AP MACRO unit 2 - EXAM REVIEW

What GDP doesn't measure

- Nonmarket Activities - Underground Economy - Negative externalities - Quality of life - used products - stocks and bonds - financial transactions

Limitation on unemployment rate

- part-time workers who wish for a full time job - discouraged workers

What is frictional unemployment?

Between jobs, moving towards a better job. (Module 7) ; short term

formula for calculating inflation rate using CPI

CPI2 - CPI1 / CPI1 X 100 ; cpi2 = cpi in second period , cpi1 = cpi in the 'first period'

Define deflation and disinflation.

Deflation: decrease in prices (CPI down) Disinflation: Decrease in inflation rate (CPI up)

formula for Income Approach when measuring GDP

GDP = : w=wages for labor, r=rent for land, i=investment on capital , pr= profit from entrepreneurship

formula for value-added approach

GDP = Value of production - value of intermediate goods (product used to produce a final good)

define product markets

The markets where finished outputs of industry are bought and sold

Define GNP

The value of all final goods and services produced within a nation in a particular year plus net income from overseas investments and remittances

What is underemployed?

Those working beneath their skill level or work part-time but seek full employment

what is the formula for GDP and what does it stand for ?

[Gross Domestic Product] C= Consumption, I=Investment , G=Gov Spending, Xn = Net Exports : <- total = GDP

A country's unemployment rate is extraordinarily low and inflation is beginning to rise sharply. Its real GDP growth is still positive but has started to slow down. Which point of the business cycle best describes this economy? a. Peak b. Trough c. Contraction d. Potential and real GDP are equal e.. Cyclical unemployment is greater than the NRU

a

An increase in ______ represents _____. The speed of the increase is ______. a. average price level; inflation; the inflation rate b. average price level; the inflation rate; inflation c. borrowing; the inflation rate; the circular flow d. lending; the inflation rate; the circular flow e. uncertainty; inflation; the inflation rate

a

At which point in the business cycle is there the largest inflationary gap? a. The peak b. The trough c. During expansion d. During contraction e. At full employment

a

How does a circular flow model illustrate GDP? a. The circular flow model is a visualization of the economic transactions across the economy. b. The circular flow model shows only the factor payments received by households. c. The circular flow model represents the balance of payments of the government. d. The circular flow model is a visualization of economic transactions in foreign countries. e. The circular flow model represents the long-run equilibrium in an economy

a

If the consumer price index begins to increase dramatically, which of the following is likely true? a. The output gap is positive and near the peak. b. The output gap is positive and near the trough. c. There is no output gap and the economy is growing. d. The output gap is negative and near the peak. e. The output gap is negative and near the trough.

a

What can you conclude regarding the the economy if it is producing below the full employment level? a. There is a negative output gap. b. There is a positive output gap. c. There is zero output gap. d. There is an inflationary gap. e. There is insufficient information to determine whether there is an output gap.

a

When an economy is at the trough of the business cycle, which of the following is then true about the state of the economy? A There is a recessionary gap. B There is an inflationary gap. C The economy is producing at its potential output level. D The economy is producing above its potential output level. E The unemployment rate is lower than the natural rate of unemployment.

a

Which of the following statements reflects a valid criticism of the unemployment rate as it is measured by the U.S. Bureau of Labor Statistics? a. A drop in the unemployment rate can be misleading if many people have left the labor force. b. Discouraged workers are included in the official unemployment rate but should not be. c. Counting people younger than 16 as unemployed artificially inflates the unemployment rate. d. Frictional unemployment is excluded from the unemployment rate but should not be. e. Counting full-time students as unemployed makes the unemployment rate misleadingly high.

a

What is CPI?

a measure of the overall cost of the goods and services bought by a typical consumer

define GDP deflator and its formula

a price index that measurs the changes in prices for all goods and services produces in a economy in a given period which tells us the aggregate price level ; (nominal gdp / real gdp) x 100

Define Nominal GDP ; formula for nominal GDP

an unadjusted GDP , quantities the total value in money rather than units of production; C= Consumer Consumption + I= gross private domestic investment + G= gov spending + (x= exports (-) M = imports)

An economy's structural unemployment rate is 2 percent, its frictional unemployment rate is 4 percent, and its cyclical unemployment rate is 3 percent. Based on this data, its natural unemployment rate is ________ and its actual unemployment rate is ________. a. 5 percent; 6 percent b. 6 percent; 9 percent c. 7 percent; 9 percent d. 9 percent; 7 percent e. 9 percent; 6 percent

b

If an economy has a structural unemployment rate of 1 percent, a frictional unemployment rate of 4 percent, and an actual rate of unemployment of 12 percent, what must be its cyclical unemployment rate? a. 5 percent b. 7 percent c. 8 percent d. 11 percent e. 17 percent

b

In an economy, if the real GDP is $50 billion and the GDP deflator is 150, what would be the value of the total output in the economy at the current market prices? a. $50 billion b. $75 billion c. $3 billion d. $7,500 billion e. $100 billion

b

Nominal GDP fails to take account of ________, and real GDP still does not measure ________. a. changes in business inventories; household consumption b. inflation; non-market transactions c. exports; imports d. imports; government spending on infrastructure e. capital investments; goods produced in the country and sold overseas

b

Use the table below to answer the question that follows. Year CPI Year 1 100 Year 2 110 Year 3 85 Year 4 150 Year 5 105 Which statement below would accurately describe the economy above? a. Overall, it is showing consistent growth. b. Its inflation rates would cause much uncertainty. c. The average price level is stable across the five years. d. Borrowers would be happy in year 3. e. It illustrates the value of fixed-rate loans.

b

Which of the following describes a difference between nominal gross domestic product (GDP) and real GDP? A Nominal GDP uses constant prices to measure the value of final output, while real GDP uses current prices. B Nominal GDP uses current prices to measure the value of final output, while real GDP uses constant prices. C Nominal GDP measures how much output is produced within the borders of a country, while real GDP measures how much output is produced around the world by domestic companies. D Nominal GDP includes sales of used goods while real GDP does not. E Nominal GDP takes into account the size of the population while real GDP does not.

b

Which of the following would benefit borrowers of fixed interest rate loans at the expense of their creditors? a. The actual inflation rate is less than the expected inflation rate. b. The actual inflation rate is more than the expected inflation rate. c. Hyperinflation begins to occur in the economy. d. The average price level remains perfectly stable. e. The average price level fluctuates wildly for a sustained period.

b

Why would the money disbursed for Social Security disability benefits not be counted as part of GDP? a. It is impossible to know the precise number. b. It is not directly involved in the production of new goods and services. c. It has previously circulated through the economy. d. It is considered part of the shadow economy. e. It is counted as part of GDP.

b

define market transactions and non market transactions

buy or sells shares of their company ; purpose of self consumption

For two straight quarters, business inventories increase at a sharp rate. This most likely indicates a. an expanding economy b. a recovering economy c. the beginning of a recession d. an increase in inflation e. a record unemployment rate

c

If the CPI for a given year is 170 and the price of a basket of goods is $40 in the base year, what is the price of the basket in the given year? a. $4.25 b. $23 c. $68 d. $40 e. $130

c

In 2020, the real gross domestic product was $20 trillion and the GDP deflator was 110. Based on this, nominal GDP must have been a. $18 trillion b. $20 trillion c. $22 trillion d. $31 trillion e. $42 trillion

c

The CPI is calculated on the basis of a basket of _____ products, but is temporarily misrepresented due to the introduction of ____ products. a. new; old b. new; common c. common; new d. common; old e. old; common

c

Which method for counting gross domestic product focuses on the money paid for all the factors of production as well as profits earned by business owners? a. The expenditures approach b. The circular flow model c. The income approach d. The value-added approach e. The consumer purchases approach

c

Which of the following describes a limitation of gross domestic product (GDP)? A It overstates the value of output by counting non-market transactions such as mowing your neighbor's lawn. B It understates the value of output by accounting for negative environmental side effects of production. C It does not account for the distribution of income in a nation or income inequality. D It overstates economic well-being by including all do-it-yourself activities. E It fails to make adjustments for the value of services consumed for free such as browsing on the Web.

c

Which of the following is a controversial indicator because while it attempts to measure total economic activity, it excludes certain data for being too difficult to count? a. Total consumption b. Net exports c. Gross domestic product d. Unemployment rate e. Production possibilities curve

c

Which of the following would be added to the gross domestic product of the United States? a. $25 million in garage sale purchases b. $1.2 trillion in interest earned on savings accounts c. $800 million increase in business inventories d. $400 billion in stimulus checks from the federal government e. $2 billion worth of steel sold to American auto manufacturers

c

Which statement is true about the circular flow diagram of an economy? A The market for goods and services connects household spending to government spending. B The market for factors of production connects household spending to goods produced by firms. C The market for factors of production connects spending by firms to household income. D The market for goods and services connects labor income to firms as employers. E The market for goods and services connects labor income to household spending.

c

what is structural unemployment ?

caused by shifts in the economy ; technological changes

What is cynical unemployment? formula for cynical unemployment

consequence of a downturn in the overall economy ; actual unemployment rate - natural unemployment rate

what is the forumal in calculating CPI ? what is the CPI of the base year always ?

cost of market basket of a current year / the market basket base year ; the base year CPI is ALWAYS 100

If the unemployment rate is 12 percent, which of the following must be true? a. For every 100 people in the country, 12 are seeking work. b. Twelve percent of the total population are discouraged workers. c. Twelve percent of the population have stopped pursuing employment. d. Twelve percent of the labor force is unemployed. e. The labor force participation rate is 88 percent.

d

In a given year, businesses invest $2 trillion, exports total $1.5 trillion, imports total $3 trillion, consumers spend $5 trillion, and the government spends $1.5 trillion on final goods and services. Based on this, which of the following statements is true? a. The net exports are $4.5 trillion. b. The gross national income must be $8.5 trillion. c. The gross domestic product must be $8.5 trillion. d. The total value added in the economy for that year must equal $7 trillion. e. The country is in a recession.

d

Which of the following groups would benefit from an increase in the average price level in an economy? a. Individuals and institutions who have loaned money b. Borrowers of loans with rates that automatically adjust with inflation c. Those controlling resources whose prices increased by more than the average d. Those controlling factors of production whose prices decreased during the same period e. The creditors for capital investment loans

d

Which of the following is a consequence of unexpected inflation that negatively impacts everyone in the economy? a. Employers are able to compensate workers with wages that have lower purchasing power. b. Borrowers must pay back money that obtains fewer goods and services than when it was originally lent. c. The average price level remains perfectly stable. d. The resulting uncertainty makes it difficult to assess costs, benefits, and risk. e. Adjustable-rate loans are modified to take into account the change in purchasing power.

d

Which of the following would directly decrease the labor force participation rate? a. More parents decide to balance part-time work and raising children. b. Many workers lose their jobs and start searching for new ones. c. People begin to increasingly put off retirement. d. An increasing number of people choose to retire early. e. Many people come out of full retirement to pursue part-time work.

d

what is the value-added approach when measuring GDP ?

determing the value of goods and serivices

what are limitations of the unemployment rate ?

discouraged workers - those want a job but have given up looking and therfore do not fall within the labor force

According to the circular flow model, which of the following should always be equal? a. Imports and exports b. Wages and transfer payments c. Consumption and investment in an economy d. Government spending, consumer spending, and business investment e. Total income and total expenditures in an economy

e

An economy operating at a trough in its business cycle is by definition a. experiencing deflation b. experiencing inflation c. in a recession d. in an expansion e. between a recession and an expansion

e

Assume that a country has a high GDP and also one of the worst life expectancy rates in the world. Which limitation of the GDP is highlighted in this scenario? a. The GDP does not measure household contributions. b. The GDP does not include sale of illegal contraband. c. The GDP does not include government aid. d. The GDP does not include net receipts from abroad. e. The GDP does not measure standard of living.

e

Jan works a 30-hour week for a minimum wage of $10 an hour. Suppose that last year is the base year for the Consumer Price Index (CPI). Which of the following is true about Jan's real wage if at the end of this year the CPI is 125 ? A Jan's real wage at the end of this year is $10 an hour because the base year equals 100. B Jan's real wage is $2.50 per hour at the end of the year due to inflation. C Jan's real wage is 25% higher because the CPI increased from 100 to 125. D Jan's real wages are equal to the nominal wages. E Jan's real wage is $8 per hour at the end of the year.

e

Total Population 16 and Older: 100 million Workers Employed : 64.4 million Structurally Unemployed: 1.6 million Cyclically Unemployed: 1 million Frictionally Unemployed: 3 million Based on the employment data above, this country's unemployment rate is ____ and its labor force participation rate is _________. a. 5.6%; 64.4% b. 8%; 70% c. 8.7%; 70% d. 35.6%; 64.4% e. 64.4%; 35.6%

e

Which of the following is considered in the calculation of gross domestic product? a. The distribution of wealth across the population b. The labor of an author on a book to be published the next year c. The total value of all consumer investments in financial markets d. Environmental costs e. The value of all new residential home construction

e

who counts in the labor force ? potential labor force ?

everyone 16 or older and who is willing to work unemployed or employed ; all indiviuals ages 16+

define expansion, peak, contraction, trough in business cycle

expansion (boom) : increased employment, economic growth positive price increase Peak : maximum growth stage of an economy Contraction (recession) : increasing unemployment , decreasing economic activity and economic output Trough: lowest point in economic avtivity , eventual upward direction of the economy called recovery

GDP calcuates from a regular year or fiscal year ?

fiscal

What is the expedentures approach when measuring GDP ?

focuses on demand for goods and services

formula for actual unemployment rate

frictional + structural + cynical unemployment

Formula for Labor Force Participation Rate

labor force/working age population x 100

factors that affect business cycles

monetary polices , political insercuity, trade barries, and government spending

formula for real value

nominal value / price index/100

what is real wage formula ?

nominal wage / CPI x 100

what are real and nominal varibales ?

real - variables whos values are aadjusted with inflation nominal - measured in money and does NOT include inflation

CPI limitations

substitution bias, increase in quality bias, new product bias, outlet bias

Define output gap

the difference between actual output and potential output

Define GDP

the market value of all final goods and services produced within a country in a given period of time

What is the unemployment rate? what is the formula for the unemployment rate ?

the percentage of the labor force that is out of work(wants jobs but cant find any) ; # of unemployed workers / labor force x 100

what is natural rate of unemployment ? what is the formula for natural rate of unemployment ?

the proportion of the labor force is unemployed during a period of full employment ; frictional + structural / labor force

what is the income approach when measuring GDP

total income earned through factors of production

What is seasonal unemployment?

unemployment that occurs as a result of harvest schedules or vacations, or when industries slow or shut down for a season

define cost-pull inflation

when aggregate supply decreases the cost of production, from a trade conflict that reduces supply to a increase in raw material for production