Question 1

The largest component of private investment expenditure is

Accepted Answer

Purchases of newly-produced plant and equipment, also known as business investment, make up the largest component of private investment expenditure. This includes investments in machinery, buildings, and other equipment that are used in the production process.

Question 2

Personal consumption spending now comprises approximately what fraction of GDP?

Accepted Answer

According to recent data from the Bureau of Economic Analysis, personal consumption expenditures account for about 75% of GDP in the United States.

Question 3

Assume net exports are -$220,consumption is $5,000,tax revenues are $1,000,government purchases are $1,500,and 2003 GDP,calculated by the expenditure approach,is $8,000.We can conclude that

Accepted Answer

Using the GDP formula: 
Y=C+I+G+NX 
where Y=GDP,C=Consumption,I=Investment,G=Government spending, and NX=Net exports. 
Given: 
NX=-$220 
C=$5,000 
G=$1,500 
Y=$8,000 
Solve for I: 
$8,000=$5,000+I+$1,500-$220 
$8,000=$7,280+I 
I = $720+ $2,000 government purchases (G) - $1,000 tax revenues, 
which equals: $720 + $2,000 - $1,000 = $1,720 
Therefore, private investment was $1,720, which is option D.

Question 4

An example of a capital good is

Accepted Answer

A house owned and occupied by a family is considered a capital good because it is a long-term asset used to produce housing services.

Question 5

The most volatile component of GDP is

Accepted Answer

Private investment spending is generally the most volatile component of GDP due to changes in business confidence, interest rates, and overall economic conditions. Government purchases of goods and services, private consumption expenditures, and the nation's capital stock tend to be more stable over time. Tax revenue, while subject to some volatility, is not considered a component of GDP.

Question 6

Private investment during a year includes

Accepted Answer

Private investment includes spending on plant and equipment, new housing construction, and changes in inventories. Inventories and stocks and bonds are not considered private investments. Government spending and household spending on stocks and bonds are not components of private investment.

Question 7

Fun Time Toys produced $60 million worth of toys in 2008.Because of a slow Christmas shopping season,only $50 million worth was sold to consumers,and the remaining $10 million worth went into inventories.Based on this information,how was GDP affected in 2008?

Accepted Answer

GDP includes all goods produced, so the entire $60 million is counted: $50 million as consumption and $10 million as inventory investment.

Question 8

When we add the up value of all capital goods,we determine

Accepted Answer

When the value of all capital goods is added up, we determine the capital stock. The capital stock is the total amount of capital goods in an economy at a given point in time, including buildings, equipment, and infrastructure. It is a stock concept as opposed to a flow concept like private investment, GDP, or inventory.

Question 9

Inventories - goods produced but not sold - are included in GDP because we want to measure total production,not just what is purchased

Accepted Answer

Inventories represent goods that have been produced and are ready for sale, but have not been sold yet. They are included in GDP because they are a part of total production, even though they have not been purchased or consumed yet. When inventories increase, it indicates that businesses are producing more than what is currently being sold, which can be an indicator of future economic growth.

Question 10

Even though households do not actually purchase certain items,the government estimates and adds to the consumption component what the household would pay for these items in the marketplace.An example of this type of item is

Accepted Answer

The government estimates the value of food that a farm family grows for themselves and adds it to the consumption component, as it represents goods produced and consumed by the household.

Question 11

Which of the following would not be included in the consumption component of GDP?

Accepted Answer

The purchase of a new home would be included in the investment component of GDP, not the consumption component.

Question 12

Which of the following is the most volatile component of private investment?

Accepted Answer

Changes in business inventories are the most volatile component of private investment as they can fluctuate greatly based on changes in market conditions and business decisions. Plant and equipment purchases and new home construction tend to be more long-term investments, while purchases of services and consumption of nondurables are typically considered part of personal consumption expenditures rather than private investment.

Question 13

Which of the following describes the relationship between GDP and government spending?

Accepted Answer

Government spending is not included as a component of GDP. Therefore, to determine the relationship between GDP and government spending, we need to subtract government spending from GDP. This results in the formula: GDP = C + I + G + (X-M), where G represents government spending. Rearranging this formula gives us Government spending = GDP - C - I - (X-M), which matches option D.

Question 14

Assume that the telephone company built a new plant this year.The value of the new plant is

Accepted Answer

The new plant built by the telephone company is included in GDP because it represents a final good produced for sale in the market. It is a part of private investment spending since it is built by a private company. Therefore, it is neither counted as public investment nor an intermediate good.

Question 15

In 2008,Computers,Inc.produced personal computers worth $20 million.If $16 million worth were sold and $4 million worth remained unsold at year end and were added to inventories,how much did Computers,Inc.contribute to GDP in 2008?

Accepted Answer

GDP includes the total value of goods produced, whether sold or added to inventory. Thus, Computers, Inc. contributed $20 million to GDP in 2008.

Question 16

If private investment increased by $50 billion while GDP remained the same,which of the following could have occurred,all else being the same?

Accepted Answer

If private investment increased by $50 billion and GDP remained the same, consumption spending must have decreased by $50 billion to offset the increase in investment, keeping GDP unchanged.

Question 17

If the boat industry produced $20 billion worth of boats,but $50 billion worth of boats were sold to consumers,the decrease in inventory would lead to

Accepted Answer

If the boat industry produced $20 billion worth of boats, but $50 billion worth of boats were sold to consumers, it means that the industry had to decrease its inventory by $30 billion to meet the demand. This decrease in inventory would lead to a decrease in the nation's capital stock, as the boat industry would have less inventory to produce and sell in the future.

Question 18

In 2008,the Ace Card Company produced $10 million worth of playing cards.Because of strong consumer demand for their product in 2008,Ace sold $12 million worth of cards,reducing their inventories by $2 million.How much value did Ace add to GDP in 2008?

Accepted Answer

The answer of In 2008,the Ace Card Company produced $10...

Question 19

Which of the following would be included in the consumption component of GDP?

Accepted Answer

The consumption component of GDP includes spending on goods and services by households. Movie ticket sales fall under this category as they represent spending by individuals on a leisure activity. The other options do not fall under the consumption component of GDP. Purchase of a new home falls under the investment component, purchase of used clothes and a baseball card collection at a yard sale fall under the second hand market and chain saw purchase may fall under the investment or government component depending on the buyer.

Question 20

The largest component of GDP is

Accepted Answer

Private consumption expenditures typically make up the largest component of GDP in most countries. This includes spending by households on goods and services such as food, clothing, housing, and healthcare. Private consumption is a major driver of economic growth and can reflect the overall health of the economy.

Quiz 6: Production, Income, and Employment