Dornbusch - Macroeconomics - 10, TEST BANK 0073128112

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Dornbusch - Macroeconomics - 10, TEST BANK
0073128112
Macroeconomics by Rudiger Dornbusch, Stanley Fischer and Richard Startz - 10, TEST
BANK 0073128112
ch2 Key
1. In calculating this year's GDP, national income accountants
A. Include any increase in stock values

B. Include an estimate for income from illegal
activities
C. Exclude Social Security payments to
retirees
D. Exclude the value of any repairs made on existing
property
E. Exclude the value of new pollution control equipment that is being
installed
Difficulty: Easy
Dornbusch - Chapter 02 #1
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2. Assume you built a new house, bought a used car, and bought some government bonds.
Which of the following is true?
A. Consumption and government purchases went up since you bought a used car and
government bonds
B. Consumption and investment went up since you bought a used car and government
bonds
C. Investment and government purchases went up since you built a new house and bought
government bonds
D. Investment went up since you built a new house
E. Consumption went up since you built a new
house
Difficulty: Medium
3. Which of the following is FALSE?
A. U.S. GDP underestimates actual economic activity because it does not include
underground activity
B. An increase in the ratio of currency holdings to bank deposits may be seen as evidence for
an increase in underground activity
C. If the underground economy grows rapidly, then the rate of economic growth will be
underestimated
D. If the underground economy grows rapidly, then the standard of living will decline sharply
E. Underground activity includes income from services produced at home but not reported,
such as typing someone else's term paper
Difficulty: Medium
4. Which of the following statements is true?
A. NDP is greater than GDP if prices are falling

B. NDP is greater than GDP if prices are rising
C. NDP can be greater than GDP but only if the economy is growing
D. NDP cannot be greater than GDP
E. NDP must always be greater than GDP
Difficulty: Easy
5. Increases in unwanted business inventories are counted as
A. A decrease in the capital stock

B. An increase in consumption
C. An increase in investment
D. An increase in depreciation
E. None of the above
Difficulty: Easy
6. The difference between gross domestic investment and net domestic investment is equal to
A. Unwanted inventory changes

B. The difference between NDP and national income
C. The addition to the capital stock
D. The difference between GDP and NDP
Difficulty: Easy
7. Assume you deplete your savings to buy a new sofa and some government bonds and then
take a vacation in a foreign country. Which of the following is true?
A. Consumption will
increase
B. Net exports will
increase
C. Government purchases will
increase
D. Investment will
increase
E. All of the above
Difficulty: Easy
8. Assume nominal GDP increased by 4.2% in the U.S. but by only 3.4% in Germany. We can
definitely conclude that
A. The standard of living of the people in the U.S. went up more than the standard of living of
the people in Germany
B. Real economic growth in the U.S. was higher than in
Germany
C. Inflation in the U.S. was 0.8% higher than in
Germany
D. Productivity growth in the U.S. was higher than in
Germany
Difficulty: Medium
9. If gross investment were zero, which of the following would be true?
A. The existing capital stock would stay the

same
B. Net investment would be positive
C. Net investment would be negative
D. Depreciation would be zero
E. Depreciation would be
negative
Difficulty: Easy
10. Depreciation is
A. The difference between gross investment and net investment

B. The difference between GDP and NDP
C. The difference between GNP and NNP
D. Another word for capital consumption allowances
E. All of the above
Difficulty: Easy
11. The difference between gross investment and net investment is
A. The same as the difference between GDP and disposable income

B. The same as the difference between disposable income and consumption
C. The same as the difference between NDP and national income
D. The same as the difference between net and gross exports
E. Equal to capital consumption
allowances
Difficulty: Medium
12. If we counted the value of autoworkers' salaries, wheels, tires, steel, body parts, and final car
sales in calculating GDP, then we would be
A. Understating GDP by overlooking car dealers' profits

B. Ignoring the contribution of capital to output
C. Overstating GDP through double counting
D. Using the value-added technique for calculating
GDP
E. Calculating GDP correctly only if we excluded any imported cars
Difficulty: Medium
13. In the United States, annual per-capita GDP in 2005 was around
A. $32,000
B. $38,000
C. $42,000
D. $48,000
E. $52,000
Difficulty: Easy
14. As defined in our text, private domestic investment (I) does NOT include
A. New residential construction except on

farms
B. Movable machinery such as trucks or
tractors
C. Inventory accumulation, unless it was planned or
intended
D. Investment in labor productivity through education and
training
E. New additions to existing factories
Difficulty: Easy
15. In 1994, U.S. GDP was $6,931, GNP was $6,922, NNP was $6,104, and national income was
$5,495 (all numbers are in billions of dollars). We can conclude that
A. Depreciation was $818

billion
B. Depreciation was $1,436 billion
C. The addition to the capital stock was $1,436
billion
D. The addition to the capital stock was $1,427
billion
E. Indirect business taxes were $9 billion
Difficulty: Easy
16. Assume a U.S. dealer bought 100 TVs from South Korea for $250 each in 2006. He
subsequently sold 80 of them in 2006 for $450 each, and the rest in 2007 for $400 each. By
how much was the U.S. GDP affected in 2006?
A. $45,000
B. $36,000
C. $19,000
D. $16,000
E. $11,000
Difficulty: Medium
17. In a simple economy with no depreciation, no government, and no foreign sector, it is correct
to say that for any specified time period (say the month of June)
A. Y ≡ C
B. C - I ≡ S
C. Y - C ≡ S
D. Y - C ≡ S + I
E. Y ≡ C + S - I
Difficulty: Medium
18. Assume that GDP = 4,800, consumption = 3,400, private domestic savings = 400, government
purchases = 1,200, and net exports = -120. Which of the following is true?
A. Disposable income is
3,800
B. Private domestic investment is
320
C. The budget deficit is 200
D. All of the above
E. Only A and C
Difficulty: Medium
19. If private domestic saving is 960, private domestic investment is 780, and the government
spends 300 more than it receives in tax revenues, then it follows that
A. The trade deficit is 120

B. The trade deficit is 300
C. The trade deficit is 420
D. The trade surplus is
120
E. The trade surplus is
180
Difficulty: Medium
20. Assume that GDP = 8,100, consumption = 5,400, gross private domestic investment = 1,200,
government purchases = 1,600. Which of the following is true?
A. Imports exceed exports by

100
B. Exports exceed imports by
100
C. Depreciation is 100
D. The trade surplus is
100
E. Both B and D
Difficulty: Medium
21. Assume exports = 300, imports = 400, tax revenues = 1,100, government purchases = 1,400,
private domestic saving = 900. Then the level of private domestic investment is
A. 600
B. 700
C. 900
D. 1,100
E. 1,300
Difficulty: Medium
22. Assume the budget deficit increases. Which of the following can happen?
A. Private domestic saving can

increase
B. Private domestic investment can
decrease
C. Imports can
increase
D. Exports can decrease
E. All of the above
Difficulty: Medium
23. Which of the following identities is FALSE?
A. Y ≡ C + I + G + NX
B. YD ≡ Y - TA + TR
C. BS ≡ TA - TR - G
D. I - S ≡ (G - TA + TR) + NX
E. S + TA - TR ≡ I + G + NX
Difficulty: Medium
24. If private domestic saving in an economy increases, which is the most likely to occur?
A. A decrease in the budget deficit

B. A decrease in net exports
C. An increase in consumption
D. An increase in imports
E. An increase in private domestic
investment
Difficulty: Easy
25. If the government increases taxes, which of the following is LEAST likely to occur?
A. A decrease in private domestic saving

B. A decrease in consumption
C. An increase in private domestic
investment
D. A decrease in net exports
E. A decrease in national income
Difficulty: Medium
26. If private domestic saving exceeds private domestic investment by $220 billion and
government spending exceeds tax revenue by $340 billion, then
A. The trade deficit is $560

billion
B. The trade surplus is $560
billion
C. The trade deficit is $120
billion
D. The trade surplus is $120
billion
E. The trade deficit is $340
billion
Difficulty: Medium
27. If national income is 5,200, disposable income is 4,400, consumption is 4,100, the trade deficit
is 110, and the budget deficit is 150, what is the level of private domestic investment?
A. 1,060
B. 540
C. 300
D. 260
E. 4
0
Difficulty: Medium
28. Assume government purchases = $1,500, the budget deficit = $120, consumption = $4,800,
private domestic saving = $1,220, the trade deficit = $90, and transfer payments = $0. Which
of the following is true?
A. Private domestic investment is

$1,190
B. National income is
$7,400
C. Disposable income is
$6,020
D. All of the above
E. Only A and C
Difficulty: Difficult
29. Assume the budget deficit decreased by $15 billion, private domestic saving decreased by $20
billion, exports increased by $10 billion, and imports increased by $15 billion. By how much did
private domestic investment change?
A. Private domestic investment decreased by $10

billion
B. Private domestic investment increased by $10
billion
C. Private domestic investment did not change at
all
D. Private domestic investment decreased by $20
billion
E. The change in private domestic investment cannot be determined from this
information
Difficulty: Difficult
30. Assume the size of the budget deficit has decreased but the size of the trade deficit has
increased. Which of the following could be true?
A. Private domestic saving has decreased but private domestic investment has remained the
same
B. Private domestic investment has decreased but private domestic saving has remained the
same
C. Private domestic investment has increased but by less than private domestic
saving
D. Private domestic saving has decreased but by less than private domestic
investment
Difficulty: Medium
31. If imports increase by $15 billion, which of the following has to happen for GDP to increase?
A. Consumption has to increase by more than $15

billion
B. Government purchases have to increase by more than $15
billion
C. Private domestic investment has to increase by more than $15
billion
D. Private domestic saving has to increase by more than $15
billion
E. Either A, B, or C would be sufficient to increase GDP
Difficulty: Easy
32. If the U.S. budget deficit increased substantially while private domestic saving and private
domestic investment remained roughly the same, then
A. The U.S. imported more than it exported

B. The U.S. exported more than it imported
C. The U.S. must have experienced a major
recession
D. There must have been a major drop in U.S. interest
rates
E. All of the above
Difficulty: Medium
33. If we look at the U.S. federal debt as a percentage of GNP over the last century, we realize
that
A. It sharply increased in the 1980s but decreased again in the

1990s
B. It has decreased steadily since World War II
C. It has increased steadily since 1960
D. It hasn't ever been lower than 20
percent
E. It has never exceeded 100
percent
Difficulty: Medium
34. The budget deficits in the early 1980s were largely financed through
A. An increase in private domestic

saving
B. An increase in private domestic
investment
C. An increase in net
exports
D. A decrease in net exports
Difficulty: Medium
35. Assume there is an increase in the budget surplus. Which of the following is likely to happen?
A. Imports will increase more than

exports
B. Exports will increase more than
imports
C. Private domestic saving will increase more than private domestic
investment
D. Private domestic investment will remain the same while private domestic saving will
increase
E. Private domestic investment will decrease
Difficulty: Medium
36. If we look at U.S. net exports over the last four decades, we realize that
A. The U.S. had consistent large trade deficits in the 1960s

B. The U.S. never had a trade imbalance in the
1970s
C. U.S. trade deficits decreased greatly in the early and mid
1980s
D. The U.S. never had a trade surplus until after the year
2000
E. U.S. trade deficits decreased substantially between 1997 and 2000
Difficulty: Easy
37. Assume that the prices of cars manufactured in the U.S. increases due to an increase in
quality. Which of the following should happen if the same number of cars is produced?
A. Real GDP should increase but nominal GDP should stay the same
B. Nominal GDP should increase
C. The GDP-deflator should
decrease
D. Real GDP and the GDP-deflator should decrease
E. All of the above
Difficulty: Easy
38. If nominal GDP was $9,200 billion in Year 1 and $9,420 billion in Year 2 and prices increased
from Year 1 to Year 2, then
A. Real GDP was larger in Year 1 than in Year 2

B. Real GDP was larger in Year 2 than in Year 1
C. The GDP-deflator must have been 122
D. The GDP-deflator must have been 102
E. We cannot determine the value of the GDP-deflator or real GDP in Year 2
Difficulty: Medium
39. If nominal GDP is $8,820 billion and the GDP-deflator is 105, then real GDP is
A. $9,261 billion
B. $8,925 billion
C. $8,715 billion
D. $8,400 billion
E. $8,000 billion
Difficulty: Medium
40. If nominal GDP increased from $8,000 billion in the base year to $8,400 billion in the following
year and real GDP stayed the same, which is true?
A. The GDP-deflator increased from 100 to 110

B. The GDP-deflator increased from 80 to
100
C. The GDP-deflator increased from 100 to
120
D. Prices increased on average by 5 percent
E. Prices increased on average by 10
percent
Difficulty: Medium
41. Assume that in 1962 nominal GDP was about $600 billion and real GDP was about $2,400
billion. The GDP-deflator for that year was
A. 1.25
B. 1.4
C. 2.5
D. 4
E. 2
5
Difficulty: Easy
42. Assume nominal GDP was $8.0 trillion in Year 1 and $8.8 trillion in Year 2. If Year 1 is the base
year, then
A. The GDP-deflator is 110

B. Prices increased on average by 10
percent
C. Real GDP has not changed
D. None of the above can be
true
E. Both A and B are true, but only if C is true
Difficulty: Easy
43. The unemployment rate is most likely to decrease if
A. The number of people who are out of work but expecting to be recalled from a layoff
increases
B. The number of people living in the country
increases
C. The labor force decreases more than the overall
population
D. More people who are currently out of work decide to give up looking for a
job
Difficulty: Easy
44. The consumer price index (CPI) and the producer price index (PPI) differ from each other
since
A. The PPI includes import goods but the CPI

doesn't
B. The CPI usually rises sooner than the PPI
C. The composition of their market baskets is different
D. The PPI does not measure price increases of a fixed market
basket
E. The CPI never overestimates inflation but the PPI often
does
Difficulty: Easy
45. The PCE deflator measures
A. The average price increase of raw materials purchased by

producers
B. The average price increase of energy
prices
C. Price changes in consumer expenditures based on national income
accounts
D. Price changes of final as well as semi-finished goods
E. The average price increase of all final goods excluding
energy
Difficulty: Easy
46. The GDP-deflator and the producer price index (PPI) differ since
A. The PPI measures a fixed market basket but the GDP-deflator

doesn't
B. The GDP-deflator includes imported goods but the PPI doesn't
C. The PPI includes more goods than the GDP-
deflator
D. The GDP-deflator does not include services but the PPI does
E. The GDP-deflator measures increases in inflation earlier than the
PPI
Difficulty: Easy
47. The CPI, a price index used to measure inflation, is imperfect since
A. It only measures those goods that are included in the market

basket
B. It does not take into account quality
improvements
C. Many payments are already indexed for
inflation
D. It does not include
services
E. Only A and B
Difficulty: Easy
48. If the nominal interest rate on a government bond is 6% and the rate of inflation is 4%, what is
your real rate of return on this government bond?
A. -2%
B. +2%
C. +4%
D. +6%
E. +10%
Difficulty: Easy
49. Which of the following is TRUE?
A. Core inflation excludes price changes for food and

energy
B. Core inflation only includes price changes for food and
energy
C. Core inflation is reported for the CPI but not the for the PCE
deflator
D. The PCE deflator measures the average price change of a market basket of consumer
goods
E. The PCE deflator only measures price changes in
energy
Difficulty: Easy
50. Assume you can exchange 10 Mexican pesos for one U.S. dollar, but you need only 0.64
British pounds to get one U.S dollar. What does this imply?
A. Product prices in Great Britain are much cheaper than in

Mexico
B. Product prices in Great Britain are much more expensive than in
Mexico
C. You can get about 36 Mexican pesos for one British pound
D. You can get about 64 Mexican pesos for one British pound
Difficulty: Easy
ch2 Summary
Category # of Question
s
Difficulty: Difficult 2
Difficulty: Easy 24
Difficulty: Medium 24
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Dornbusch - Macroeconomics - 10, TEST BANK

A. Include any increase in stock values

3. Which of the following is FALSE?

4. Which of the following statements is true?

A. NDP is greater than GDP if prices are falling

A. A decrease in the capital stock

A. Unwanted inventory changes

9. If gross investment were zero, which of the following would be true?

A. The existing capital stock would stay the

A. The difference between gross investment and net investment

A. The same as the difference between GDP and disposable income

A. Understating GDP by overlooking car dealers' profits

A. New residential construction except on

A. Depreciation was $818

A. The trade deficit is 120

A. Imports exceed exports by

A. Private domestic saving can

A. A decrease in the budget deficit

A. A decrease in private domestic saving

A. The trade deficit is $560

A. Private domestic investment is

A. Private domestic investment decreased by $10

A. Consumption has to increase by more than $15

A. The U.S. imported more than it exported

A. It sharply increased in the 1980s but decreased again in the

A. An increase in private domestic

A. Imports will increase more than

A. The U.S. had consistent large trade deficits in the 1960s

A. Real GDP was larger in Year 1 than in Year 2

A. The GDP-deflator increased from 100 to 110

A. The GDP-deflator is 110

43. The unemployment rate is most likely to decrease if

A. The PPI includes import goods but the CPI

45. The PCE deflator measures

A. The average price increase of raw materials purchased by

A. The PPI measures a fixed market basket but the GDP-deflator

A. It only measures those goods that are included in the market

49. Which of the following is TRUE?

A. Core inflation excludes price changes for food and

A. Product prices in Great Britain are much cheaper than in

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