Multiple-Choice Review Questions

1. Which of the following is counted in U.S. GDP?
(A) Final goods and services purchased by the government
(B) Both the peaches used by a bakery to make peach pies and the peach pies
(C) Museum purchases of ancient art
(D) Imported goods and services
(E) Sales of antiques

2. Which of the following is counted in GDP?
(A) The estimated value of housework
(B) The value of illegally produced goods and services
(C) The value of stocks, bonds, and other financial assets
(D) The change in business inventories
(E) Secondhand sales

3. According to the way in which economists use the word, the bulk of “investment” is done by
(A) households.
(B) businesses.
(C) government.
(D) foreigners.
(E) all of the above.

4. In the equation GDP = C + I + G + X, X stands for
(A) exports.
(B) expenditures.
(C) exports minus imports.
(D) imports minus exports.
(E) export taxes.

5. GDP measures
(A) production within a nation’s borders.
(B) production by a nation’s citizens wherever they may be.
(C) total income earned producing goods and services.
(D) (B) and (C)
(E) (A) and (C)

6. Suppose a nation produces only two goods: pizza and soda. In 2018, 20 pizzas are sold at $10 each and 10 sodas are sold at $1 each. In 2016, the base year, 10 pizzas were sold at $8 each and 10 sodas were sold at $1 each. Therefore, nominal GDP in 2018 is __________ and real GDP in 2018 is ____________.
(A) $30; $20
(B) $170; $90
(C) $210; $100
(D) $110; $90
(E) $210; $170

7. Imagine an economy that produces only two goods: cheese and crackers. Calculate GDP for this economy if cheese retails for $3 a pound and 10 pounds are produced while crackers sell for $2 a pound and 20 pounds are produced.
(A) $35
(B) $70
(C) $150
(D) $1,200
(E) Not enough information is given to calculate GDP.

8. Suppose a nation produces only two goods: pizza and soda. In 2018, 20 pizzas are sold at $10 each and 10 sodas are sold at $1 each. In 2016, the base year, 10 pizzas were sold at $8 each and 10 sodas were sold at $1 each. Therefore, real GDP in 2016 is __________.
(A) $90
(B) $110
(C) $170
(D) $210
(E) $330

9. Your grandparents buy the vacation house they used to rent every year.
(A) GDP decreases by the amount of the purchase because C decreases.
(B) GDP increases by the amount of the purchase because I increases.
(C) GDP is unaffected because it is a secondhand sale.
(D) GDP decreases because I decreases.
(E) I increases, but C decreases.

10. The cabbages you grow in your summer garden are
(A) counted in GDP under C.
(B) counted in GDP under I.
(C) counted in GDP but not NDP.
(D) not counted in GDP.
(E) counted in final sales but not GDP.

11. If your grandparents have a new home built for their retirement, this would primarily affect
(A) consumption.
(B) government purchases.
(C) investment.
(D) exports.
(E) imports.

12. If a U.S. citizen buys a television made in Korea by a Korean firm, then this action by itself ____ U.S. net exports and ____ Korean net exports.
(A) increases; does not affect
(B) increases; decreases
(C) increases; increases
(D) decreases; decreases
(E) decreases; increases

13. Given:
Government expenditures.........................$300
Depreciation................................................$200
Investment...................................................$400
Consumption expenditures.......................$900
Taxes..............................................................$100
Corporate profits..........................................$500
Exports..........................................................$200
Imports........................................................$300
GDP equals ________.
(A )$1,500
(B) $1,700
(C) $1,800
(D) $2,100
(E) $2,900

14. Which of the following events has no effect on GDP?
(A) You buy a 1957 Chevy from a friend.
(B) The Department of Transportation repaves a road.
(C) Your friends make a music CD that doesn’t sell any copies.
(D) A college buys computers.
(E) You buy a bottle of French wine.

15. Which of the following will have an effect on GDP?
(A) You lose $50 betting with a friend.
(B) You fix your brother’s car without buying any new parts.
(C) Your father’s firm makes computers and exports them to China.
(D) You buy 1,000 shares of stock in a corporation.
(E) Your wealthy uncle buys a painting by Picasso.

Free-Response Review Questions

1. Explain the difference between nominal GDP, real GDP, and GDP per capita.
2. Suppose that production and prices rise from one year to the next but population stays constant. Will each of the three statistics above rise, fall, or remain unchanged? Explain your reasoning.
3. In what type of situation is GDP per capita more appropriate than nominal or real GDP?
4. Is GDP an overestimate or an underestimate of all that is produced in a nation? Explain.