Economics Chapter 21: Gross Domestic Product
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Questions and Answers

Which individuals are considered unemployed using the official U-3 unemployment rate?

  • A, B, and C (correct)
  • A, C, and D
  • B, C, and D
  • C and D

    • In an economy with 40 million people employed, 2 million unemployed, and 8 million not in the labor force, what is the labor force participation rate?

  • 80 percent
  • 83 percent
  • 87.5 percent
  • 84 percent (correct)

    • The labor force according to the above table is ______________ million.

    125

    During a recession, which of the following is true?

    <p>Number of marginally attached workers increases</p> Signup and view all the answers

    Frictional unemployment is associated with normal labor turnover.

    <p>True</p> Signup and view all the answers

    What is the best example of a frictionally unemployed individual?

    <p>Mary who quit her job to find work closer to her home.</p> Signup and view all the answers

    Which of the following means that the CPI overstates the actual inflation rate?

    <p>All of the above cause the CPI to overstate inflation</p> Signup and view all the answers

    Substitution bias in the CPI refers to the fact that the CPI

    <p>Takes no account of the substitution of goods by consumers when relative prices change.</p> Signup and view all the answers

    The type of unemployment described in the story is ____ unemployment.

    <p>structural</p> Signup and view all the answers

    Reflecting the state of the economy in 2008, the lawyers that were fired are an example of ____ unemployment.

    <p>Cyclical</p> Signup and view all the answers

    The economic growth rate is measured as the

    <p>Annual percentage change of real GDP.</p> Signup and view all the answers

    Real GDP is $9 trillion in the current year and $8.6 trillion in the previous year. The economic growth rate between these years has been

    <p>4.65 percent.</p> Signup and view all the answers

    Which of the following events will increase short-run aggregate supply?

    <p>An advance in technology</p> Signup and view all the answers

    If the full-employment quantity of labor increases, then the

    <p>SAS curve shifts rightward and the LAS curve shifts leftward.</p> Signup and view all the answers

    The aggregate demand curve shows

    <p>The quantity of real GDP demanded at different price levels.</p> Signup and view all the answers

    Gross domestic product measures the value of the aggregate production of goods and services in a country during a given time period.

    <p>Measures the value of the aggregate production of goods and services in a country during a given time period.</p> Signup and view all the answers

    If Nike, an American corporation, produces sneakers in Thailand, this would add to Thailand's GDP but not to U.S. GDP.

    <p>Add to Thailand's GDP but not to U.S. GDP.</p> Signup and view all the answers

    Which of the following is a final good? Flour purchased at the store to bake cookies.

    <p>Flour purchased at the store to bake cookies.</p> Signup and view all the answers

    In 2013, Ozzie purchased a 2010 Ford Escort from his neighbor for his son and bought a 2013 new Ford for himself. Which, if any, of these transactions will be included in GDP in 2013?

    <p>Only the purchase of the Ford.</p> Signup and view all the answers

    Intermediate goods are excluded from GDP because their inclusion would involve double counting.

    <p>Their inclusion would involve double counting.</p> Signup and view all the answers

    If we compare the four sources of spending in the economy, we see that household consumption is the largest.

    <p>Household consumption is the largest.</p> Signup and view all the answers

    Compared to the other sources of spending, net exports is small and negative.

    <p>Small and negative.</p> Signup and view all the answers

    Which of the following are equal to one another? Aggregate production, aggregate expenditure, aggregate income.

    <p>I equals II equals III.</p> Signup and view all the answers

    GDP equals C + I + G + (X - M).

    <p>C + I + G + (X - M)</p> Signup and view all the answers

    Depreciation is defined as the decrease in the stock of capital due to wear and tear.

    <p>Decrease in the stock of capital due to wear and tear.</p> Signup and view all the answers

    A recessionary gap means that short-run macroeconomic equilibrium GDP is _____.

    <p>is less than full-employment GDP.</p> Signup and view all the answers

    If real GDP is less than potential GDP, then the economy is in ____ equilibrium.

    <p>below full-employment</p> Signup and view all the answers

    The short-run macroeconomic equilibrium is a price level of _____ and a real GDP of _____.

    <p>110; $500</p> Signup and view all the answers

    In short-run equilibrium, there is _____.

    <p>a recessionary gap of $100</p> Signup and view all the answers

    In the long run, if aggregate demand does not change, Lotus Land will return to full-employment as _____.

    <p>the money wage rate falls</p> Signup and view all the answers

    In the given figure, the inflationary gap when AD2 is the aggregate demand curve equals _____

    <p>the difference between $13.5 trillion and $13.0 trillion.</p> Signup and view all the answers

    If the economy is at point A in the figure, which of the following is true?

    <p>The economy might be at point A as a result of a recent cut in the tax rate.</p> Signup and view all the answers

    The long-run aggregate supply curve is vertical at $12 trillion but the short-run aggregate supply curve intersects the aggregate demand curve at $13 trillion. We know that _____.

    <p>adjustments will occur so that the short-run aggregate supply eventually intersects the aggregate demand curve at $12 trillion.</p> Signup and view all the answers

    A decrease in short-run aggregate supply _____ the equilibrium price level and _____ the equilibrium quantity of real GDP.

    <p>increases; decreases</p> Signup and view all the answers

    Assuming the economy is at long run equilibrium and oil prices rise. As a result, the _____ shifts _____.

    <p>SAS; leftward</p> Signup and view all the answers

    Stagflation is the combination of _____.

    <p>inflation and recession.</p> Signup and view all the answers

    _____ economists believe that the economy is self-regulating and always at full employment.

    <p>Classical</p> Signup and view all the answers

    Which of the following statements is INCORRECT?

    <p>A Keynesian believes the business cycle is mainly influenced by changes in people's expectations.</p> Signup and view all the answers

    A Keynesian economist believes that _____.

    <p>the economy is self-regulating and will normally, though not always, operate at full employment if fiscal policy is not erratic.</p> Signup and view all the answers

    _____ economists believe that the economy is self-regulating and will be at full employment as long as monetary policy is not erratic.

    <p>Monetarist</p> Signup and view all the answers

    Which of the following is not a phase or turning point of the business cycle?

    <p>shutdown</p> Signup and view all the answers

    The four parts of the business cycle occur in the following order:

    <p>expansion, trough, peak, recession</p> Signup and view all the answers

    An economic expansion rather than a recession occurs when:

    <p>when growth in real GDP is positive</p> Signup and view all the answers

    The use of purchasing power parity prices decreases the real GDP per person statistics published by the International Monetary Fund.

    <p>dog</p> Signup and view all the answers

    Real GDP does not show the state of economic welfare in a country in part because GDP omits household production, leisure time available, and the quality of the environment.

    <p>I, II and III</p> Signup and view all the answers

    In calculating GDP, household production is not included because there is no market transaction.

    <p>True</p> Signup and view all the answers

    Which of the following is not included in real GDP?

    <p>production that takes place in the underground economy</p> Signup and view all the answers

    Pollution is a by-product of some production processes, so on this count real GDP as measured tends to overstate economic welfare.

    <p>tends to overstate economic welfare</p> Signup and view all the answers

    Real GDP overvalues household production.

    <p>Real GDP overvalues household production</p> Signup and view all the answers

    What was the value of net exports of goods and services in 1999?

    <p>-$254 billion</p> Signup and view all the answers

    What was (nominal) GDP equal to in 1999?

    <p>$9,257 billion</p> Signup and view all the answers

    To see how variables evolve over time we use

    <p>a time-series graph</p> Signup and view all the answers

    Which of the following is not a phase or turning point of the business cycle?

    <p>Shutdown</p> Signup and view all the answers

    The four parts of the business cycle occur in the following order:

    <p>Recession, trough, expansion, peak.</p> Signup and view all the answers

    A recession is commonly defined as occurring when:

    <p>Real GDP decreases for a period of 6 or more months</p> Signup and view all the answers

    An expansion ends when the economy:

    <p>Hits a peak and then enters a recession.</p> Signup and view all the answers

    An economic expansion rather than a recession occurs when:

    <p>When growth in real GDP is positive.</p> Signup and view all the answers

    In the above figure, which point represents the under use of resources?

    <p>G</p> Signup and view all the answers

    In the above figure, which point represents a situation with significant shortages of labor, capital, and other resources?

    <p>F</p> Signup and view all the answers

    In the above figure, which point represents an economy which is at the peak part of a business cycle?

    <p>F</p> Signup and view all the answers

    The use of purchasing power parity prices results in:

    <p>Accounts for differences in the prices of the same goods in different countries when measuring real GDP.</p> Signup and view all the answers

    The aggregate demand curve shows that, if other factors are held constant, a higher price level results in a decrease in the quantity of real GDP demanded.

    <p>Higher price level results in a decrease in the quantity of real GDP demanded.</p> Signup and view all the answers

    The AD curve slopes downward due to the wealth and substitution effects.

    <p>Downward due to the wealth and substitution effects.</p> Signup and view all the answers

    Your real wealth is measured as the amount of goods and services your wealth will buy.

    <p>Amount of goods and services your wealth will buy.</p> Signup and view all the answers

    As the price level falls and other things remain the same, real wealth ___ and ___.

    <p>increases; the quantity of real GDP demanded increases</p> Signup and view all the answers

    According to the wealth effect, if real wealth decreases then people

    <p>Decrease their consumption expenditure.</p> Signup and view all the answers

    The intertemporal substitution effect refers to substitution of

    <p>Goods and services today for goods and services in the future.</p> Signup and view all the answers

    One reason that the aggregate demand curve has a negative slope is because

    <p>People buy more foreign goods when the domestic price level rises.</p> Signup and view all the answers

    In the above figure, the economy is initially at point B. Then the price level falls by 10. The wealth effect will help

    <p>Move the economy to point A.</p> Signup and view all the answers

    Which of the following does NOT shift the aggregate demand curve?

    <p>An increase in the price level</p> Signup and view all the answers

    Which of the following shifts the aggregate demand curve rightward?

    <p>An increase in investment</p> Signup and view all the answers

    If the expected future inflation rate decreases, then

    <p>Aggregate demand decreases.</p> Signup and view all the answers

    People expect their incomes will decrease next year. As a result, the ___ will shift ___.

    <p>Aggregate demand curve; leftward</p> Signup and view all the answers

    A decrease in government transfer payments

    <p>Decreases aggregate demand.</p> Signup and view all the answers

    The aggregate demand curve shifts rightward when

    <p>Shifts rightward when taxes are decreased.</p> Signup and view all the answers

    Which of the following shifts the aggregate demand curve rightward?

    <p>An increase in the quantity of money</p> Signup and view all the answers

    The aggregate demand curve shows that, if other factors are held constant,

    <p>Higher price level results in a decrease in the quantity of real GDP demanded.</p> Signup and view all the answers

    The AD curve slopes

    <p>Downward due to the wealth and substitution effects.</p> Signup and view all the answers

    Your real wealth is measured as the

    <p>amount of goods and services your wealth will buy.</p> Signup and view all the answers

    As the price level falls and other things remain the same, real wealth __ and __.

    <p>increases; the quantity of real GDP demanded increases</p> Signup and view all the answers

    According to the wealth effect, if real wealth decreases then people

    <p>Decrease their consumption expenditure.</p> Signup and view all the answers

    The intertemporal substitution effect refers to substitution of

    <p>Goods and services today for goods and services in the future.</p> Signup and view all the answers

    One reason that the aggregate demand curve has a negative slope is because

    <p>People buy more foreign goods when the domestic price level rises.</p> Signup and view all the answers

    In the above figure, the economy is initially at point B. Then the price level falls by 10. The wealth effect will help

    <p>Move the economy to point A.</p> Signup and view all the answers

    Which of the following does NOT shift the aggregate demand curve?

    <p>An increase in the price level</p> Signup and view all the answers

    Study Notes

    Measuring National Income and Output

    Gross Domestic Product (GDP)

    • Measures the value of aggregate production of goods and services in a country during a given time period
    • Includes all goods and services produced within a country's borders, regardless of the nationality of the producer
    • Excludes intermediate goods and services
    • Can be calculated using the expenditure approach: GDP = C + I + G + (X - M)

    Expenditure Approach

    • Consumption (C): household expenditures on goods and services
    • Investment (I): expenditures on capital goods, inventories, and business expenditures
    • Government Expenditure on Goods and Services (G): government expenditures on goods and services
    • Net Exports (X - M): exports minus imports of goods and services

    Income Approach

    • Compensations of employees: wages, salaries, and benefits
    • Rent and royalty income: income from owned resources
    • Corporate profits: profits earned by corporations
    • Proprietor's income: income of self-employed individuals

    Nominal GDP vs. Real GDP

    • Nominal GDP: value of GDP at current prices
    • Real GDP: value of GDP at constant prices (adjusted for inflation)
    • Real GDP is a better indicator of economic growth and welfare

    Business Cycle

    • Fluctuations in the level of real GDP around potential GDP
    • Phases of the business cycle: expansion, peak, recession, trough
    • Recession: a period of at least two consecutive quarters of negative economic growth
    • Expansion: a period of economic growth

    Limitations of GDP as a Measure of Welfare

    • Omits household production: value of goods and services produced within households
    • Omits leisure time: value of time spent on leisure activities
    • Omits environmental degradation: negative externalities from production
    • Omits underground economy: illegal or unreported economic activitiesHere are the study notes for the provided text:

    Labor Force and Unemployment

    • The labor force is equal to the number of people employed plus the number of people unemployed.
    • The official U-3 unemployment rate includes persons without a job who have made efforts in the last week to find a job.
    • Full-time students and prisoners are not in the labor force.
    • To calculate the unemployment rate, we need to know the number of unemployed persons and the labor force.
    • The employment-to-population ratio is the number of employed people as a percentage of the working-age population.

    Unemployment Types

    • Frictional unemployment is associated with normal labor turnover.
    • Structural unemployment occurs when workers' skills do not match the available jobs.
    • Cyclical unemployment fluctuates over the business cycle.
    • Marginally attached workers are not actively searching for work but are available for work.

    Business Cycle

    • Cyclical unemployment increases during recessions and decreases during expansions.
    • The natural unemployment rate occurs when only frictional unemployment is present.
    • The natural unemployment rate is the unemployment rate when the economy is at potential GDP.

    Inflation

    • Inflation is an increase in the general price level of goods and services in an economy over time.
    • Hyperinflation is very high inflation rates.
    • The cost of inflation to society includes unpredictable changes in the value of money.
    • The Consumer Price Index (CPI) is a measure of inflation.

    Economic Growth

    • The economic growth rate is measured as the annual percentage change of real GDP.
    • Real GDP per person is a measure of the standard of living.
    • If the population growth rate is greater than the growth rate of real GDP, then real GDP per person falls.

    Aggregate Supply

    • The supply of real GDP is a function of the quantities of labor, capital, and the state of technology.
    • The aggregate supply curve depicts the relationship between the price level and the aggregate quantity supplied.
    • In the macroeconomic short run, actual real GDP may be less than or more than potential GDP.### Aggregate Supply and Demand
    • The long-run aggregate supply curve is vertical because along it, as prices rise, the money wage rate stays constant.
    • The short-run aggregate supply curve is upward sloping because a lower price level creates a wealth effect, and lower taxes motivate people to work more.
    • The short-run aggregate supply curve shifts when the money wage rate or other resource prices change.
    • The long-run aggregate supply curve shifts when there is a change in the quantity of capital or labor, a technological advancement, or a change in institutions.

    Shifts in Aggregate Demand

    • The aggregate demand curve slopes downward because of the wealth effect and the substitution effect.
    • The aggregate demand curve shifts when there is a change in consumer confidence, government expenditures, or net exports.

    Short-Run Equilibrium

    • Short-run equilibrium occurs at the intersection of the short-run aggregate supply curve and the aggregate demand curve.
    • In the short run, real GDP can be greater than or less than potential GDP because the money wage rate is fixed.

    Economic Growth

    • Economic growth is an increase in potential GDP as the long-run aggregate supply curve shifts rightward.
    • If aggregate demand grows only slightly faster than potential GDP, then the economy will experience economic growth with low inflation.

    Full-Employment Equilibrium

    • Full-employment equilibrium is achieved when real GDP equals potential GDP.
    • An inflationary gap occurs when real GDP exceeds potential GDP.
    • A recessionary gap occurs when real GDP is less than potential GDP.

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    Multiple choice questions about Gross Domestic Product (GDP) and its definition. Learn about the value of aggregate production of goods and services in a country.

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