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Test I. Multiple Choice 1. National income accounting a. measures the nation's economic performance. b. measures an industry's income in a given nation. c. was developed during the 1800s. d. provides a full accounting of all productive activities in a nation. 2. Gross National Product measures: a. the market value of all goods and services sold in a nation during a year. b. the resources allocated to the production of goods and services for an economy during a year. c. the market value of all final goods and services produced in a nation during a year. d. all production except that which represents replacement production for physical assets used up during this year's production process. 3. Which economic variable below is not a stock variable? a. money supply b. investment c. portfolio holding d. federal budget deficit 4. Which of the following items would not be included in a nation's gross national product? a. P 8,000 worth of garbage bags produced by a local company for sale to the local government b. P 3,000 worth of babysitting traded by a friend for an equivalent amount of carpentry c. Salesperson and administrative expenses of selling goods at the local pawnshop d. P 300 of Suzuki violin lessons purchased during the year at the local Suzuki Academy of Strings 5. Gross national product probably understates the full amount of production in the economy because it: a. fails to include interest pain on government debt while including other 187types of interest. b. cannot pick up the full value of second-hand sales of goods. c. fails to accurately measure "underground" economic activity. d. fails to take into account capital items produced to replace those worn out generating this year's GNP. 6. Transfer payments are not included in gross national product because: a. they represent no current productive activity. b. it is difficult to get a dollar measure of their value. c. they are only undertaken by the government and are therefore not productive. d. they represent commodity transfers and not dollar transfer. 7. In the circular flow diagram: a. the flow of expenditures on final goods and services matches the flow of earnings to resource owners. b. households are suppliers of final goods and services. c. households receive income from their participation in the product market. d. the flow of expenditures on final goods and services may exceed the flow of earnings to resource owners if the level of saving is positive. 8. Leakages are significant to the student of economics because: a. they represent spending by businesses rather than spending by households. b. they tend to expand circular flow activity. c. they indicate an economy is headed for a recession. d. they represent a diversion from spending flows. 9. If injections into the circular flow (such as investment and exports) are imports): greater than leakages out of the circular flow (such as savings and a. the GNP flow through the system will increase. b. the GNP flow through the system will decrease. c. shortages of resources will appear. d. production of goods and services will be greater than sales of goods and services. 18810. Which of the following is not a part of the flow of expenditures approach to determine gross national product? a. personal consumption expenditures b. gross private domestic investment c. gross rental payments d. net exports of goods and services 11. The largest component of GNP in the flow of expenditures approach is: a. personal consumption expenditures b. gross private domestic investment c. government spending on goods and services d. net exports. 12. Which of the following items is not a part of gross private domestic investment? a. purchase of a share of IBM stock b. purchase of a new house c. net additions to inventory d. equipment for a new wing on a factory 13. A cause of inflation characterized by an excess demand over supply is a. cost-push b. demand-pull c. quantity theory of money d. none of the above 14. The flow of earnings approach to GNP consists of: a. all national income accounts. b. all national income accounts plus depreciation and indirect business taxes c. all national income accounts as well as government, business, and personal transfer payments. d. all national income accounts except for net interest payments and indirect business taxes. 15. National income: a. measures all income received by households in the economy in one year. b. measures the value of wage and salary payments which occur in an economy in one year. C. is usually a larger value than gross national product. d. measures the value of income earned by factors of production in an economy in one year. 18916. Capital consumption allowances are not included in national income because: a. they represent money siphoned off for payments to government. b. they represent money set aside to replace worn-out capital. c. they are earned by owners of land resources, not owners of labor resources. d. they are an injection from outside the circular flow into the income stream. 17. To obtain a measure of all income received by households during a given period of time, one would use: a. a disposable personal income b. personal income c. national income d. distributed corporate profits. 18. Personal saving: a. equals consumption less personal income b. equals gross national product less spending c. equals national income less consumption d. equals disposable personal income less consumption 19. The amount of investment spending of firms a. is influenced by profit expectations and interest rates b. seems to be entirely random c. has little effect on the economy d. is quite stable and predictable 20. Total investment depending in an economy will usually a. rise as national income falls b. rise as interest rates falls c. remain unaffected by changes in interest rates d. remain unaffected by changes in national income. 21. A cause of inflation characterized by an increase in the cost of production is a. quantity theory of money b. cost-push c. demand-pull 22. Imagine an economy that has been recovery following depression. In its except initial stages, it could be characterized by all of the following conditions a. increase in aggregate demand 190b. rising income c. increased inflation d. favorable business and consumer expectations 23. If you were estimating the total of investment spending, which would you not include? a. changes in inventories b. purchases of stocks and bonds c. new residential construction d. new plant and equilibrium 24. Investment in inventories tend to vary a. directly with the level of sales, inversely with the rate of investment. b. inversely with sales directly with interest rates. c. directly with sales and interest rates. d. inversely with sales and interest rates. 25. Investment in residential construction tends to vary a. inversely with changes in average income, directly with interest rates. b. directly with changes in average income, inversely with interest rates. c. directly with both average income and interest rates. d. inversely with both average income and interest rates. Test II. Problem Solving: (50 pts.) 1. Compute the Gross National Product (20 pts.) a) Given the following information, solve (a) the national income (NI); (b) gross domestic product (GDP), with the use of a T-account format. (10 points). (PCE) Personal Consumption Expenditure P 770,261 (CE) Compensation of Employees 800,320 (X) Exports of Goods and Services 820,320 (GDKF) Gross Domestic Capital Formation 590,680 (EDIP) Entrepreneurial and Property Income of Persons 225,944 (GCE) Government Current Expenditures 200,944 (M) Imports of Goods and Services 790,690 (C) Corporate Income 10,628 (GIPE) Government Income from Property and Entrepreneurship 5,000 b) If the net factor income from abroad (NFIA) is equal to 5,000, what is the level of GNP? (5 points) c) If the capital consumption allowance (CCA) and indirect business taxes (IBT) are 191equal to 57,399 and 492,223 respectively, what is the level of GNP? (5 points) 2. Solve the equilibrium income (2-sector model). (30 points) a) Complete the savings (S) and (C + 1) schedules below. Investment is pegged at 160 level. (20 points) Income (Y) Consumption (C) Savings (S) C + I 0 60 50 90 100 120 250 210 300 240 400 300 550 390 600 420 650 450 700 480 b. Determine the equilibrium income. (5 points) c. Given the above schedules, establish a relationship that exists among investment, assumption and income. (5 points) 192