CHAPTER 15: TEST BANK

SOME ANSWERS AND COMMENTS ON THE TEXT DISCUSSION QUESTIONS

1. One reason behind the argument that the government should attach a value to
homemaking services and include it in GDP statistics is that our society seems to
value production that does have a value attached. How many homemakers, when
asked what they do, say, !m "ust a homemaker#$ How many %arm wives who do the
milking, the gardening, the canning, and the care o% the livestock are re%erred to as
"ust housewives# rather than %armers$ !ve even heard women in less developed
countries& where cooking means growing, harvesting, processing, and cooking the
%ood& where housekeeping means building, repairing, painting, and cleaning the
house& and where childcare means providing medicine, education, health care, and
clothing %or the children& say that they do not %eel valued until they earn a monetary
income.
'nother problem with not counting the value o% homemaking services is that
comparisons become distorted. (or e)ample, in the 1*+,s, many homemakers cared
%or their homes and %amilies by themselves, without paying %or additional help. n the
1*-,s and 1**,s, many women work outside their homes, and pay %or child care
services, laundry services, housekeeping services, and so on. .he very same
homemaking services might have been done, but were not tabulated as part o% GDP in
the earlier time period.
/. 0hile there are problems with the use o% GDP as a measure o% economic activity,
there are even more serious problems with the use o% GDP as a measure o% standards
o% living. nternational comparisons discussed in 1hapter 12 on 3conomic
Development will make this even more evident.
4. 0e think it!s good %or students to know the macroeconomic rami%ications o% the
various government policies. (or e)ample, we normally don!t think that a nation will
go to war "ust to improve its macro economy, yet the stock market couldn!t have been
more optimistic during the 0ar in the Gul%.
5. 6iberals pre%er %iscal policy that increases government purchases and income
trans%ers 7though conservatives generally approve o% increases in de%ense spending8.
1onservatives pre%er %iscal e)pansion through reduced ta)es. 1onservatives also tend
to %avor policy that reduces interest rates. .hese are all generalities& o% course the real
world is more comple).
+. .his one is a harder one. .ell students you don!t believe it was success%ul in the early
1*-,s, and you!ll be branded a liberal9 Point out the various ways to look at the
e%%ects o% the policy, and students will welcome your impartiality. (or e)ample, there
may be some types o% supply side policies that work better than others 7some policies,
such as antitrust en%orcement and a%%irmative action, may even be considered as
supply side policies8. 1hapter :even on Poverty does a good "ob o% e)plaining how
many people can be le%t out o% the prosperity o% the economy.
SUGGESTED TEST QUESTIONS
;ultiple<1hoice =uestions
1. 0hich o% the %ollowing is true about gross domestic product$
a. t includes output at all stages o% production 7that is, intermediate goods as
well as %inal goods8.
b. t is e)pressed in terms o% physical >uantities, not values.
c. It includes services as well as goods.
d. 'll o% the above
/. 0hen re%erring to GDP over time, we want to use?
a. real GDP.
b. nominal GDP.
c. GDP calculated using actual current prices.
d. none o% the above.
4. Gross national product 7G@P8 di%%ers %rom gross domestic product 7GDP8 in that
G@P?
a. refers to production by the economy.
b. re%ers to production in the economy.
c. re%ers to production o% goods only.
d. re%ers to production o% services only.
5. Anderground activity?
a. includes illegal activity.
b. includes activity not reported in order to evade ta)es.
c. is siBable %or many countries.
d. all of the above.
+. 1onsumer purchases o% GDP include consumer purchases o%?
a. durable goods.
b. non<durable goods.
c. services.
d. all of the above.
2. Cusiness purchases o% GDP include?
a. purchases o% stocks.
b. purchases o% bonds.
c. purchases of factories.
d. all o% the above.
D. 0hich o% the %ollowing is not correct$ Government purchases o% goods and services
include?
a. government purchases o% %ood %or nutrition programs.
b. government purchases o% police protection %or citiBens.
c. government income transfers to low income individuals.
d. government purchases o% the teaching services o% public school teachers.
-. Demand<pull in%lation is caused by?
a. anything that increases aggregate demand.
b. anything that increases costs o% production.
c. market power that increases pro%its.
d. anything that pulls down aggregate demand.
*. 0hich o% the %ollowing is a tool o% e)pansionary %iscal policy$
a. increased ta)es
b. reduced trans%ers
c. reduced regulations
d. increased government purchases of goods and services
1,. ;onetary policy is under the direct control o%?
a. the President.
b. the 1ongress.
c. the Federal Reserve.
d. the ma"or city mayors.
11. 0hich o% the %ollowing can be a tool o% 7e)pansionary8 supply<side policy$
a. increased ta)es
b. increased trans%ers
c. increased regulations
d. none of the above
1/. 0hich o% the %ollowing is not associated with trickle<down philosophy$
a. economic growth and prosperity
b. bene%its to all
c. special concern for the poor through government programs for them
d. conservative economics
14. 0hich o% the %ollowing is included in GDP$
a. homemakers! services
b. volunteer activities
c. services such as health care and education
d. productive work that you do %or yoursel% without being paid
15. 0hich group purchases the largest share o% A.:. GDP$
a. consumers
b. businesses
c. government
d. %oreigners
1+. 3)amples o% income trans%ers include?
a. %ood stamps
b. housing assistance %or the poor
c. social security cash benefits
d. all o% the above
12. 0hich o% the %ollowing is not an e)ample o% e)pansionary %iscal policy$
a. reduction in ta)es
b. increase in government purchases
c. increase in money supply
d. increase in government income trans%ers
1D. Demand pull in%lation is caused by?
a. anything that increases aggregate demand.
b. anything that increases costs o% production.
c. market power that increases pro%its.
d. anything that pulls down aggregate demand.
1-. 0hich o% the %ollowing is a tool o% supply side policy$
a. reduction in tax rates
b. increase in government regulations
c. increase in government trans%ers
d. all o% the above
1*. Cusiness purchases include?
a. purchases o% machinery.
b. purchases o% %actories.
c. purchases# o% inventories.
d. All of the above.
/,. .he e%%ects o% stag%lation include?
a. recession
b. in%lation
c. unemployment
d. all of the above
/1. 3)pansionary monetary policy involves?
a. an increase in the money supply.
b. a reduction in interest rates.
c. an increase in business and consumer purchases.
d. all of the above
.rue<and<(alse =uestions
. 1. .he letter P# on the vertical a)is o% the graph o% aggregate demand and
aggregate supply re%ers to the average price level in the economy.
. /. Gross domestic product is de%ined as the market value o% all %inal goods and
services produced in the economy, over a particular time period.
( 4. 'ggregate supply shows the >uantity o% total output supplied 7produced8,
assuming that the average price level in the economy is constant.
( 5. % we are interested in the value o% GDP during the current year only, then we
are interested in real GDP.
( +. Anderground activities re%er to activities such as homemakers! services, which
do not create incomes.
. 2. .he composition o% GDP re%ers to the types o% goods and services that GDP
consists o%.
. D. Durable goods are those goods that last longer than one year.
( -. Cusiness purchases o% GDP include the purchases o% stocks, bonds, and
treasury bills.
( *. (iscal policy includes government purchases o% goods and services,
government ta)es, and (ederal Eeserve decisions about the money supply in
the economy.
. 1,. :upply side policy can include deregulation and cuts in ta) rates.
( 11. ;y current purchase o% a 1,<year old house is part o% current GDP.
. 1/. .he price the consumer pays %or a gallon o% gasoline, including any e)cise
ta)es, is called the market price o% gasoline.
. 14. Production by a %oreign citiBen in the A.:. is part o% A.:. GDP.
. 15. Production by a A.:. citiBen in a %oreign country is part o% A.:. G@P.
. 1+. .wo di%%erent types o% %iscal policy may result in identical levels o% GDP but a
di%%erent composition o% GDP.
( 12. 3)pansionary monetary policy results in increased interest rates.
. 1D. 1hanges in government income trans%ers may be considered as %iscal or
supply<side policy.
( 1-. 7appendi)8 .he aggregate demand curve is downward sloping because higher
average price levels directly reduce our purchasing power by making goods
and services more e)pensive.
. 1*. 7appendi)8 One o% the reasons %or the downward sloping aggregate demand
curve is that a higher average price level is associated with higher interest
rates, thereby reducing purchases.
( /,. 7appendi)8 'n increase in aggregate demand along the Feynesian 7%lat8
portion o% aggregate supply results in increased GDP and a higher average
price level.
:hort<'nswer =uestions
(Answes !e s"#wn $n %"e &#''#w$n( (!)"s $n #*e %# *$s%$n(+$s" be%ween AD !n*
AS s"$&%s,-
1. Draw the shi%t that will occur i% there is an increase in government income trans%ers,
which increase the incomes o% many consumers. 0hat will be the e%%ect on GDP and
employment$ GGGGGGGGGGGGGG 0hat will be the e%%ect on the average price level$
GGGGGGGGGGGGGGGG
7@ote that on >uestions o% this nature, instructors must be e)tremely care%ul to
distinguish between changes in ta)es and trans%ers as %iscal policy tools vs. supply<
side policy tools. =uestions need to be phrased with re%erence to the e%%ect o% a
change in trans%ers and ta)es on income versus work incentives.8
/. Draw the shi%t that will occur i% there is an increase in government purchases o%
public libraries. 0hat will be the e%%ect on GDP and employment$ GGGGGGGGGGGG
0hat will be the e%%ect on the average price level$ GGGGGGGGGGGGGGGG
4. Draw the shi%t that will occur i% the government reduces regulations re>uiring
consumer sa%ety %or automobiles and other manu%actured goods, thereby lowering the
costs o% production. 0hat will be the e%%ect on GDP and employment$
GGGGGGGGGGGG 0hat will be the e%%ect on the average price level$ GGGGGGGGGGGG

5. Draw the shi%t that will occur i% there is a reduction in ta) rates that success%ully
increases work incentives and work e%%ort by the labor %orce. 0hat will be the e%%ect
on GDP and employment$ GGGGGGGGGGGGGGGG 0hat will be the e%%ect on the
average price level$ GGGGGGGGGGGGGGGG

+. Draw the shi%t that will occur i% there is a reduction in ta)es that serves to increase the
a%ter<ta) income o% consumers. 0hat will be the e%%ect on GDP and employment$
GGGGGGGGGGGGG 0hat will be the e%%ect on the average price level$ GGGGGGGGGGGGGG
2. Draw the shi%t that will occur i% the government reduces trans%ers, that we will
assume results in greater work incentives and work e%%ort by the labor %orce. 0hat
will be the e%%ect on GDP and employment$ GGGGGGGGGGGGGGGG 0hat will be the
e%%ect on the average price level$ GGGGGGGGGGGGGGG
D. Draw the shi%t that will occur i% the (ederal Eeserve increases the money supply,
thereby lowering interest rates. 0hat will be the e%%ect on GDP and employment$
GGGGGGGGGGGGG 0hat will be the e%%ect on the average price level$ GGGGGGGGGGGGG
-. Draw the shi%t that will represent each o% the %ollowing types o% in%lation.
a. 1ost<push in%lation.
b. Demand<pull in%lation
c. Pro%it<push in%lation