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ECON_Q2

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1. The purchase of financial assets such as stocks and bonds is not included in GDP because
a. taxes are paid on them.

b. brokerage firms don't want them to be included.

c. they are too expensive.

d. when households buy stocks and bonds, they are making loans, not buying goods and services.

e. the money spent to buy these assets does not influence the amount of expenditure on capital goods.
2. The table below gives the production and prices for a small economy that produces only bread and pop. The base year is 2002. What is nominal GDP in 2003?

Data for 2002 Data for 2003
Item Quantity Price Quantity Price
Bread 40 $2.00 50 $2.50
Pop 60 $4.00 50 $6.00

a. $300
b. $240
c. $320
d. $425
e. $125

3. If a good or service is not traded in a market, it is
a. entered into GDP by estimating how much the good or service is worth to the economy.
b. entered into GDP by imputing the usual market value.
c. entered into GDP by entering the time used to produce it.
d. entered into GDP by entering the cost of producing it.
e. not included in the calculation of GDP.
4. When calculating GDP, depreciation is
a. added to the factor cost to find the market price.
b. subtracted from indirect taxes less subsidies.
c. subtracted from investment.
d. added to net domestic product at factor cost.
e. subtracted from net domestic product at factor cost.
5. When measuring GDP,
a. only the federal government's expenditure on goods and services is included.

b. the value of goods but not services purchased by all levels of government is included.

c. the government sector is included, and the value of the government sector is equal to total taxes collected.

d. the government sector is not included because GDP counts expenditure on goods only by the private sector.

e. the expenditure on goods and services by all levels of government is included.
6. In 2003, consumption expenditure is $13 billion, interest payments are $1.5 billion, government expenditure on goods and services IS $3 billion, net exports are $2 billion, and investment is $8 billion. Total expenditure equals
a. $26 billion.
b. $20.5 billion.
c. $24.5 billion.
d. $27.5 billion.
e. $22.5 billion.
7. In 2001, the government made adjustments to GDP calculations so that software purchases are now categorized as
a. an intermediate good.
b. net exports because most software is developed abroad.
c. investment.
d. consumption expenditure.
e. inventory.
8. An increase in nominal GDP can result from an increase in
a. production.
b. prices.
c. depreciation.
d. a. and b.
e. all of the above
9. Total expenditure equals consumption expenditure plus
a. investment plus government expenditure on goods and services plus net exports.
b. stocks and bonds plus government expenditure on goods and services plus net exports.
c. investment plus government expenditure on goods and services minus net exports.
d. money plus government expenditure on goods and services plus net exports.
e. investment plus government expenditure on goods and services.
10. Which of the following statements is correct?
a. If real GDP decreases, then nominal GDP must decrease.
b. If real GDP increases, then nominal GDP must increase.
c. If nominal GDP decreases, then real GDP must increase.
d. If nominal GDP increases, then real GDP must increase.
e. Nominal GDP and real GDP can change in the same direction or in opposite directions.
11. Carol brags to her mother that her starting salary as a management trainee is $26,000, much higher than her mother's starting salary of $18,000 as a management trainee several years ago. If the CPI the year Carol begins work is 160.5 and the CPI the year her mother started work was 107.6, Carol is
a. wrong. Adjusting for quantity changes, her salary is less than her mother's salary.

b. wrong. Adjusting for quality of work done, her salary is probably equivalent to her mother's salary.

c. wrong. Adjusting for price changes, her salary is less than her mother's salary.

d. correct. Adjusting for price changes, her salary is more than her mother's salary.

e. correct. Adjusting for quantity changes, her salary is more than her mother's salary.
12. If the CPI is used as a cost of living index, incomes that are adjusted to reflect the changes in the CPI will
a. decrease by more than the actual change in the cost of living.
b. increase by more than the actual change in quantities.
c. increase by more than the actual change in the quality of services.
d. decrease by more than the actual change in quantities.
e. increase by more than the actual change in the cost of living.
13. If the nominal wage rate is $20 an hour in 2002 and the GDP deflator is 145 (1997 = 100) in 2002, then the real wage rate in 1997 dollars
a. is $45 an hour.
b. is $14.50 an hour.
c. is $20 an hour.
d. is $13.79 an hour.
e. cannot be calculated without information about the nominal wage rate in 2001.
14. When calculating the GDP deflator, Statistics Canada
a. directly measures the physical quantities produced in Canada.

b. estimates some of the quantities produced by dividing expenditures on these goods and services by nominal GDP.

c. directly measures the prices of all final goods and services produced in Canada.

d. estimates some of the quantities produced by dividing expenditures on these goods and services by real GDP.

e. estimates some of the quantities produced by dividing expenditures on these goods and services by the CPI.
15. The bias in Canada's CPI is smaller than the bias in the United States' CPI because
a. Statistics Canada tries to eliminate at least some of the biases in the CPI by making statistical adjustments.

b. Statistics Canada updates the basket of goods and services that it uses for calculating the CPI about every 5 years.

c. Statistics Canada changes the base year for calculating the CPI periodically.

d. both a. and b.

e. none of the above
16. Suppose a group of workers and a firm negotiate a wage increase based on their expectation of inflation. Who gains or loses if the actual inflation rate is higher than expected?
a. Neither the firm nor workers will gain because the wages rise as much as the cost of living.
b. The firm gains at the expense of the workers.
c. The workers gain at the expense of the firm.
d. all of the above
e. none of the above
17. If the working-age population is 20 million and labour force is 13 million, the labour force participation rate is
a. 61 percent.
b. 35 percent.
c. 60 percent.
d. 65 percent.
e. 153 percent.
18. Cyclical unemployment includes people who become unemployed because of
a. fluctuations of the business cycle.
b. the desire to search for better employment opportunities.
c. normal changes in the labour force.
d. seasonal weather patterns.
e. technological change.
19. A mismatch between the skills or the location of workers compared to the skills or location required for available jobs is an example of
a. seasonal unemployment.
b. natural unemployment.
c. cyclical unemployment.
d. structural unemployment.
e. frictional unemployment.
20. Full employment is the level of unemployment that occurs
a. when cyclical unemployment is zero.
b. when frictional unemployment, structural unemployment, and seasonal unemployment are zero.
c. when frictional unemployment, structural unemployment, and cyclical unemployment are zero.
d. when frictional unemployment and structural unemployment are zero.
e. when everyone who wants a job has a job.
21. All of the following are reasons for the existence of an underground economy except
a. to avoid paying taxes.
b. to avoid regulations.
c. stricter jail sentences for illegal activities.
d. the goods produced are illegal.
e. only A and B
22. Choose the correct equation.
a. Y = C - I + G + NX.
b. Y = C - I - G - NX.
c. Y = C + I - G + NX.
d. Y= C + I - G - NX.
e. Y = C + I + G + NX.
23. If in 2003 real GDP is greater than nominal GDP, then the GDP deflator in 2003 is
a. negative.
b. equal to the GDP deflator in 2002.
c. less than the GDP deflator in 2002.
d. greater than 100.
e. larger than the GDP deflator in 2002.
24. All of the following lead to a bias in the CPI except
a. index change bias.
b. commodity substitution bias.
c. outlet substitution bias.
d. new goods bias.
e. quality change bias.
25. The inflation rate that people forecast and use to make decisions is the ________ inflation rate.
a. correct
b. expected
c. decision
d. anticipated
e. forecast
26. When potential GDP exceeds real GDP, the output gap is
a. changed.
b. zero.
c. negative.
d. called an inflationary gap.
e. positive.
27. National income minus undistributed profits minus net taxes is
a. net national product.
b. personal disposable income
c. gross national product.
d. gross domestic product.
e. personal income.
28. In 1990, the price of a Hershey candy bar was $0.85. In 2001, the price of the same Hershey candy bar was $1.25. If the CPI was 130.7 in 1990 and 180.5 in 2001, the price of the 1990 Hershey candy bar in 2001 dollars is
a. twice as much as the 2001 Hershey candy bar.
b. greater than the price of the 2001 Hershey candy bar.
c. equivalent to the price of the 2001 Hershey candy bar.
d. less than the price of the 2001 Hershey candy bar.
e. unknown given the information in the question.
29. The natural unemployment rate equals the sum of
a. frictional unemployment, seasonal unemployment, and structural unemployment.
b. seasonal unemployment and cyclical unemployment.
c. cyclical unemployment and structural unemployment.
d. cyclical unemployment, seasonal unemployment, and structural unemployment.
e. cyclical unemployment and frictional unemployment.
30. Real GDP is the value of the final goods and services produced in a given year when valued at
a. constant prices.
b. the average of prices that existed in a base year and the current year.
c. future prices.
d. prices that prevail in the same year.
e. prices that prevail in a chosen country, usually the United States.

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