Multiple choice questions on National income accounting
1 . **Question:**
What is the key difference between Gross National Product (GNP) and Gross Domestic Product (GDP)?
a) GNP includes net exports, while GDP does not.
b) GNP considers income earned by residents abroad, while GDP does not.
c) GDP includes depreciation, while GNP does not.
d) GDP accounts for transfer payments, while GNP does not.
**Explanation:**
The correct answer is (b). GNP includes the income earned by a country's residents domestically and abroad, while GDP only considers income generated within the country's borders.
2. **Question:**
How does the inclusion of the informal economy affect the measurement of GDP?
a) GDP is overstated.
b) GDP is understated.
c) No effect on GDP.
d) GDP becomes difficult to measure accurately.
**Explanation:**
The correct answer is (b). The informal economy, not officially recorded, can lead to an understatement of GDP since it doesn't capture all economic activactivities
3. **Question:**
If the government raises taxes on individuals, how does this affect Disposable Income?
a) Disposable Income increases.
b) Disposable Income decreases.
c) No effect on Disposable Income.
d) Disposable Income may increase or decrease depending on other factors.
**Explanation:**
The correct answer is (b). Taxes reduce Disposable Income as they are deducted from gross income.
4. **Question:**
In national income accounting, what is the term "double counting"?
a) Counting the same income or production more than once.
b) Counting only half of the income or production.
c) Counting income and production only once.
d) Ignoring certain types of income or production.
**Explanation:**
The correct answer is (a). Double counting occurs when both the intermediate and final goods and services are included in the calculations of GDP
5. **Question:**
How does an increase in business inventories impact Gross Domestic Product (GDP)?
a) It increases GDP.
b) It decreases GDP.
c) No impact on GDP.
d) It depends on the type of inventory.
**Explanation:**
The correct answer is (a). An increase in business inventories reflects production exceeding sales, contributing to GDP.
6. **Question:**
What is the relationship between the Consumer Price Index (CPI) and inflation?
a) CPI measures inflation directly
b) CPI and inflation are unrelated.
c) CPI is used to calculate inflation.
d) Inflation is subtracted from CPI.
**Explanation:**
The correct answer is (c). CPI is a key indicator used to measure inflation, representing the average change in prices paid by consumers for goods and services.
7. **Question:**
What does the term "structural unemployment" refer to in the context of national income accounting?
a) Unemployment due to cyclical economic fluctuations.
b) Unemployment caused by mismatched skills and job opportunities.
c) Temporary unemployment during a recession.
d) Unemployment caused by technological advancements.
**Explanation:**
The correct answer is (b). Structural unemployment results from a mismatch between the skills of workers and the requirements of available jobs.
8. **Question:**
How does an increase in government spending impact Aggregate Demand?
a) It increases Aggregate Demand.
b) It decreases Aggregate Demand.
c) No impact on Aggregate Demand.
d) It depends on other economic factors.
**Explanation:**
The correct answer is (a). An increase in government spending contributes to higher Aggregate Demand as it represents an injection of funds into the economy
9. **Question
When calculating Net Domestic Product (NDP), how is depreciation treated?
a) Depreciation is added to GDP.
b) Depreciation is subtracted from GDP.
c) Depreciation has no impact on NDP.
d) Depreciation is added to Net Investment.
**Explanation:**
The correct answer is (b). Depreciation represents the wear and tear of capital goods and is subtracted from GDP to calculate NDP.
10. **Question:**
what does the term "ceteris paribus" mean?
a) All else being equal.
b) Constantly changing.
c) Without any restrictions.
d) Variable factors included.
**Explanation:**
The correct answer is (a). "Ceteris paribus" is a Latin phrase meaning "all other things being equal," indicating the isolation of a particular variable for analysis.
11. **Question:**
If a country experiences a decrease in its capital stock due to depreciation, how does this impact its Net National Product (NNP)?
a) NNP increases.
b) NNP decreases.
c) No impact on NNP
d) NNP depends on government policies.
**Explanation:**
The correct answer is (b). NNP accounts for depreciation, so a decrease in the capital stock due to depreciation results in a decrease in NNP.
12. **Question:**
How is the government sector represented in the national income accounts?
a) As a producer of goods and service
b) As a consumer of goods and services.
c) Both as a producer and a consumer.
d) Exclusively as a collector of taxes.
**Explanation:**
The correct answer is (c). The government sector is represented both as a producer of public goods and services and as a consumer through its expeexpenditures
13. **Question:**
If the labor force participation rate increases, what is the likely impact on the unemployment rate?
a) Unemployment rate increases.
b) Unemployment rate decreases.
c) No impact on the unemployment rate.
d) Unemployment rate becomes unpredictable.
**Explanation:**
The correct answer is (c). The labor force participation rate and the unemployment rate measure different aspects of the labor market; an increase in participation does not necessarily impact the unemployment rate directly.
14. **Question:**
In the calculation of Gross Private Domestic Investment, which of the following is included?
a) Government expenditures on infrastructure.
b) Personal savings.
c) Business purchases of machinery.
d) Transfer payments.
**Explanation:**
The correct answer is (c). Gross Private Domestic Investment includes business expenditures on machinery, equipment, and structures.
15. **Question:**
How does the inclusion of income earned by foreign residents impact a country's Gross National Product (GNP)?
a) GNP increases.
b) GNP decreases.
c) No impact on GNP.
d) GNP becomes unpredictable.
**Explanation:**
The correct answer is (a). Including income earned by foreign residents increases GNP, as it reflects the total output generated by a country's residents, both domestic and abroad.
6. **Question:**
What is the purpose of the Real Gross Domestic Product (Real GDP) in national income accounting?
a) To measure economic growth without inflation effects.
b) To account for the effects of inflation on nominal GDP.
c) To focus on the services sector exclusively.
d) To calculate government expenditures.
**Explanation:**
The correct answer is (a). Real GDP provides a more accurate measure of economic growth by isolating the changes in output from price fluctuations.
17. **Question:**
If the government implements expansionary fiscal policy, what is the likely effect on Aggregate Demand?
a) Aggregate Demand increases.
b) Aggregate Demand decreases.
c) No impact on Aggregate Demand.
d) Aggregate Demand becomes unpredictable.
**Explanation:**
The correct answer is (a). Expansionary fiscal policy involves increasing government spending or decreasing taxes, both of which boost Aggregate Demand.
18. **Question:**
How is the unemployment rate calculated ?
a) (Number of unemployed / Labor force) x
100
b) (Labor force / Number of unemployed) x 100
c) (Number of employed / Labor force) x 100
d) (Labor force / Number of employed) x 100
**Explanation:**
The correct answer is (a). The unemployment rate is calculated as the percentage of the labor force that is unemployed.
19. **Question:**
What is the main drawback of using Gross Domestic Product (GDP) as a measure of economic well-being?
a) It does not account for income distribution.
b) It only considers monetary transactions.
c) It excludes government spending.
d) It focuses too much on inflation.
**Explanation:**
The correct answer is (a). GDP does not provide information about how income is distributed among the populations
20. **Question:**
In the context of national income accounting, what does the term "capital deepening" refer to?
a) An increase in the quantity of capital per worker.
b) A decrease in the quantity of capital per worker.
c) An increase in government investments.
d) A decrease in private investments.
**Explanation:**
The correct answer is (a). Capital deepening occurs when there is an increase in the amount of capital available per worker, leading to improved productivity.
21. **Question:**
If a country experiences an increase in net exports, how does this affect its Gross Domestic Product (GDP)?
a) GDP increases.
b) GDP decreases.
c) No impact on GDP.
d) GDP becomes unpredictable.
**Explanation:**
The correct answer is (a). An increase in net exports contributes positively to GDP as it reflects higher demand for a country's goods and services abroad
22. **Question:**
What does the term "crowding out" refers to ?
a) Increased private sector investment.
b) Reduced government spending.
c) Decreased private sector investment due to increased government borrowing.
d) Efficient allocation of resources.
**Explanation:**
The correct answer is (c). Crowding out occurs when increased government borrowing leads to higher interest rates, reducing private sector investment.
23. **Question:**
How does the presence of discouraged workers impact the official unemployment rate?
a) The official unemployment rate decreases.
b) The official unemployment rate increases.
c) No impact on the official unemployment rate.
d) The official unemployment rate becomes unpredictable.
**Explanation:**
The correct answer is (c). Discouraged workers, those who have given up searching for employment, are not considered part of the labor force in the official unemployment rate calculation.
24. **Question:**
In national income accounting, what is the difference between operating surplus and mixed income?
a) Operating surplus includes profits, while mixed income includes rents.
b) Operating surplus includes rents, while mixed income includes profits.
c) Both refer to the same concept.
d) Operating surplus includes profits, while mixed income includes wages.
**Explanation:**
The correct answer is (d). Operating surplus includes profits earned by corporations, while mixed income includes income earned by self-employed individuals, including wages.
25. **Question:**
How does the Phillips curve illustrate the relationship between inflation and unemployment?
a) Inversely proportional.
b) Directly proportional.
c) No relationship.
d) Unpredictable relationship.
**Explanation:**
The correct answer is (a). The Phillips curve suggests an inverse relationship between inflation and unemployment; as one decreases, the other tends to increase.
26. **Question:**
If a country experiences a decrease in its government expenditures, how does this impact Aggregate Demand?
a) Aggregate Demand increases.
b) Aggregate Demand decreases.
c) No impact on Aggregate Demand.
d) Aggregate Demand becomes unpredictable.
**Explanation:**
The correct answer is (b). A decrease in government expenditures leads to a reduction in Aggregate Demand.
27. **Question:**
In the calculation of Gross National Product (GNP), how is net foreign factor income accounted for?
a) Added to GNP.
b) Subtracted from GNP.
c) No impact on GNP.
d) Added to Gross Domestic Product (GDP).
**Explanation:**
The correct answer is (b). Net foreign factor income (NFFI) is subtracted from GNP to account for income earned by foreign factors within the country.
28. **Question:**
How does a decrease in consumer confidence affect Aggregate Demand?
a) Aggregate Demand increases.
b) Aggregate Demand decreases.
c) No impact on Aggregate Demand.
d) Aggregate Demand becomes unpredictable.
**Explanation:**
The correct answer is (b). A decrease in consumer confidence tends to result in lower spending, negatively impacting Aggregate Demand.
29.**Question:**
What is the main focus of the Personal Consumption Expenditures (PCE) component in GDP calculations?
a) Government spending on public goods.
b) Business investments.
c) Household spending on goods and services.
d) Net exports.
**Explanation:**
The correct answer is (c). Personal Consumption Expenditures (PCE) represents the total spending by households on goods and service
30. **Question:**
How does an increase in the value of a country's currency impact its exports?
a) Exports increase.
b) Exports decrease.
c) No impact on exports.
d) Exports become unpredictable.
**Explanation:**
The correct answer is (b). An increase in the value of a country's currency makes its exports more expensive for other countries, potentially leading to a decrease in exports.
31. **Question:**
How does an increase in corporate income taxes impact the profitability of businesses?
a) Profitability increases.
b) Profitability decreases.
c) No impact on profitability.
d) Profitability becomes unpredictable.
**Explanation:**
The correct answer is (b). An increase in corporate income taxes reduces the after-tax profits of businesses, impacting their profitability.
32. **Question:**
If a country experiences a decrease in the money supply, what is the likely impact on interest rates?
a) Interest rates increase.
b) Interest rates decrease.
c) No impact on interest rates.
d) Interest rates become unpredictable.
**Explanation:**
The correct answer is (a). A decrease in the money supply tends to lead to higher interest rates as borrowing becomes more expensive.
33. **Question:**
How does the labor force participation rate differ from the employment-population ratio?
a) They measure the same concept.
b) Labor force participation rate includes discouraged workers, while the employment-population ratio does not.
c) Employment-population ratio includes part-time workers, while the labor force participation rate does not.
d) They both exclude unemployed individuals
**Explanation:**
The correct answer is (b). The labor force participation rate includes discouraged workers who are not actively seeking employment, while the employment-population ratio does not consider them.
34 **Question:**
How does an increase in government transfer payments, such as unemployment benefits, impact the components of Gross Domestic Product (GDP)?
a) Increases Consumption and GDP
b) Increases Government Expenditure and GDP
c) Decreases Savings and GDP
d) Decreases Investment and GDP
**Solution:**
The correct answer is (a). Government transfer payments directly increase households' disposable income, leading to higher consumption and, consequently, an increase in GDP.
35. **Question:**
If a country experiences an increase in both inflation and real GDP, what could be a plausible explanation?
a) A decrease in productivity
b) An increase in government spending
c) A decrease in consumer spending
d) A decrease in net exports
**Solution:**
The correct answer is (b). An increase in both inflation and real GDP could be indicative of an expansionary fiscal policy, where increased government spending stimulates economic activity.
36. **Question:**
How is the underground economy (informal economy) typically represented in official national income accounts?
a) Included in GDP
b) Excluded from GDP
c) Included in GNP
d) Excluded from GNP
**Solution:**
The correct answer is (b). The underground economy, consisting of unreported and illegal activities, is generally excluded from official GDP calculation
37. **Question:**
In the calculation of Net National Product (NNP), why is depreciation subtracted from Gross National Product (GNP)?
a) To account for inflation
b) To calculate Net Investment
c) To adjust for changes in population
d) To incorporate government expenditures
**Solution:**
The correct answer is (b). Depreciation represents the wear and tear on capital goods, and subtracting it from GNP gives Net National Product, which provides a measure of the net increase in the economy's productive capacity.
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