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       Multiple-choice questions to accompany 
        
       MACROECONOMIC ESSENTIALS  
       FOR MEDIA INTERPRETATION 
       (MIT Press, third edition, 2010) 
        
       Copyright 2010 by Peter E. Kennedy 
        
        
       This set of multiple-choice questions has been prepared for instructors wishing a bank of 
       such questions for examination purposes, and for students who find studying from such 
       questions to be an efficient way of learning. (My students have told me that the single 
       best thing to do to ensure doing well in my course is to keep up to date with this bank of 
       multiple-choice questions!) There are three generic types of questions.  
        
       Most numerous are questions based on short news clips, reflecting the unique flavor of 
       Macroeconomic Essentials for Media Interpretation. It is because this text's focus on the 
       interpretation of news commentary is so different from traditional texts that it was felt 
       necessary to provide this set of multiple-choice questions. These questions are based 
       almost exclusively on clips found in the text as examples or as end-of-chapter questions, 
       and so students who have worked through the text should be familiar with them. 
        
       Second are questions providing numerical examples to be worked out. These questions 
       are unlike traditional economics numerical multiple-choice questions, and so also reflect 
       a unique character of the text. Again, almost all of these questions are similar to 
       numerical questions found as end-of-chapter exercises in the text and so students who 
       have worked through the text should be familiar with them. 
        
       Third are a few traditional multiple-choice questions, included for completeness. 
        
       As with all multiple-choice questions, the intent is that the best of the possible answers 
       should be chosen. Answers are found at the end of each chapter’s questions. 
        
       Although I have tried hard to remove ambiguities and errors, some such may remain, for 
       which I apologize and accept full responsibility. Suggested corrections, sent to 
       kennedy@sfu.ca, would be appreciated. 
        
        
       Chapter 3: Measuring GDP and the Price Level 
        
       1. "Almost all of the fourth quarter increase in GDP wound up as unsold inventory sitting 
       on shelves." If it doesn't get sold, how could it get counted into GDP? 
       a) it is added when measuring GDP, as an element of investment demand 
       b) it is added when measuring GDP, as an element of consumption demand 
       c) it is subtracted when measuring GDP, as an element of investment demand 
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      d) it is subtracted when measuring GDP, as an element of consumption demand 
       
      2. "The oil crisis caused U.S. oil companies' overseas profits to shoot up, producing a 
      jump in ______ that could mislead policy-makers."  The blank should be 
      a) GDP   b) GNP   c) investment   d) interest rates 
       
      3. "Suppose a new computer is invented that costs one-quarter of existing computers and 
      performs as well. Now when GDP is calculated production of the same number of 
      computers creates only one-quarter as much dollar output - GDP falls!"  
      a) true, both nominal and real GDP fall            
      b) false, real GDP should rise because of adjustments for quality  
      c) false, real GDP should rise because of price index adjustments 
      d) false, real GDP should be unchanged because of price index adjustments   
       
      4. "Homemakers often feel their work is taken for granted, and advocates in the women's 
      movement argue that the statistical invisibility of homemakers' work has substantive 
      policy implications."  What is meant by "statistical invisibility" here? 
      a) homemakers' output is not counted in GDP 
      b) homemakers' output is double-counted in GDP 
      c) homemakers' output is added into GDP at an artificially-low price 
      d) homemakers' output is only counted into GDP if there exists a market counterpart 
       
      5. "Experts keen on the concept of Green GDP have offered a variety of suggestions to 
      make economic statistics more environmentally friendly." 
      An example of such a suggestion is 
      a) add the cost of cleaning up after an oil spill 
      b) ignore the cost of cleaning up after an oil spill 
      c) subtract the cost of cleaning up after an oil spill 
      d) add output produced in private vegetable gardens   
       
      6. "He claimed that a better measure of Turkish national income could be obtained by 
      including money sent back to their families by Turks living and working in Germany, 
      something that is currently ignored in the national accounts." This income is 
      a) included in Turkish GDP                b) included in Turkish GNP  
      c) included in both Turkish GDP and GNP   
      d) completely ignored in the Turkish accounts 
       
      7. "Note that the percent change in the GDP deflator is being used as the measure of 
      inflation rather than the more familiar CPI. The GDP deflator is a price index that 
      samples _______, not just those paid by consumers." The blank should be 
      a) all prices, including imports    
      b) prices of all domestically-produced goods and services 
      c) prices of all domestically-produced goods and services except exports 
      d) prices of all domestically-produced goods and services except those produced by 
      government 
       
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      8. "The government insists that the CPI measures consumer prices, not the cost of living. 
      But don't shoot the CPI - whether bringing good news or bad, it's the best messenger 
      we've got." During a typical inflation 
      a) the CPI rises by less than the cost of living 
      b) the CPI rises by more than the cost of living 
      c) the CPI and the cost of living rise by the same amount 
      d) there is no consistent relationship between rises in the CPI and in the cost of living 
       
      9. "The rapid development of computers makes it difficult to determine how much of the 
      change in measured prices of computers is due to pure price change or due to the change 
      in quality of the product. It is clear that the cost of obtaining a given amount of 
      computing capability has been falling." If the national accounts statistician makes proper 
      adjustments, this implies that computers should be causing the CPI to  
      a) fall       b) rise      c) be steady        d) move in no predictable direction 
       
      10. "As best we can tell, responded the central bank governor, the center of the 2 percent 
      inflation target, namely 1 percent, appears to correspond to genuine price stability once 
      the various sources of bias in the CPI are allowed for." An example of bias in the CPI 
      measure is that it 
      a) ignores import prices                       b) ignores investment goods 
      c) ignores most quality changes           d) values government output at cost 
              
      "The Commerce department announced that it is shifting from 1987 to 1992 as the base 
      year for calculating the nation's real GDP and price index."  
       
         11. In the new official figures, compared to the old official figures, the 1987 
         number for  real GDP is 
         a) smaller      b) unchanged       c) larger       d) not enough information to tell 
          
         12. In the new official figures, compared to the old official figures, the 1987 
         number for nominal GDP is 
         a) smaller       b) unchanged       c) larger       d) not enough information to tell 
          
         13. In the new official figures, compared to the old official figures, the 1987 
         number for the price index is 
         a) smaller        b) unchanged       c) larger       d) not enough information to tell 
       
      14. "The Commerce Department revised its estimate of real GDP to $3.877 trillion, up 
      from the earlier estimate of $3.835 trillion. Before adjusting for inflation, GDP was 
      $4.603 trillion, up from $4.523 trillion." The GDP deflator used for revised calculations 
      is 
      a) 118.0 or less             b) more than 118.0 but not more than 118.5  
      c) more than 118.5 but not more than 119.0          d) more than 119.0 
       
      15. Suppose that inventories fall by $2b, consumption increases by $8b, unemployment 
      insurance payments decline by $4b and imports rise by $1b. Then measured GDP should 
      rise by 
      a) $5b     b) $7b     c) $9b     d) $11b  
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              16. From the data below,  the official measure of GDP is 
              a) below 100   b) between 100 and 103   c) between 104 and 107   d) above 107 
               
                       Personal Consumption Expenditures             62.0 
                       Depreciation 5.0 
                       Indirect Business Taxes less Subsidies         1.0 
                       Gross Private Domestic Investment             15.0 
                       Exports 12.0 
                       Government Purchases of Goods and Services    20.0 
                       Government Transfer Payments                   4.0 
                       Imports 11.0 
                        
              17. Suppose the sum of consumption, investment, and government spending is $620 
              billion, where investment includes involuntary inventory accumulation of $2 billion in 
              addition to expenditure on plant and equipment, and government spending includes $5 
              billion interest payments on the national debt, $5 billion unemployment insurance 
              payments, $10 billion social security payments, $2 billion in salaries to elected 
              politicians, $14 billion in salaries to government employees and $25 billion expenditure 
              on goods and services produced by the private sector. If we imported $3 billion more 
              than we exported,  measured GDP by the adding expenditures method is 
              a) $600b or less               b) more than $600b but not more than $610b  
              c) more than $610b but not more than $620b          d) more than $620b 
               
              18. If in 1992 nominal GDP is 600 and real GDP is 500, then the price index for 1992 
              a) is 100                 b) is 120 
              c) cannot be calculated because we don't know the base year 
              d) cannot be calculated because we don't know last year's figures 
               
              19. If a typical market basket of goods and services cost $120 in 1975, the base year, and 
              $180 in 1985, the price index in 1985 would be     
              a) 120    b) 150    c) 160    d) 180 
               
              20. If the price index is 120 in 1989 and 150 in 1990, what is the rate of inflation?  
              a) 20%  b) 25%  c) 30%  d) more than 30% 
               
              21. Suppose nominal GDP is $566 billion in 1986, $600 billion in 1987 and $642 billion 
              in 1988. If 1986 is the base year, the price index is 105 in 1987, and real growth in 1988 
              is 3%,  from this information, the price index in 1988 is 
              a) less than 109    b) 109     c) greater than 109 but less than 110     d) 110 or over 
               
              22. Suppose hamburgers cost $1.20 last year and $1.32 this year, and the overall price 
              index (the GDP deflator) rose from 110 last year to 120 this year.   
              How much will 1000 hamburgers contribute to this year's real GDP? 
              a) $1,000    b) $1,100     c) $1,200     d) $1,320 
               
              23. If in 1994 nominal GDP is 540 and real GDP is 500,  the price index for 1994 is 
              a) 100   b) 108   c) 140   d) not enough information to tell