Question 1

Which of these is NOT included in gross private domestic investment?

Accepted Answer

Gross private domestic investment includes the construction of residential housing, new equipment purchased by businesses, and an increase in business inventories, but it does not include purchases of common stock by investors.

Question 2

Martin purchases 500 shares of stock in ABC Company at a price of $10 per share. He pays his stockbroker a commission of $50 for helping with the transaction. How much does GDP change as a result of Martin's commission payment?

Accepted Answer

GDP rises by the amount of the commission ($50) because it is a service transaction that contributes to the country's economic activity. The purchase of stocks itself does not affect GDP, as it is merely a transfer of ownership.

Question 3

A business cycle is

Accepted Answer

A business cycle is a periodic fluctuation of economic activity, characterized by alternating periods of expansion and contraction. It is a natural occurrence in a market economy, driven by various factors such as changes in interest rates, consumer confidence, and government policies. The business cycle is not the engine of economic growth, but rather a reflection of the ups and downs of the economic activity. It is also different from the consumption life cycle, which refers to the pattern of individual consumption behavior over a lifetime.

Question 4

Leisure time is included in the GDP accounts.

Accepted Answer

Leisure time is not included in the GDP accounts as it is not a tangible good or service that is produced and sold in the market. GDP only includes goods and services that are purchased by consumers or businesses for their own use or investment. Leisure time is considered a personal choice and not a part of economic activity.

Question 5

The National Bureau of Economic Research determines that a recession is over

Accepted Answer

The National Bureau of Economic Research (NBER) defines the end of a recession as when the economy hits its trough, meaning the point at which it stops contracting and begins to expand again. This is not necessarily tied to a specific unemployment rate, stock market level, or period of growth.

Question 6

The main idea of a circular flow diagram is that every dollar spent in an economy becomes a dollar of income to someone else.

Accepted Answer

The circular flow diagram illustrates how money, goods, and services flow through an economy. It shows that every dollar spent by one person becomes income for someone else. This cycle helps to keep the economy functioning and growing.

Question 7

Gross private domestic investment is a key factor behind economic growth in the United States.

Accepted Answer

Gross private domestic investment, which includes spending on business equipment, structures, and residential construction, contributes to the expansion of the economy by increasing productivity, employment, and income.

Question 8

A simple circular flow diagram shows that the factors of production are

Accepted Answer

The factors of production, which include land, labor, capital, and entrepreneurship, are purchased by businesses in order to produce goods and services. This is represented in the circular flow diagram as businesses buying inputs or factors of production from households and markets, which is then used to produce goods and services that are sold back to households and markets. The other choices are incorrect because the government does not necessarily own the factors of production, and households do not purchase the factors of production themselves, but rather sell their labor or land to businesses.

Question 9

GNP includes output produced _____, but it does NOT include output produced _____.

Accepted Answer

GNP (Gross National Product) includes the total value of all goods and services produced by the nationals of a country (in this case, U.S. citizens) regardless of where they are produced. This means it includes output produced outside the United States by U.S. citizens but does not include output produced inside the United States by foreign citizens.

Question 10

Joyce is an accountant. Sarah, her hair stylist, cuts and perms her hair in exchange for having her taxes done. This is an example of an economic transaction that is NOT included in the national income and product accounts.

Accepted Answer

This is an example of a barter transaction, which typically goes unreported and is not included in the calculation of national income and product accounts because no money changes hands.

Question 11

The Leading Economic Index sometimes predicts recessions that do not occur.

Accepted Answer

The Leading Economic Index (LEI) is a composite index of several economic indicators that are supposed to predict future economic activity. However, there have been instances where the LEI has suggested an upcoming recession, but a recession did not occur. This is because economic forecasting is not an exact science and unexpected events, such as policy changes or natural disasters, can have an impact on the economy.

Question 12

The National Activity Index is

Accepted Answer

The National Activity Index is a weighted average of 85 indicators of national economic activity, including indicators related to employment, production, income, and sales.

Question 13

During a typical economic recovery

Accepted Answer

During a typical economic recovery, unemployment decreases as businesses begin to hire more workers to meet the increase in demand for goods and services. Inflation may rise, but it does not necessarily decline. People tend to become more optimistic as they see the economy improving, and incomes tend to rise rather than fall.

Question 14

What component of GDP includes college tuition?

Accepted Answer

College tuition falls under the services category of GDP, as it is considered a service provided by colleges and universities.

Question 15

Henry sells brownies to his classmates at college for cash. His income from this product is probably NOT part of the informal economy.

Accepted Answer

Income earned from selling goods or services outside of formal channels, such as under-the-table jobs or illegal activities, is part of the informal economy. Since Henry is selling brownies for cash to his classmates at college, and assuming he is not engaging in any illegal activity or avoiding taxes, his income is likely part of the formal economy.

Question 16

Which phase of the business cycle occurs immediately after a recovery?

Accepted Answer

After a recovery, the economy reaches the peak phase, which is the point at which it transitions from expansion to the next phase of the cycle, potentially leading to a contraction or recession.

Question 17

To solve the double counting problem, economists include only final goods and services in the summing of gross domestic product.

Accepted Answer

This is true. Economists include only final goods and services in the calculation of GDP to avoid double counting. Intermediate goods, which are used to produce final goods, are not included.

Question 18

What impact will a rising price level have on real GDP?

Accepted Answer

Real GDP is adjusted for inflation and measures the value of goods and services produced in an economy at constant prices. Therefore, changes in the price level do not impact real GDP, as it reflects the economy's output in physical terms, not nominal terms affected by inflation.

Question 19

According to the circular flow model, the value of the household sector and the value of the business sector will

Accepted Answer

In the circular flow model, the value of the household sector and the value of the business sector are always equal because every transaction in the product market involves both a buyer and a seller. The total value of goods and services produced by businesses equals the total income earned by households, and vice versa. Therefore, the value of the household sector and the business sector are always equal.

Question 20

Which of these is NOT a problem in using GDP to measure standards of living?

Accepted Answer

GDP already includes exports and imports, so their exclusion is not a problem in measuring standards of living. However, failure to include the value of nonmarket work, environmental impacts, and investments in human capital are all valid criticisms of using GDP as a standard of living measure.

Quiz 5: Introduction to Macroeconomics