recession

• Imports exceed exports

Answer explanation

The price level is increasing is the necessarily true statement.

Explanation:

• If real GDP is increasing at 5% and nominal GDP is increasing at 10%, it indicates that the difference (which is 5%) must be attributed to changes in the price level (inflation). This means that prices are rising, as nominal GDP includes both real growth and inflation.

• There is no information provided about unemployment, so we cannot conclude that unemployment is increasing.

• The economy being in a recession would typically mean that real GDP is declining, which contradicts the information given (real GDP is increasing).

• We cannot determine the relationship between imports and exports based on the given information; the GDP growth rates do not provide sufficient context regarding trade balance.

Thus, the only necessarily true statement is that the price level is increasing.

If the nominal GDP in a given year is $500 billion and the GDP deflator for that year is 125, how much is the real GDP?

• $1,125 billion

• $500 billion

• $625 billion

• $400 billion

Answer explanation