AP Macroeconomics chapter practice15 questions

06 The Circular Flow and Gross Domestic Product

These questions come directly from the chapter practice in the book. Choose the best answer, check your reasoning, and use the explanation to correct any gap.

Question 1

Question 1 of 15

Gross domestic product counts newly produced final output. Which of the following transactions is included in this year's measure?

The refrigerator is final output produced inside the period, which is precisely what GDP counts. A was counted in the year the car was built, so counting the resale would double-count it. B and D move claims from one holder to another without creating output, and C creates real value that no market records.
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E. A newly produced refrigerator sold to a household

The refrigerator is final output produced inside the period, which is precisely what GDP counts. A was counted in the year the car was built, so counting the resale would double-count it. B and D move claims from one holder to another without creating output, and C creates real value that no market records.

Question 2

Question 2 of 15

Goods a firm produces this year but does not sell are recorded in gross domestic product as

Unsold current output is recorded as an addition to firms' inventories, which keeps production and expenditure equal within the year. Choices B and C would require a buyer, D reverses the direction of the transaction, and E is not a purchase of output at all.
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A. inventory investment

Unsold current output is recorded as an addition to firms' inventories, which keeps production and expenditure equal within the year. Choices B and C would require a buyer, D reverses the direction of the transaction, and E is not a purchase of output at all.

Question 3

Question 3 of 15

Government purchases and transfer payments are recorded separately. What item belongs in government purchases?

The salary buys a teaching service produced this year, which is what a purchase means in the accounts. A and C hand money to recipients who owe nothing in return, D pays for the use of past borrowing rather than for current output, and E returns money already collected. None of the four buys anything currently produced.
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B. A salary paid to a public-school teacher

The salary buys a teaching service produced this year, which is what a purchase means in the accounts. A and C hand money to recipients who owe nothing in return, D pays for the use of past borrowing rather than for current output, and E returns money already collected. None of the four buys anything currently produced.

Question 4

Question 4 of 15

Consumption is 600, investment is 150, government purchases are 200, exports are 80, and imports are 110. Gross domestic product equals

600+150+200+80-110=920. A subtracts the 110 of imports a second time, B leaves exports out of the sum, D drops the import subtraction and stops at 600+150+200+80, and E adds imports where the identity subtracts them.
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C. 920

600+150+200+80-110=920. A subtracts the 110 of imports a second time, B leaves exports out of the sum, D drops the import subtraction and stops at 600+150+200+80, and E adds imports where the identity subtracts them.

Question 5

Question 5 of 15

In the expenditure approach, gross domestic product equals consumption plus investment plus government purchases plus exports minus imports. Imports are subtracted because

Imported goods are already sitting inside consumption, investment, and government purchases, so the subtraction strips foreign-produced value back out of a domestic total. A gets the direction right for the wrong reason, since foreign output was never in this country's GDP to begin with. B invokes a balance the accounts do not require, C invents a data problem, and E reclassifies purchases as transfers.
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D. foreign production may already appear inside the domestic spending categories

Imported goods are already sitting inside consumption, investment, and government purchases, so the subtraction strips foreign-produced value back out of a domestic total. A gets the direction right for the wrong reason, since foreign output was never in this country's GDP to begin with. B invokes a balance the accounts do not require, C invents a data problem, and E reclassifies purchases as transfers.

Question 6

Question 6 of 15

A mill sells flour to a bakery for 30, and the bakery sells bread to households for 75. Total value added across the two stages is

The mill adds 30 and the bakery adds 75-30=45, for a total of 75, which equals the final sale price. Choice B counts only the bakery's stage, A only the mill's, D adds the mill's sale to the final price, and E sums both stages and the final sale.
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C. 75

The mill adds 30 and the bakery adds 75-30=45, for a total of 75, which equals the final sale price. Choice B counts only the bakery's stage, A only the mill's, D adds the mill's sale to the final price, and E sums both stages and the final sale.

Question 7

Question 7 of 15

National accounts record only what passes through a market. Which of the following is excluded for that reason?

Cooking at home creates real value, but no price is quoted and no transaction is recorded, so the accounts have nothing to enter. A is a contractor's sale recorded as residential investment, B and D are services bought at posted prices, and C is a retail sale of new final output. All four leave a market record.
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E. Unpaid cooking done within a household

Cooking at home creates real value, but no price is quoted and no transaction is recorded, so the accounts have nothing to enter. A is a contractor's sale recorded as residential investment, B and D are services bought at posted prices, and C is a retail sale of new final output. All four leave a market record.

Question 8

Question 8 of 15

A broker earns a commission on the sale of a house built twenty years ago. Which of the following does gross domestic product include?

The house itself was counted when it was built, so only the broker's current service adds to this year's output. Choices A, C, and E count a past year's production again, and B overlooks the service the broker performed this year.
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D. The commission only

The house itself was counted when it was built, so only the broker's current service adds to this year's output. Choices A, C, and E count a past year's production again, and B overlooks the service the broker performed this year.

Question 9

Question 9 of 15

New residential construction is recorded in the expenditure accounts as

Residential construction is classified as investment in the national accounts, even though households occupy the building. Choice B would apply to the services the housing later provides, and C, D, and E name components with different buyers or no output at all.
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A. investment

Residential construction is classified as investment in the national accounts, even though households occupy the building. Choice B would apply to the services the housing later provides, and C, D, and E name components with different buyers or no output at all.

Question 10

Question 10 of 15

Gross domestic product is described as a domestic measure. That word indicates that the statistic counts production

``Domestic'' fixes the boundary geographically: output produced inside the country counts regardless of who owns the firm. Choice A describes gross national product instead, B and D narrow the measure to particular producers or buyers, and E abandons the period and boundary that define the statistic.
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C. within a country's borders during a stated period

``Domestic'' fixes the boundary geographically: output produced inside the country counts regardless of who owns the firm. Choice A describes gross national product instead, B and D narrow the measure to particular producers or buyers, and E abandons the period and boundary that define the statistic.

Question 11

Question 11 of 15

Social insurance benefits are recorded in the government budget yet excluded from gross domestic product, because such a payment

A transfer hands over purchasing power and buys nothing currently produced, so counting it would double-count the output the recipient later purchases. A confuses how the payment is financed with what it buys, C reverses its effect on the recipient, and D and E file it under categories that both require current production.
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B. is not exchanged for a currently produced good or service

A transfer hands over purchasing power and buys nothing currently produced, so counting it would double-count the output the recipient later purchases. A confuses how the payment is financed with what it buys, C reverses its effect on the recipient, and D and E file it under categories that both require current production.

Question 12

Question 12 of 15

Exports rise by 20 and imports rise by 20 during the same year, with every other expenditure component unchanged. Gross domestic product

Net exports are X-M, and both terms rise by 20, so the difference is unchanged. Choice D counts the export increase and forgets the offsetting import increase, while C counts the import increase alone. A adds the two changes as though a rise in imports also added to output, and E subtracts both of them.
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B. does not change

Net exports are X-M, and both terms rise by 20, so the difference is unchanged. Choice D counts the export increase and forgets the offsetting import increase, while C counts the import increase alone. A adds the two changes as though a rise in imports also added to output, and E subtracts both of them.

Question 13

Question 13 of 15

GDP per person is often used to compare living standards. Which of the following limits it as a measure of how income is shared?

A per-person figure is a mean, and the same mean is consistent with near equality or with extreme concentration. B names a real limitation, but it concerns depreciation rather than shares. C describes how output is valued, D describes a step in measuring domestic production, and E describes which buyers are counted. None of the three says anything about who receives the output.
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A. An average hides how output is divided among people.

A per-person figure is a mean, and the same mean is consistent with near equality or with extreme concentration. B names a real limitation, but it concerns depreciation rather than shares. C describes how output is valued, D describes a step in measuring domestic production, and E describes which buyers are counted. None of the three says anything about who receives the output.

Question 14

Question 14 of 15

Which of the following classifications applies to a tire sold by its manufacturer to an automobile producer that will install it on a new vehicle?

The tire is bought to be built into another product sold this year, so counting it separately would double-count its value. Choice A would apply to a replacement tire sold to a driver, and B, C, and E name categories with no bearing on a business purchase of a component.
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D. An intermediate good

The tire is bought to be built into another product sold this year, so counting it separately would double-count its value. Choice A would apply to a replacement tire sold to a driver, and B, C, and E name categories with no bearing on a business purchase of a component.

Question 15

Question 15 of 15

Which of the following explains why the expenditure and income approaches produce the same measure of gross domestic product?

Every dollar spent on current output lands as wages, rent, interest, or profit for whoever supplied the resources, so the two totals are the same sum read from opposite ends. A imports a consumption assumption the identity never needs, B assumes away profit, and C and D impose balanced trade and a balanced budget. The equality holds whether or not any of those conditions is met.
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E. Spending on output becomes income for resource suppliers.

Every dollar spent on current output lands as wages, rent, interest, or profit for whoever supplied the resources, so the two totals are the same sum read from opposite ends. A imports a consumption assumption the identity never needs, B assumes away profit, and C and D impose balanced trade and a balanced budget. The equality holds whether or not any of those conditions is met.

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