David Mayer - Allen Independent School District



AP Macroeconomics – GDP, Unemployment, and Inflation

Questions from the 2005 AP Macroeconomics Released Exam

1. The major difference between real and nominal gross domestic product (GDP) is that real GDP

a. Excludes government transfer payments

b. Excludes imports

c. Is adjusted for price-level changes using a price index

d. Measures only the value of final goods and services that are consumed

e. Measures the prices of a market basket of goods purchased by a typical urban consumer

2. Which of the following statements exemplifies the concept of structural unemployment?

a. New entrants into the labor force have trouble finding jobs.

b. Workers leave their current jobs to find better jobs.

c. Workers are laid off because of aggregate demand has declined.

d. Workers are fired because consumers have reduced their total expenditures.

e. Workers are fired because their skills are no longer in demand.

3. The unemployment rate measures the percentage of

a. People in the labor force who do not have jobs

b. People in the labor force who have a part-time job but are looking for a full-time job

c. People who do not have jobs and have given up looking for work

d. People in the adult population who do not have jobs

e. People in the adult population who have temporary jobs

4. Which of the following can be considered a leakage from the circular flow of economic activity?

a. Investment

b. Government expenditures

c. Consumption

d. Exports

e. Saving

5. Which of the following is included in the computation of gross domestic product (GDP)?

a. Government transfer payments, such as unemployment benefits

b. Purchases of goods, such as used cars

c. Child care tasks performed by househusbands

d. Total value of business inventories

e. Additions to business inventories

6. Which of the following best explains why transfer payments are not included in the calculation of gross domestic product?

a. Transfer payments are used to pay for intermediate goods, and intermediate goods are excluded from gross domestic product.

b. Transfer payments are government expenditures, and government expenditures are excluded from gross domestic product.

c. Recipients of transfer payments have not produced or supplied goods and services in exchange for these payments.

d. Recipients of transfer payments are usually children, and income earned by children is excluded from gross domestic product.

e. Recipients of transfer payments are sometimes not citizens of the United States.

7. Suppose that a typical consumer buys the following quantities of three commodities in 1993 and 1994.

|Commodity |Quantity |1993 per Unit Price |1994 per Unit Price |

|Food |5 units |$6.00 |$5.00 |

|Clothing |2 units |$7.00 |$9.00 |

|Shelter |3 units |$12.00 |$19.00 |

Which of the following can be concluded about the consumer price index (CPI) for this individual from 1993 to 1994?

a. It remained unchanged

b. It decreased by 25%

c. It decreased by 20%

d. It increased by 20%

e. It increased by 25%

8. Which of the following would be true if the actual rate if inflation were less than the expected rate of inflation?

a. Inflation has been under-predicted.

b. The real interest rate had exceeded the nominal interest rate.

c. The real interest rate had been negative.

d. People who had borrowed funds at the nominal interest rate during this time period would lose.

e. The economy would expand because of the increased investment and spending.

Questions from the 2000 AP Macroeconomics Released Exam

9. Which of the following transactions would represent an addition to a nation’s current gross domestic product?

a. Ms. Smith purchases a share of stock in an automobile company.

b. A retailer increases her stock of imported shoes.

c. The government increases its domestic purchases of food for use by the military.

d. A corporation sells shoes from last year’s inventory.

e. A mother sells her car to her daughter.

10. Which of the following is true according to the circular flow model?

a. Firms are suppliers in both the product and factor markets.

b. Firms are demanders in the product markets and suppliers in the factor markets.

c. Households are demanders in both the product and factor markets.

d. Households are demanders in the product market and suppliers in the factor markets.

e. The government is a demander in the product market only.

11. The official unemployment rate is not an accurate indicator of actual unemployment in the economy because

a. Structural unemployment is greater than cyclical unemployment at the going wage rate

b. Full employment is greater than natural unemployment

c. The unemployment rate is less than natural unemployment

d. The official rate does not include persons who have given up looking for work

e. The official rate does not reflect the number of people receiving unemployment compensation

12. As a measure of economic welfare, gross domestic product underestimates a country’s production of goods and services when there is an increase in

a. The production of military goods

b. The production of antipollution devices

c. Crime prevention services

d. Household production

e. Legal services

13. If purchases of education and medical care were counted as investment rather than consumption, gross domestic product would

a. Not change, because there is no change in total expenditures

b. Increase, because investment is included in gross domestic product but consumption is not

c. Increase, because consumption is included in gross domestic product but investment is not

d. Decrease, because investment is weighted more heavily than consumption in calculating gross domestic product

e. Decrease, because consumption is weighted more heavily than investment in calculating gross domestic product

Answers to 2005 Questions w/Explanation

1. The major difference between real and nominal gross domestic product (GDP) is that real GDP

c. Is adjusted for price-level changes using a price index

Explanation: Nominal GDP is measured in current year dollars. Real GDP is measured through dividing Nominal GDP by a price index and then multiplying by 100. Real GDP is useful for making comparisons over time by holding the value of the dollar constant.

2. Which of the following statements exemplifies the concept of structural

unemployment?

e. Workers are fired because their skills are no longer in demand.

Explanation: Structural unemployment is ‘permanent unemployment’ caused by changes in technology, lack of necessary skills or obsolescence. For example, with the advent of the personal computer, the need for skilled typewriter repair technicians all but vanished.

3. The unemployment rate measures the percentage of

a. People in the labor force who do not have jobs

Explanation: To be classified as unemployed a person must be 16 years or older, not have a job, and have actively searched for work in the last 4 weeks. A common misconception is that the unemployment rate is the percentage of the population not working. Instead, it is the percentage of the civilian labor force that is not working. In other words, not employed does not necessarily equal unemployed.

4. Which of the following can be considered a leakage from the circular flow of

economic activity?

e. Saving

Explanation: The circular flow model traces all of the spending that occurs in the economy between the private, public and foreign sectors. Savings is simply defined as not spending and therefore reduces consumption in the private sector. Another leakage from the circular flow is imports.

5. Which of the following is included in the computation of gross domestic

product (GDP)?

e. Additions to business inventories

Explanation: Additions to business inventories is the only answer that meets the definition of GDP: New, final, domestic goods, for which there is a market transaction.

6. Which of the following best explains why transfer payments are not included in

the calculation of gross domestic product?

c. Recipients of transfer payments have not produced or supplied goods

and services in exchange for these payments.

Explanation: It is important to note that GDP is not a measure of all monetary transactions that take place in an economy.

7. Suppose that a typical consumer buys the following quantities of three commodities in 1993 and 1994.

|Commodity |Quantity |1993 per Unit Price |1994 per Unit Price |

|Food |5 units |$6.00 |$5.00 |

|Clothing |2 units |$7.00 |$9.00 |

|Shelter |3 units |$12.00 |$19.00 |

Which of the following can be concluded about the consumer price index (CPI) for this individual from 1993 to 1994?

e. It increased by 25%

Explanation: First, multiply each quantity by the 1993 per unit price and then the 1994 per unit price. Sum the two sets. Next, calculate the percentage change between the two sums, where the formula for percentage change is equal to the change over the initial number multiplied by 100.

(5 * $6) + (2 * $7) + (3 * $12) = $80

(5 * $5) + (2 * $9) + (3 * $19) = $100

[($100 – $80) / $80 ] * 100 = 25%

8. Which of the following would be true if the actual rate if inflation were less than

the expected rate of inflation?

d. People who had borrowed funds at the nominal interest rate during this

time period would lose.

Explanation:

the nominal interest rate = real interest rate + expected inflation

If the expected inflation rate is greater than actual inflation, then the nominal interest rate charged to borrowers is higher than it should. As a result, borrowers lose.

Answers to 2000 Questions w/Explanation

9. Which of the following transactions would represent an addition to a nation’s

current gross domestic product?

c. The government increases its domestic purchases of food for use by the

military

Explanation: Government spending on goods and services is a component of GDP.

10. Which of the following is true according to the circular flow model?

d. Households are demanders in the product market and suppliers in the

factor markets.

Explanation: In the circular flow model, households demand goods and services in the product market and supply the factors of production (land, labor, capital, and entrepreneurship) in the factor market.

11. The official unemployment rate is not an accurate indicator of actual

unemployment in the economy because

d. The official rate does not include persons who have given up looking

for work

Explanation: Unemployment statistics don’t measure those who have given up the job search because they are by definition no longer in the labor force. Remember that to be considered unemployed, a person must be actively seeking employment and not be working.

12. As a measure of economic welfare, gross domestic product underestimates a

country’s production of goods and services when there is an increase in

d. Household production

Explanation: Although real output has been created, household production is not included because no financial transaction takes place.

13. If purchases of education and medical care were counted as investment

rather than consumption, gross domestic product would

a. Not change, because there is no change in total expenditures

Explanation: Real GDP = C + IG + G + XN. No change occurs by re-categorizing the expenditures.

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