The following multiple-choice questions are extracted from CourseMate, Principles of

Economics by Mankiw; available when you register through http://login.cengage.com.

Chapter 23: Measuring a Nation's Income

1. GDP only measures production, not income.
a.
b.

True
False

2. The sale of used cars is not included in GDP.

a.
b.

True
False

3. A shampoo company produces 100,000 bottles of shampoo. Of these they sell 90,000 to consumers at
$5 a bottle and the other 10,000 go into inventory. Overall the shampoo adds $450,000 to this year's GDP.
a.
b.

True
False

4. If country A has a higher level of real GDP per person than country B, we can be certain that people in
country A are better off.
a.
b.

True
False

5. Which of the following is included in GDP?

a.
b.
c.
d.

both the value of a meal served at a restaurant and the value of the food used to prepare the meal
the value of a meal served at a restaurant but not the value of the food used to prepare the meal
the value of the food used to prepare the meal, but not the value of the meal served at a restaurant
neither the value of a meal served at a restaurant nor the value of the food used to prepare the meal

6. Mike is a U.S. citizen who works in a motorcycle factory in Mexico. Wendy is a foreign exchange student
from Germany who works in a fast food restaurant in the U.S. Who's output is included in GDP?
a.
b.
c.
d.

both Mike's and Wendy's

Mike's but not Wendy's
Wendy's but not Mike's
neither Mike's nor Wendy's

7. Which of the following are included in the investment category of GDP?

a.
b.

both purchases of new capital such as forklifts to be used in a warehouse and purchases of financial
assets such as stocks and bonds
purchases of new capital such as forklifts to be used in a warehouse but not purchases of financial assets
such as stocks and bonds

c.
d.

purchases of new capital such as forklifts to be used in a warehouse and purchases of financial assets
such as stocks and bonds
neither purchases of new capital such as forklifts to be used in a warehouse nor purchases of financial
assets such as stocks and bonds

8. Which of the following is included in GDP?

a.
b.
c.
d.

both the salaries of school teachers and Social Security benefits

the salaries of school teachers but not Social Security benefits
Social Security benefits but not the salaries of teachers
neither the salaries of school teachers nor Social Security benefits

9. To produce electricity a U.S. energy company purchases electrical generators from a company in
Germany. Which of the following happens to the components of U.S. GDP?
a.
b.
c.
d.

U.S. investment and U.S. net exports increase

U.S. investment increases and U.S. net exports decrease
U.S. investment does not change, U.S. net exports increase
U.S. investment does not change, U.S. net exports decrease

10. Refer to Table 23-1. In which year was this country's real GDP the highest?
a.
b.
c.
d.

2008
2009
2010
2011

11. Refer to Table 23-1. In which year was this country's nominal GDP the highest?
a.
b.
c.
d.

2008
2009
2010
2011

12. Refer to Table 23-1. What is the GDP deflator for 2010?
a.
b.
c.
d.

103.45
102.78
97.30
96.67

Chapter 24: Measuring the Cost of Living

1. The consumer price index for this year equals [ Price of basket of goods & services this year ] / [ Price of
basket of goods & services in the base year].
a.
b.

True
False

2. If an improvement in the quality of a good is not fully measured than the consumer price index will
overstate the increase in the cost of living.
a.
b.

True
False

3. Indexation is the automatic correction by law or contract of a dollar amount for the effects of inflation.
a.
b.

True
False

4. Interest rates are usually reported as nominal interest rates.

a.
b.

True
False

5. The consumer price index is computed using weights based

a.
b.
c.
d.

on a survey of consumers. Of the major categories of goods and services, food and beverages is the
largest.
on domestic production of consumer goods. Of the major categories of goods and services, housing is the
largest.
on a survey of consumers. Of the major categories of goods and services, housing is the largest.
on domestic production of consumer goods. Of the major categories of goods and services, food and
beverages is the largest.

6. If 2002 is the base year, then the inflation rate in 2010 equals
a.
b.
c.
d.

7. Suppose the basket of goods used to compute the CPI includes 6 pieces of cake and 2 pints of ice cream
and the base year is 2009.

What is the CPI for 2010?

a.
b.
c.
d.

128.6
87.5
114.3
100

8. Suppose that the CPI includes two goods, rice and bread which are substitutes. If the year after the base
year the price of bread rises relative to the price of rice then
a.
b.
c.
d.

the weight the CPI places on rice will be higher than actual expenditures indicate, so the inflation rate will
be understated.
the weight the CPI places on rice will be lower than actual expenditures indicate, so the inflation rate will
be overstated.
the weight the CPI places on rice will be higher than actual expenditures indicate, so the inflation rate will
be overstated.
the weight the CPI places on rice will be lower than actual expenditures indicate, so the inflation rate will
be understated.

9. In comparing the CPI with the GDP deflator, which of the following is not correct?
a.
b.
c.
d.

Both the CPI and the GDP deflator are based on a basket of goods that changes infrequently.
The CPI does not reflect the price of all domestically produced goods and services, the GDP deflator does.
A price increase in an imported consumption good shows up in the CPI, but not the GDP deflator.
The inflation rate computed using the CPI and the GDP deflator usually tell a similar story.

10. In 1970 tuition at Harvard was $4,070 per year. In 2010 it was $50,724. The CPI was 39.20 in September
1970 and 218.43 in September 2010. What is the amount in 2010 dollars of Harvard's tuition in 1970?
a.
b.
c.
d.

$8,890.10
$34,849.20
$9,103.06
$22,678.83

11. If the nominal interest rate were 5% and the expected inflation rate were 2%, what would the real
interest rate be?
a.
b.
c.
d.

10%
2.5%
7%
3%

12. If the nominal interest rate was 8% and the CPI rose from 125 to 130, what was the real interest rate?
a.
b.
c.
d.

3%
13%
4%
12%

Chapter 25: Production and Growth

1. Income per person in the U.S. is about eight times that in China and sixteen times that in India.
a.
b.

True
False

2. Jim produces 12 goods in 8 hours while Laura produces 8 goods in 4 hours. Jim's productivity is higher
than Laura's.
a.
b.

True
False

3. Differences in natural resources explain some differences in the standard of living around the world, but
abundant natural resources are not necessary for an economy to be highly productive.
a.
b.

True
False

4. On the one hand more rapid population growth may lower productivity by stretching the supply of
natural resources and reducing the amount of capital available per worker. On the other hand, a large
population may enhance the rate of technological progress because there are more scientists and
engineers.
a.
b.

True
False

5. Which of following countries had the highest rate of economic growth over the last 120 years or so?
a.
b.
c.
d.

United Kingdom
Japan
United States
Germany

6. Which of the following is human capital?

a.
b.
c.
d.

the knowledge of technology that a society has access to

machinery and buildings which were produced in past periods and now contribute to the production of
goods and services
the skills and knowledge that workers have gained from experience and education and on the job training
the amount of GDP per person spent on education

7. If a production function has constant returns to scale and all inputs are doubled what happens to output?
a.
b.
c.
d.

it remains the same

it more than doubles
it increases
it doubles

8. According to the traditional theory of production, as capital per worker increases

a.
b.
c.
d.

the addition to output per worker rises. So, other things the same, poor countries should grow faster than
rich ones.
the addition to output per worker falls. So, other things the same, poor countries should grow faster than
rich ones.
the addition to output per worker rises. So, other things the same, poor countries should grow slower
than rich ones.
the addition to output per worker falls. So, other things the same, poor countries should grow slower
than rich ones.

9. In the long run an increase in the saving rate

a.
b.
c.
d.

raises productivity and its growth rate.

leaves both productivity and its growth rate unchanged.
raises productivity but its growth rate is unchanged.
None of these choices are correct.

10. If a U.S. airplane manufacturer opened a factory in Brazil, it would be engaged in

a.
b.
c.
d.

foreign portfolio investment. Brazil's GDP would increase by more than its GNP.
foreign direct investment. Brazil's GNP would increase by more than its GDP.
foreign portfolio investment. Brazil's GNP would increase by more than its GDP.
foreign direct investment. Brazil's GDP would increase by more than its GNP.

11. Education
a.
b.
c.
d.

has positive externalities, which can justify public subsidies of human capital investment.
has negative externalities, so public subsidies of human capital investment cannot be justified.
has positive externalities, so public subsidies of human capital investment cannot be justified.
has negative externalities, which can justify public subsidies of human capital investment.

12. To raise productivity the opposition to the government in a less developed economy proposes the
following changes. Which of these changes is not likely to raise productivity?
a.
b.
c.
d.

reduce corruption in the court system

reverse the current government's outward-oriented policies
redesign government and tax policy to increase the saving rate
support private research

Ans.
Ch. 23
Ch. 24
Ch. 25

Q1
B
B
A

Q2
A
A
B

Q3
B
A
A

Q4
B
A
A

Q5
B
C
B

Q6
C
A
C

Q7
B
C
D

Q8
B
B
B

Q9
B
A
C

Q10
D
D
D

Q11
C
D
A

Q12
A
C
B