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TEST BANK

Charles I. Jones

MacroeconomicsTHIRD EDITION

Robert SonoraFORT LEWIS COLLEGE

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iii

Preface v

Part 1: Preliminaries

Chapter 1 | Introduction to Macroeconomics 1

Chapter 2 | Mea sur ing the Macroeconomy 10

Part 2: The Long Run

Chapter 3 | An Overview of Long- Run Economic Growth 34

Chapter 4 | A Model of Production 54

Chapter 5 | The Solow Growth Model 82

Chapter 6 | Growth and Ideas 109

Chapter 7 | The Labor Market, Wages, and Unemployment 134

Chapter 8 | Infl ation 161

Part 3: The Short Run

Chapter 9 | An Introduction to the Short Run 183

Chapter 10 | The Great Recession: A First Look 209

Chapter 11 | The IS Curve 230

Chapter 12 | Monetary Policy and the Phillips Curve 258

Chapter 13 | Stabilization Policy and the AS/AD Framework 290

Chapter 14 | The Great Recession and the Short- Run Model 313

Chapter 15 | DSGE Models: The Frontier of Business Cycle Research 337

TABLE OF CONTENTS



v

When was the last time you were pleased with the consis-

tency and quality of the assessment supplements that come

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probably fi nd that these assessment packages do not always

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methodology for delivering high- quality, valid, and reliable

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sive suite of support materials.

WHY A NEW APPROACH?

In evaluating the test banks that accompany introductory

texts, we found four substantive problem areas associated

with the questions:

1. Test questions were misclassifi ed in terms of type and

diffi culty.

2. The prevalence of low- level and factual questions mis-

represented the goals of the course.

3. Topics were unevenly distributed: trivial topics were

tested via multiple items, while important concepts were

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The Test Bank authors started with a detailed concept sum-

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concept. By asking students questions that vary in both

type and level of diffi culty, instructors can gather different

types of evidence that will allow them to assess more effec-

tively how well students understand specifi c concepts.

SIX QUESTION TYPES

1. Remembering questions— test declarative knowledge,

including textbook defi nitions and relationships between

two or more pieces of information. Can students recall

or remember the information in the same form it was

learned?

2. Understanding questions— pose problems in a context

different from the one in which the material was

PREFACE



vi | Preface

learned, requiring students to draw from their declarative

and/or procedural understanding of important concepts.

Can students explain ideas or concepts?

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to each other and to the whole. Can students distinguish

among the different parts?

5. Evaluating questions— ask students to assess informa-

tion as a whole and frame their own arguments. Can stu-

dents justify a stand or decision?

6. Creating questions— pose questions or objectives that

prompt students to put elements they have learned

together into a coherent whole to generate new ideas. Can

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data?

THREE DIFFICULTY LEVELS

1. Easy questions— require a basic understanding of the

concepts, defi nitions, and examples presented in the

textbook.

2. Medium questions— direct students to use critical-

thinking skills and to demonstrate an understanding of

core concepts in de pen dent of specifi c textbook examples.

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concepts with their own experiences, making analytical

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READING THE TEST ITEM NOTATION

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TOP: This references the topic, taken from the chapter-

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REF: This is the section in the textbook from which a ques-

tion is drawn.

MSC: This is the knowledge type (see earlier section) that

the question is designed to test.

DIF: This is the diffi culty assigned to the problem. Problems

have been classifi ed as Easy, Medium, or Diffi cult.

To ensure that the Test Bank material fl ows in the same

order as the topics covered in the textbook, the questions

have been numbered in order based on the “REF” fi eld.



1

CONCEPT MAP

I. What is Macroeconomics?

II. Macroeconomics Studies

III. Overview

A. The Long Run

B. The Short Run

CHAPTER 1 Introduction to Macroeconomics



2 | Chapter 1

MULTIPLE CHOICE

1. Macroeconomics is the study of ________ while microeconomics studies ________.a. the cosmos; particle physicsb. the overall performance of an economy; an individual marketc. an individual market; the overall performance of an economyd. the overall performance of a single economy; the individual firme. consumer behavior; firm behavior

ANS: B DIF: Easy REF: 1.1 TOP: I.MSC: Remembering

2. The three main variables we discuss in the short run are:a. economic fluctuations; interest rates; unemploymentb. economic fluctuations; inflation; moneyc. economic fluctuations; inflation; unemploymentd. interest rates; money supply; taxese. economic fluctuations; interest rates; money

ANS: C DIF: Easy REF: 1.1 TOP: I.MSC: Remembering

3. Macroeconomic is to microeconomic what ________ is to ________.a. cosmology; particle physics d. chemistry; organic chemistryb. particle physics; cosmology e. biology; zoologyc. physics; biology

ANS: A DIF: Easy REF: 1.1 TOP: I.MSC: Applying

4. Which of the following does macroeconomics endeavor to answer?i. Why is the typical person in the United States today more than ten times richer than the typical person a century ago?ii. Why has the unemployment rate been nearly twice as high in Europe as in the United States in recent years?iii. What determines the rate of inflation? What determines how rapidly the overall price level in an economy increases?

a. i only d. i and iib. i, ii, and iii e. ii and iiic. ii only

ANS: B DIF: Medium REF: 1.1 TOP: I.MSC: Applying



Introduction to Macroeconomics | 3

5. Which of the following does macroeconomics NOT endeavor to answer?i. Why is the typical person in the United States today more than ten times richer than the typical person a century ago?ii. Why has the unemployment rate been nearly twice as high in Europe as in the United States in recent years?iii. Why has the price of orange juice risen sharply?

a. ii and iii d. i, ii, and iiib. i only e. iii onlyc. ii only

ANS: E DIF: Medium REF: 1.1 TOP: I.MSC: Applying

6. Which of the following does macroeconomics endeavor to answer?i. What role does the government play in recessions and booms and in determining the rate of inflation?ii. What causes an increase in the price of Exxon stock?iii. How does a dairy farmer react to rising milk prices?

a. i only d. i, ii, and iiib. ii only e. ii and iiic. iii only

ANS: A DIF: Medium REF: 1.2 TOP: II.MSC: Applying

7. Which of the following does macroeconomics endeavor to answer?i. How does a dairy farmer react to rising wheat prices?ii. What causes an increase in the price of Apple stock?iii. What are potential causes of financial crises?

a. i only d. i, ii, and iiib. ii only e. ii and iiic. iii only

ANS: C DIF: Medium REF: 1.1 TOP: II.MSC: Applying

8. Which of the following does macroeconomics endeavor to answer?i. What role does the government play in recessions and booms and in determining the rate of inflation?ii. What caused the currency crises in Mexico in the mid-1990s and in many Asian economies at the end of the 1990s?iii. How does a dairy farmer react to rising milk prices?

a. iii only d. i, ii, and iiib. ii only e. i and iiic. i and ii




4 | Chapter 1

9. Which of the following lists the four steps we use to study macroeconomic behavior in the correct order?a. (1) document the facts; (2) develop a model; (3) compare the predictions of the model to

the original facts; (4) use the model to make other predictions that may eventually be tested

b. (1) document the facts; (2) use the model to make other predictions that may eventually be tested; (3) compare the predictions of the model to the original facts; (4) develop a model

c. (1) compare the predictions of the model to the original facts; (2) develop a model; (3) document the facts; (4) use the model to make other predictions that may eventually be tested

d. (1) develop a model; (2) document the facts; (3) compare the predictions of the model to the original facts; (4) use the model to make other predictions that may eventually be tested

e. None of the above answers are correct.

ANS: A DIF: Easy REF: 1.2 TOP: II.MSC: Remembering

10. ________ variables are parameters to the model and generally are fixed over time, while ________ variables are the outcome of the model.a. Shocks; parameters d. Exogenous; endogenousb. Endogenous; exogenous e. Parameters; systemc. Endogenous; shocks

ANS: D DIF: Easy REF: 1.2 TOP: II.MSC: Remembering

11. Which of the following questions should a successful model predict?i. How do changes in government policies change the labor market?ii. How does money supply influence inflation?iii. How does investment affect economic growth?

a. ii only d. i and iib. i, ii, and iii e. i and iiic. iii only

ANS: B DIF: Medium REF: 1.2 TOP: II.MSC: Applying

12. Which of the following questions should a successful model predict?i. How do changes in government policies change the labor market?ii. How does money supply influence inflation?iii. What is the relationship between inflation and unemployment?

a. iii only d. i and iib. ii only e. i and iiic. i, ii, and iii





13. Which of the following questions should a successful model predict?i. Why, in general, do Americans have higher incomes than Africans?ii. How much less unemployment is there during an economic expansion?iii. Why does the United States have a lower unemployment rate than Europe?

a. i and ii d. i, ii, and iiib. ii only e. i and iiic. iii only

ANS: D DIF: Medium REF: 1.2 TOP: II.MSC: Applying

14. Consider the following model of the labor market:

Labor supply: Ls= a × w +

Labor demand: Ld= f − w.

The endogenous variables are:

a. f and ab. a and the equilibrium wage, w

c. f and the equilibrium wage, wd. the equilibrium quantity of labor, L, and wage, we. a and the equilibrium quantity of labor, L

ANS: D DIF: Difficult REF: 1.2 TOP: II.MSC: Applying


Labor supply: Ls= a × w +

Labor demand: Ld= f − w

The values of the equilibrium quantity of labor, L, and wage, w, are:

a. L* = (a f + ) /( + a ); w* = ( f − ) /( + a )

b. L* = (a f + ) /( + a ); w* = ( f − ) /( − a )

c. L* = (a f + ) /( + a ); w* = ( f + ) /( + a )

d. L* = (a f + ) /( − a ); w* = ( f − ) /( − a )

e. L* =

a f +

+ a; w* =

f −

− a

ANS: A DIF: Difficult REF: 1.2 TOP: II.MSC: Applying


Labor supply: Ls= 1 + w

Labor demand: Ld= 11 − w

The value of the equilibrium quantity of labor, L, and wage, w, are:a. L* = 44/5; w* = 1/5 d. L* = 6; w* = 6b. L* = 5; w* = 6 e. Not enough information is given.c. L* = 6; w* = 5

ANS: C DIF: Difficult REF: 1.2 TOP: II.MSC: Applying



6 | Chapter 1

17. Income per person began at ________ in 1870 and ________ over a factor of 15 to ________ in 2012.a. $2,500; rose; $35,000 d. $44,000; fell; $3,500b. $2,800; rose; $44,000 e. $40,000; fell; $2,500c. $2,800; rose; $100,000

ANS: B DIF: Easy REF: 1.3 TOP: III.A.MSC: Remembering

18. Actual GDP is ________ to potential GDP.a. rarely not equal d. rarely equalb. always equal e. Not enough information is given.c. always not equal

ANS: D DIF: Easy REF: 1.3 TOP: III.A./B.MSC: Understanding

19. When we look at the ________ we are concerned with the ________.a. short run; causes of economic fluctuationsb. long run; causes of economic fluctuationsc. short run; determinants of economic growthd. long run; causes of inflatione. long run; money supply

ANS: A DIF: Easy REF: 1.3 TOP: III.A./B.MSC: Understanding

20. When we look at the ________ we are concerned with ________.a. long run; money supplyb. long run; causes of economic fluctuationsc. long run; causes of economic growthd. long run; causes of inflatione. long run; unemployment

ANS: C DIF: Easy REF: 1.3 TOP: III.A.MSC: Understanding

21. The short run is concerned with ________ while the long run is concerned with ________.a. inflation; unemploymentb. causes of economic fluctuations; inflationc. causes of economic fluctuations; determinants of economic growthd. determinants of economic growth; causes of economic fluctuationse. causes of economic fluctuations; money supply

ANS: C DIF: Easy REF: 1.3 TOP: III.B.MSC: Understanding

TRUE/FALSE

1. Macroeconomics is the study of an individual market.

ANS: F DIF: Easy REF: 1.1 TOP: I. MSC: Remembering NOT: It is the study of the overall performance of an economy.




2. These four steps, and in the following order, are used to study macroeconomic behavior: (1) document the facts; (2) develop a model; (3) compare the predictions of the model to the original facts; (4) use the model to make other predictions that eventually may be tested.

ANS: T DIF: Easy REF: 1.2 TOP: II.MSC: Applying

3. These four steps, and in the following order, are used to study macroeconomic behavior: (1) document the facts; (2) use the model to make other predictions that may eventually be tested; (3) compare the predictions of the model to the original facts; (4) develop a model.

ANS: F DIF: Easy REF: 1.2 TOP: II. MSC: Applying NOT: They are (1) document the facts; (2) develop a model; (3) compare the predictions of the model to the original facts; (4) use the model to make other predictions that eventually may be tested.

4. In the long run, we are concerned about the causes of economic growth.

ANS: T DIF: Easy REF: 1.3 TOP: III.A.MSC: Applying

5. In the long run, we are concerned about the causes of economic fluctuations.

ANS: F DIF: Easy REF: 1.3 TOP: III.A.MSC: Understanding NOT: We are concerned with economic growth.

6. In the short run, we are concerned with the causes of economic fluctuations and how to fix them.

ANS: T DIF: Medium REF: 1.3 TOP: III.B.MSC: Applying

7. In the short run, we are concerned with the causes of economic growth.

ANS: F DIF: Easy REF: 1.3 TOP: III.B. MSC: Understanding NOT: We are concerned with the causes of economic fluctuations.

8. An economic model is an exact replica of the macroeconomy.

ANS: F DIF: Medium REF: 1.2 TOP: II. MSC: Analyzing NOT: It is a very simplified version of the macroeconomy that gives us insight into how the economy functions.

9. An endogenous variable is often called a parameter.

ANS: F DIF: Medium REF: 1.2 TOP: II. MSC: Understanding NOT: It is a variable that is predicted by the model; the parameter is chosen by the economist.



8 | Chapter 1

10. An exogenous variable is one that is taken as given, that is, a parameter.

ANS: T DIF: Easy REF: 1.2 TOP: II.MSC: Remembering

SHORT ANSWER

1. What are at least four of the main concerns of the study of macroeconomics?

ANS: Here are a handful of options:a) Why does the average person today have 10 times more income than the typical person 100 years ago?b) What determines the rate of inflation, and how do we control it?c) How can we minimize the number of unemployed?d) What role, if any, does the government and/or central bank have in promoting economic wellbeing?e) Why do unemployment rates differ across countries?f) Why are some countries richer than others, and how can we promote development in lower income countries?g) Causes, and fixes, for economic crises

DIF: Medium REF: 1.1 TOP: I. MSC: Understanding

2. What are the steps macroeconomists use to analyze the economy?

ANS: a) Document the problem, identify and ask the question;b) Develop a framework for analysis, a model;c) Test the model using empirical analysis or some other comparable analysis and compare to the observed facts;d) Apply the model to similar situations and make other predictions.

DIF: Easy REF: 1.2 TOP: II. MSC: Remembering

3. Describe the differences between the long and short run.

ANS: The short run is concerned with the causes of economic fluctuations, the business cycle. In the long run, we are concerned with the determinants of economic growth. Thus, the long run is the trend of output, and the short run represents the fluctuations around the trend.

DIF: Medium REF: 1.3 TOP: III.A./B. MSC: Understanding





Labor Supply: Ls= 2w + 2

Labor Demand: Ld= 3 − 3w

a. Identify the model’s parameters.b. Identify the endogenous variables.c. Solve the model.d. In the labor supply equation, if the “ ” increases to some constant > 1, what would happen to the equilibrium wage and equilibrium labor?

ANS:

a. Using the notation in the text, Ls: a = 2, = 2, and Ld : f = 3, z = 3, z is not in the text, but this is the parameter on w in the demand question, which is implicitly equal to 1.b. They are the wage, w, and the labor in the market, L.c. Setting supply equal to demand:

2w + 2 = 3 − 3w

and solving yields w* = 1/5 and, subbing this into either equation, L* = 12/5.d. The real wage would fall and the equilibrium labor in the market would rise.

DIF: Difficult REF: 1.2 TOP: II. MSC: Applying



10

III. Mea sur ing Change over Time

A. Case Study: Beyond GDP

B. Examples

C. Indexes

1. Laspeyres, Paasche, and Chain Weighting

2. Price Indexes and Infl ation

3. Using Chain Weighted Data

IV. Comparing Economic Per for mance across Countries

CONCEPT MAP

I. Introduction

II. Mea sur ing the State of the Economy

A. Equilibrium

B. Expenditure Approach

C. Income Approach

D. Production Approach

E. What Is Included in GDP and What Is Not?

CHAPTER 2 Mea sur ing the Macroeconomy



Mea sur ing the Macroeconomy | 11

MULTIPLE CHOICE

1. Who led the team that created the original National Income and Product Accounts in the 1930s?a. John M. Keynes d. Simon Kuznetsb. Paul A. Samuelson e. Milton Friedmanc. William D. Nordhaus

ANS: D DIF: Easy REF: 2.1 TOP: I.MSC: Remembering

2. Which measure of overall economic activity was not available in the 1930s?a. Stock prices d. Steel productionb. GDP e. Gold pricesc. Industrial production

ANS: B DIF: Easy REF: 2.1 TOP: I.MSC: Understanding

3. The National Income and Product Accounts provides a system for:a. aggregating the production of all goods and services into a single measure of economic

activityb. aggregating the production of all goods into a single measure of economic activityc. aggregating the production of all services into a single measure of economic activityd. aggregating the production of most goods and services into a single measure of economic

activitye. aggregating the production of all goods and services into two measures of economic

activity

ANS: A DIF: Easy REF: 2.1 TOP: I.MSC: Understanding

4. In 2012, U.S. national output was equal to about:a. $15.7 billion d. $10 trillionb. $15.7 trillion e. $13.1 millionc. $50,000

ANS: B DIF: Easy REF: 2.2 TOP: II.MSC: Remembering

5. In 2012, U.S. national output per person was equal to about:a. $15.7 billion d. $12,000b. $43,000 e. $80,000c. $50,000

ANS: C DIF: Easy REF: 2.2 TOP: II.MSC: Remembering



12 | Chapter 2

6. The National Income and Product Accounts allows us to relate ________ to ________ to ________.a. household income; government income; firm incomeb. total output; total spending; inflationc. total output; inflation; total incomed. household income; household expenditure; total outpute. total output; total spending; total income

ANS: E DIF: Easy REF: 2.2 TOP: II.A.MSC: Applying

7. The National Income and Product Accounts identity states:a. Expenditure = Production + Income d. Expenditure = Production − Incomeb. Production = Expenditure − Income e. Production = Expenditure = Incomec. Production = Expenditure + Income

ANS: E DIF: Easy REF: 2.2 TOP: II.A.MSC: Applying

8. The difference between economic profits and normal profits is that:a. normal profits are earnings based on the normal competitive return to one’s own labor;

economic profits are the above-normal returns associated with prices that exceed competitive prices

b. economic profits are earnings based on the normal competitive return to one’s own labor; normal profits are the above-normal returns associated with prices that exceed competitive prices

c. normal profits are earnings based on the normal competitive return to one’s own labor; economic profits are the above-normal returns associated with prices that exceed monopolistic prices

d. economic profits are earnings based on the noncompetitive return to one’s own labor; normal profits are the above-normal returns associated with prices that exceed competitive prices

e. None of these answers are correct.

ANS: A DIF: Medium REF: 2.2 TOP: II.A.MSC: Understanding

9. Goods that are produced in a different year than they are sold are called:a. inventory d. a lossb. output adjustment e. net national productc. capital depreciation

ANS: A DIF: Medium REF: 2.2 TOP: II.A.MSC: Remembering

10. The statistic used by economists to measure the value of economic output is:a. the unemployment rate d. the GDP deflatorb. GDP e. the federal funds ratec. the CPI

ANS: B DIF: Easy REF: 2.2 TOP: II.MSC: Understanding




11. An economy’s ________ is equal to its ________.a. consumption; incomeb. expenditure on goods and services; outputc. expenditure on goods; expenditure on servicesd. investment; government expenditurese. taxes; net exports

ANS: B DIF: Easy REF: 2.2 TOP: II.A.MSC: Understanding

12. According to the expenditure approach, if Y is GDP, C is consumption, I is investment, G is government purchases, and NX is net exports, the national income identity can be written as:a. Y = C + I + G d. Y = (C + I + G)/NXb. Y = C + I + G − NX e. Y = C + I + G + NXc. Y + C = I + G + NX

ANS: E DIF: Easy REF: 2.2 TOP: II.B.MSC: Remembering

13. According to the expenditure approach, if Y is GDP, C is consumption, I is investment, G is government purchases, and NX is net exports, the national income identity can be written as:a. Y + C − G = I + NX d. Y = (C + I + G)/NXb. Y − C = I + G − NX e. Y = C + I + Gc. Y − C − G − I = NX

ANS: C DIF: Easy REF: 2.2 TOP: II.B.MSC: Remembering

14. According to the expenditure approach, if Y is GDP, C is consumption, I is investment, G is government purchases, and NX is net exports, which of the following is the national income identity?a. Y = C + I + G − NX d. Y = (C + I + G)/NXb. Y = C + I + G + NX e. Y = C + I + Gc. Y + C = I + G + NX

ANS: B DIF: Easy REF: 2.2 TOP: II.B.MSC: Remembering



14 | Chapter 2

Refer to the following table when answering the next four questions.

Table 2.1: U.S. 2011−2012 Expenditures ($ billions)

2011 2012Personal consumption expenditures 10,729 11,120 Goods 3,625 3,783 Services 7,104 7,337Gross private domestic investment 1,855 2,062 Fixed investment 1,818 2,004 Change in private inventories 37 58Net exports of goods and services –568 –560 Exports 2,094 2,184 Imports 2,662 2,744Government expenditures 3,060 3,063 Federal 1,222 1,214 State and local 1,838 1,849

15. Consider Table 2.1, which tabulates GDP for 2011–2012. Total GDP in 2011 is:a. $35,476 billion d. $10,092 billionb. $15,076 billion e. $6,382 billionc. $15,644 billion

ANS: B DIF: Medium REF: 2.2 TOP: II.B.MSC: Applying

16. Consider Table 2.1, which tabulates GDP for 2011–2012. Total GDP in 2012 is:a. $36,858 billion d. $15,685 billionb. $13,991 billion e. $6,554 billionc. $16,245 billion

ANS: D DIF: Medium REF: 2.2 TOP: II.B.MSC: Applying

17. Consider Table 2.1, which tabulates GDP for 2011–2012. The federal government’s share of total GDP in 2011 was about:a. 19.5 percent d. 20.3 percentb. 7.7 percent e. 8.1 percentc. 12.2 percent

ANS: D DIF: Medium REF: 2.2 TOP: II.B.MSC: Applying

18. Consider Table 2.1, which tabulates GDP for 2011–2012. Household consumption as a share of GDP ________ and investment’s share ________ over 2011–2012.a. decreased; increased d. increased; decreasedb. increased; increased e. stayed the same; stayed the samec. decreased; stayed the same

ANS: A DIF: Difficult REF: 2.2 TOP: II.B.MSC: Applying




19. In 2012, household expenditures accounted for about ________ of total GDP.a. 50 percent d. 76 percentb. 71 percent e. 13 percentc. 45 percent

ANS: B DIF: Easy REF: 2.2 TOP: II.B.MSC: Remembering

20. In 2012, investment expenditures accounted for about ________ of total GDP.a. 71 percent d. 10 percentb. −3.5 percent e. 16 percentc. 13 percent

ANS: C DIF: Easy REF: 2.2 TOP: II.B.MSC: Remembering

21. In 2012, government expenditures accounted for about ________ of total GDP.a. 5 percent d. 13 percentb. −4 percent e. 20 percentc. 66 percent


22. In 2012, net exports accounted for about ________ of total GDP.a. −4 percent d. 100 percentb. 13 percent e. −14 percentc. 20 percent

ANS: A DIF: Easy REF: 2.2 TOP: II.B.MSC: Remembering

23. Net exports are also called:a. capital outflows d. foreign aidb. the trade balance e. government transfersc. the current account

ANS: A DIF: Easy REF: 2.2 TOP: II.B.MSC: Remembering

24. Using the expenditure approach, government expenditures include:a. defense and nondefense federal, state, and local government expendituresb. only nondefense federal government expendituresc. federal government expenditures and transfer paymentsd. only state and local government expenditurese. residential investment and state and local government expenditures

ANS: A DIF: Medium REF: 2.2 TOP: II.B.MSC: Understanding

25. In 2012, government transfer payments accounted for about ________ of government spending.a. one-third d. three-fifthsb. half e. 100 percentc. 74 percent

ANS: A DIF: Medium REF: 2.2 TOP: II.B.MSC: Applying



16 | Chapter 2

26. Using the expenditure approach, consumption expenditures include household purchases of:a. durable and nondurable goods and servicesb. durable and nondurable goodsc. durable and nondurable goods and taxesd. durable and nondurable goods and residencese. nondurable goods

ANS: A DIF: Medium REF: 2.2 TOP: II.B.MSC: Understanding

27. Using the expenditure approach, investment includes:a. household residential expendituresb. firm structures, equipment, and inventoriesc. fixed firm and household structures, equipment, and inventoriesd. government and firm equipment expenditurese. government defense and firm equipment expenditures

ANS: C DIF: Medium REF: 2.2 TOP: II.B.MSC: Understanding

28. Which of the following is/are NOT included in the expenditure approach to national income accounting?a. transfer payments d. changes in stock pricesb. taxes e. None of these answers are correct.c. Social Security

ANS: E DIF: Medium REF: 2.2 TOP: II.B.MSC: Applying

29. Which of the following are NOT included in the expenditure approach to national income accounting?a. defense expenditures d. household service expendituresb. firm expenditures on equipment e. All of these answers are correct.c. residential expenditures

ANS: E DIF: Medium REF: 2.2 TOP: II.B.MSC: Applying

30. In 2012, the U.S. GDP was about ________, and ________ was the largest share.a. $5 trillion; net exports d. $13.6 billion; consumptionb. $22.5 billion; government expenditures e. $15.7 trillion; consumptionc. $10.5 trillion; investment


31. Which of the following is/are NOT included in the expenditure approach to national income accounting?a. software d. All of these answers are correct.b. taxes e. None of these answers are correct.c. defense expenditures

ANS: B DIF: Medium REF: 2.2 TOP: II.B.MSC: Applying




32. U.S. expenditure shares by households, firms, and the government have been relatively ________ except during ________.a. constant; the 1970s d. constant; the Vietnam Warb. variable; the Great Depression e. variable; the 1990sc. constant; World War II

ANS: C DIF: Medium REF: 2.2 TOP: II.C.MSC: Understanding

33. Since about ________, U.S. expenditure shares by households, firms, and the government have been relatively ________.a. 1939; constant d. 1950; constantb. the Great Depression era; constant e. 1929 until 1945; constantc. 1950; variable

ANS: D DIF: Medium REF: 2.2 TOP: II.C.MSC: Understanding

34. According to the text, the gains in GDP’s consumption share has:a. caused a rapid decline in inventoriesb. driven investment below 10 percentc. no impact on net exportsd. been at a cost to net exports and government spendinge. also pushed up the government expenditure share

ANS: D DIF: Medium REF: 2.2 TOP: II.C.MSC: Understanding

35. Prior to the late 1970s, the United States ________ about as much as it ________.a. exported; consumed d. invested; exportedb. exported; imported e. imported; investedc. imported; consumed

ANS: B DIF: Medium REF: 2.2 TOP: II.C.MSC: Understanding

36. According to the income approach to GDP, the largest percentage of GDP comes from:a. indirect business taxes d. depreciation of fixed capitalb. firm profits e. None of these answers are correct.c. compensation to employees

ANS: C DIF: Easy REF: 2.2 TOP: II.C.MSC: Understanding



18 | Chapter 2

Refer to the following table when answering the next three questions.

Table 2.2: U.S. 2011–2012 Domestic Income ($ billions)

2011 2012Compensation of employees, paid 8,303 8,600 Wage and salary accruals 6,669 6,914 Supplements to wages and salaries 1,634 1,687Taxes on production and imports 1,098 1,130Subsidies 62 61Net operating surplus 3,768 3,963 Private enterprises 3,794 3,997 Current surplus of government enterprises –27 –34Depreciation of fixed capital 1,937 2,012 Private 1,587 1,648 Government 349 364

37. Consider Table 2.2, National Income Accounts for 2011 and 2012. From this data, total GDP in 2011 was about ________ billion.a. $16,606 d. $15,044b. $14,008 e. $15,645c. $32,969

ANS: D DIF: Medium REF: 2.2 TOP: II.C.MSC: Applying

38. Consider Table 2.2, National Income Accounts for 2011 and 2012. From this data, total GDP in 2012 was about ________ billion.a. $15,644 d. $14,576b. $15,044 e. $17,201c. $34,339

ANS: A DIF: Medium REF: 2.2 TOP: II.C.MSC: Applying

39. Consider Table 2.2, National Income Accounts for 2011 and 2012. From this data, total net domestic product in 2012 was about ________ billion.a. $13,632 d. $14,576b. $13,708 e. $11,743c. $15,645

ANS: A DIF: Difficult REF: 2.2 TOP: II.C.MSC: Applying

40. Since about 1970, ________ income share of GDP has been ________.a. labor’s; rising d. indirect business taxes’; risingb. labor’s; the same e. the health sector’s; fallingc. profits’; falling

ANS: B DIF: Easy REF: 2.2 TOP: II.C.MSC: Remembering




41. In the past 60 years or so, labor’s share of GDP in the United States ________.a. is roughly two-thirds d. is equal to capital’s income shareb. is exactly 50 percent e. has risen sharplyc. is roughly one-third

ANS: A DIF: Easy REF: 2.2 TOP: II.C.MSC: Remembering

42. When the city of Los Angeles hires more police officers, ________ may rise, but it may be due to the ________ associated with crime.a. GDP; costs d. interest rates; costsb. revenues; costs e. prices; costsc. taxes; benefits

ANS: A DIF: Medium REF: 2.2 TOP: II.E.MSC: Analyzing

43. When a state builds a new penitentiary, ________ rise(s), but that does not imply that ________ improve(s).a. income; welfare d. GDP; welfareb. GDP; taxes e. taxes; costsc. GDP; transfers

ANS: D DIF: Medium REF: 2.2 TOP: II.E.MSC: Analyzing

44. Which of the following counts toward changes in the current GDP?a. You find $10 on the sidewalk.b. You purchase a used stereo from a friend.c. The government builds a new highway.d. You fix your own sink.e. None of these answers are correct.

ANS: C DIF: Medium REF: 2.2 TOP: II.E.MSC: Analyzing

45. Which of the following does NOT count toward changes in the current GDP?a. A student buys another year of tuition.b. You buy a used car from your parents.c. The local police station buys new squad cars.d. The Pentagon buys gasoline.e. None of these answers are correct.

ANS: B DIF: Medium REF: 2.2 TOP: II.E.MSC: Analyzing

46. By how much does the current GDP rise in the following scenario? A real estate agent sells a house for $250,000 that the previous owners had purchased 10 years earlier for $90,000. The real estate agent earns a commission of $10,000.a. $160,000 d. $90,000b. $250,000 e. $260,000c. $10,000

ANS: C DIF: Medium REF: 2.2 TOP: II.E.MSC: Analyzing



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