AP Macroeconomics Unit 2 Progress Check: MCQ

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.

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C) The market for factors of production connects spending by firms to household income.

Correct. The market for factors of production connects spending by firms to household income.

Which statement is true about the approaches used to measure the value of a nation's gross domestic product (GDP) ?
A) The expenditure approach to calculating GDP sums the components of the supply side of the economy.
B) The income approach to calculating GDP sums the income earned by the factors of production excluding profits.
C) The value-added approach to calculating GDP sums the final monetary value of output at each stage of production.
D) The expenditure approach to calculating GDP sums the market value of all final goods and services produced by foreigners in a given period of time.
E) The expenditure approach to calculating GDP sums consumption spending, investment spending, government spending, and net exports.

E) The expenditure approach to calculating GDP sums consumption spending, investment spending, government spending, and net exports.

Correct. The expenditure approach to calculating GDP sums the components of the demand side of the economy - consumption spending, investment spending, government spending, and net exports.

Calculate Country X's nominal gross domestic product (GDP) for 2017 using the expenditures approach.
A) 14 billion dollars
B) 18 billion dollars
C) 19 billion dollars
D) 20 billion dollars
E) 21 billion dollars

C) 19 billion dollars

Correct. The expenditure approach to calculating GDP sums consumption spending, government spending, investment spending, and net exports. Using the numbers provided in the table, the country's nominal GDP for 2017 is therefore 13+3+4+(−1)=19 billion dollars.

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) It does not account for the distribution of income in a nation or income inequality.

Correct. GDP measures the final output produced by a nation but does not account for the distribution of income or income inequality

Which of the following is true about gross domestic product (GDP)?
A) Calculations of GDP include the monetary value of non-market production activities such as households preparing own meals at home.
B) Calculations of GDP do not include the monetary value of production activities involving negative environmental side effects such as pollution.
C) Calculations of GDP include the monetary value of illegal production activities such as drug cartels.
D) Calculations of GDP include the sale of used goods.
E) Calculations of GDP include the unsold inventories of goods produced within the borders of the country.

E) Calculations of GDP include the unsold inventories of goods produced within the borders of the country.

Correct. The calculations of GDP do include the unsold inventories of goods produced within the borders of the country because these goods were produced during the year.

As a measure of economic performance, the United States gross domestic product (GDP) accounts for which of the following?
A) The use of open-source, free Web browsers
B) A parent's care of children in the home
C) The street sale of illegal substances
D) The cleanup of an oil spill
E) The production of vegetables grown in the backyard and consumed by the family

D) The cleanup of an oil spill

Correct. The cleanup of an oil spill is a measurable production activity that would be accounted for in GDP.

Which of the following is classified as a discouraged worker?
A) Javier earned a degree in business and is actively seeking a job in the financial sector.
B) Sara has been unable to find a job and abandoned her job search.
C) Raphael decided to be a stay-at-home dad after he lost his job.
D) Ida was laid off during a downturn in the economy and is looking for a new job.
E) Zack volunteers at the local elementary school all year long.

B) Sara has been unable to find a job and abandoned her job search.

Correct. Sara is a discouraged worker because she gave up looking for jobs.

What type of unemployment describes the situation of factory workers displaced by automation?
A) Cyclical
B) Frictional
C) Natural
D) Seasonal
E) Structural

E) Structural

Correct. Structural unemployment exists when there is a surplus of job-seekers in a particular labor market than there are jobs available at the current wage rate.

Given the labor market data above, what are the labor-force participation rate (LFPR) and the unemployment rate (UR) ?
A) The LFPR is 60% and the UR is 6.0%.
B) The LFPR is 54% and the UR is 6.0%.
C) The LFPR is 54% and the UR is 10.0%.
D) The LFPR is 60% and the UR is 10.0%.
E) The LFPR is 60% and the UR is 3.3%.

D) The LFPR is 60% and the UR is 10.0%.

Correct. The civilian labor force is 150;(Employed + Unemployed=135+15=150). The labor-force participation rate is 60%;(=[Civilian Labor Force/Civilian non-institutional population]×100=[150/250]×100=60%), and the unemployment rate is 10%;(=[Unemployed/Civilian Labor Force]×100=(15/150)×100=10%)

Suppose the consumer price index (CPI) was 100 on January 1st, 2017 and 110 on January 1st, 2018 with no changes in nominal wages. Which of the following is definitely true about the economy between January of 2017 and January of 2018?
A) The inflation rate was 10 percent.
B) The inflation rate was -10 percent.
C) Real wages increased by 10 percent.
D) There was disinflation of 10%
E) Nominal GDP decreased by 10 percent.

A) The inflation rate was 10 percent.

Correct. The inflation rate is the percentage change in the CPI = (CPI in 2018 - CPI in 2017)/(CPI in 2017)×100 = (110-100)/100×100 = 10%.

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) Jan's real wage is $8 per hour at the end of the year. Correct. Jan's real wage is $8 per hour =Nominal wage/(CPI in hundredths)=$10/(125/100) at the end of the year.Which of the following terms describes a slowdown in the rate of increase in the consumer price index? A) Deflation B) Disinflation C) Hyperinflation D) Inflation E) StagflationB) Disinflation Correct. Disinflation refers to a slowdown in the rate of increase in the consumer price index or inflation.Last year, Myron purchased a $10,000 certificate of deposit with a 3% rate of interest from his bank. The government reported that prices, on average, have fallen by 5% during the current year. Which of the following can be concluded as a result of this transaction? A) Myron loses, while the bank gains. B) Myron gains, while the bank remains unaffected. C) Myron gains, while the bank loses. D) Both Myron and the bank equally gain. E) The bank gains, while Myron remains unaffected.C) Myron gains, while the bank loses. Correct. Prices have fallen by 5% on average, which results in an increase in the real interest rate (real interest rate = nominal interest rate - inflation). Myron is better off because the dollars that Myron will receive back from the bank when the certificate of deposit matures will buy more goods and services than when Myron purchased the certificate of deposit. And conversely, the money that the bank pays back to Myron when the certificate of deposit matures is worth more than that money was worth during the time the bank had this money.Which of the following will happen when the actual inflation rate exceeds the expected inflation rate? A) This will benefit lenders with fixed-interest rate loans. B) This will harm lenders with variable-interest rate loans. C) This will harm lenders with fixed-interest rate loans. D) This will harm borrowers with fixed-interest rate loans. E) This will benefit borrowers with variable-interest rate loans.C) This will harm lenders with fixed-interest rate loans. Correct. When the actual inflation rate exceeds the expected inflation rate, lenders will receive lower real interest rates than expected. Therefore, this will harm lenders with fixed-interest rate loans.Labor unions negotiated a 3-year contract with employers in the automobile industry. They agreed to a 3 percent per year increase in pay over the 3 years. How would each group be affected by an actual inflation rate of 4% next year? A) Workers would be better off, and the employers would be worse off. B) Workers would be better off, and the employers would be unaffected. C) Workers and employers would be equally well off. D) Workers would be worse off, and the employers would be unaffected. E) Workers would be worse off, and the employers would be better off.E) Workers would be worse off, and the employers would be better off. Correct. When the actual rate of inflation (4%) is greater than the expected inflation rate (3%), the real value of worker income is reduced, which means that workers are worse off and employers are better off.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) Nominal GDP uses current prices to measure the value of final output, while real GDP uses constant prices. Correct. Nominal GDP uses current prices to measure the value of final output, while real GDP uses constant prices.Which of the following is the correct calculation of Real Gross Domestic Product (GDP) ? A) Real GDP = Nominal GDP/GDP deflator B) Real GDP = GDP deflator/Nominal GDP C) Real GDP = Nominal GDP × GDP deflator D) Real GDP = Nominal GDP + GDP deflator E) Real GDP = Nominal GDP - GDP deflatorA) Real GDP = Nominal GDP/GDP deflator Correct. Nominal GDP = Real GDP × GDP DeflatorSuppose Miguel wants to know the value of real gross domestic product (GDP) for 2011 in terms of the base year 1984 dollars. In 1984 nominal GDP was $10 billion. In 2011 nominal GDP was $15 billion and the price deflator was 200. Real GDP in 1984 dollars would be equal to which of the following? A) $5 billion B) $7.5 billion C) $10 billion D) $20 billion E) $30 billionB) $7.5 billion Correct. To obtain Real GDP from nominal GDP and the GDP deflator requires the following calculation: Real GDP = Nominal GDP/(GDP deflator in hundredths). In this problem we are asked for 2011 Real GDP converted into 1984 dollars. Therefore we need to divide the 2011 Nominal GDP by the GDP deflator (in hundredths) to deflate 2011 dollars down to 1984 dollars. 2011 Real GDP in 1984 dollars = 2011 Nominal GDP/GDP deflator in hundredths = $15 billion/(200/100) or $7.5. The incorrect answers all use some combination of incorrect values in the numerator or denominator.The output gap is measured by which of the following? A) The difference between nominal and real GDP. B) The difference between actual and potential GDP. C) The difference between the expenditure side of GDP and the income side of GDP. D) The difference between the actual rate of unemployment and the natural rate of unemployment. E) The difference between the GDP deflator and the consumer price index in a given year.B) The difference between actual and potential GDP. Correct. The output gap is measured by the difference between actual and potential GDP.The economy of Fisherland is at full employment for which year in the above diagram? A) 2009 B) 2010 C) 2013 D) 2015 E) 2017D) 2015 Correct. In 2015 the economy is at full employment because actual real GDP is equal to potential real GDP.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) There is a recessionary gap. Correct. At the trough of a business cycle, there is a recessionary gap because, at the trough, actual output is below potential output.