AP Macroeconomics

UNIT 2 REVIEW RATIONALE MULTIPLE CHOICE

Q A Rationale
1 A We established that, during a recession, there is an adverse effect on GDP and the level of
employment and also that prices may stagnate or fall. Although the labor force is highly likely to
be affected, it will probably decrease in size as jobless individuals who become frustrated give up
their job searches. The best answer here is clearly that the unemployment rate will most likely
head upwards.
2 D We defined the labor force as all those who qualify as employed (have full- or part-time job) and
unemployed (jobless but actively, within the last 4 weeks, seeking work).
3 E Aggregate output (production) is measured as GDP. Sustained increases, or expansions, are
known as economic growth periods, which can be shown with both a PPC and business cycle
model:

4 C While there is a special situation that can occur where inflation can occur as the employment
level falls, a) we havent covered that yet and b) youve learned that inflation is usually a sign of
an economy heating up (growing) so, usually, its connected to a rising level of employment.
Also, weve established that inflation reduces the purchasing power (value, in terms of goods and
services that can be acquired with the same nominal amount) of an economys money, so it
destabilizes currency and therefore discourages households and firms from holding cash so that
they either spend it or invest it more aggressively in order to try and offset the effects of inflation.
5 D Goods and services are produced by firms and are purchased by households in the product
market. When you look at a simple circular flow model, it is easy to see the flow of $ to firms,
through the product market, moves opposite to the flow of goods and services, through the
product market, to households:

AP Macroeconomics

UNIT 2 REVIEW RATIONALE MULTIPLE CHOICE

6 C Although a better understanding is individuals or groups of people that share income, the best
available option in this problem is individuals or groups that live together since all of the other
options are too strict or narrow in interpretation.
7 A In class, we defined GDP as the total value of all domestic production of final goods and services
in a given time period. One of the methods of calculating GDP involves adding total spending on
final goods and services by sectors of our economy. This formula is C + I + G + (X M) where
C = consumer spending, I = business investment, G = government spending, X = exports and M =
imports. Another method we discussed in calculating GDP was total income earned by
households. The formula is W + I + R + P where W = wages, I = interest, R = rent and P =
profits. We also established that the value of intermediate goods (i.e. tires on new cars) are
counted as part of final goods instead of separately in order to avoid double-counting and thereby
inflation of the GDP statistic.
8 B Using the formula GDP = C + I + G + (X M):
$1000 = $700 + $100 + $150 + (X M)
$1000 = $950 + (X M)
$50 = (X M)
9 A Changes to business inventories are counted towards GDP as a form of business investment.
10 B Imports are foreign-produced goods and therefore do not count towards an economys GDP
figure which only accounts for domestic production of final goods and services.
11 A Consumers (household members) are the largest segment of the private sector (households and
firms), which is much larger than the public sector (government) and constitute the greatest % of
GDP in terms of spending. Keep in mind there are both domestic and foreign consumers of
domestically produced goods and services.

12 D Real always indicates adjusted for inflation and, yes, anytime aggregate (total or overall)
output increases, the real value of that output will be greater. As a demonstration, consider a
simple economy that produces one product that sells for $1and never experiences inflation:
2010 Quantity = 500 so rGDP = $500
2011 Quantity = 600 so rGDP = $600
13 B Technically, the most refined measure of GDP for making comparisons between countries and
over time is real GDP per capita. However this problem is asking for the best measure of the
total size of an economy over time. In this case,
14 C To measure real GDP for each year, multiply each years output (quantity) of each product times
its price in the base year (Year 1) adding up all the results:
Year 1 rGDP = [3,000 x $0.20] + [2,000 x $0.40] = $600 + $800 = $1,400
Year 2 rGDP = [4,000 x $0.20] + [3,000 x $0.40] = $800 + $1,200 = $2,000
15 C GDP as a statistic has several key flaws as a measure of the quality of life in an economy which
we discussed but the only one listed was the fact that GDP can include spending on recovery
efforts from undesirable events like natural disasters.
AP Macroeconomics

UNIT 2 REVIEW RATIONALE MULTIPLE CHOICE

16 E One must be jobless, actively seeking work (within the last 4 weeks) and available for work
(physically and legally) in order to be considered unemployed by the governments criteria.
17 B I mistyped one of the potential statements (II) which should have read: The European Union had
a higher nominal GDP than the United States. This was intended to be an obvious answer,
although upon reflection, one should realize that this statement does not tell us much at all
because nominal values are not adjusted for inflation and, in this case, the lack of a per capita
measure may also lead to inaccurate conclusions about the productiveness of each region.
18 B The labor force participation rate is calculated by dividing the size of the labor force (100,000) by
the working-age population (200,000), so:
100,000 / 200,000 = 0.50 = 50%
19 A The labor force (100,000) in any economy is comprised of all the employed (90,000) and
unemployed, so:
100,000 90,000 = 10,000
20 D The unemployment rate is calculated by dividing the number of unemployed (10,000) by the size
of the labor force (100,000), so:
10,000 / 100,000 = 0.10 = 10%
21 B Remember that being jobless can both be an official and unofficial status since the governments
criteria as to who is unemployed may neglect a significant % of the working-age population that
has given up trying to find a job (hence the phrase discouraged workers) and outside the labor
force and therefore are not reflected in the unemployment rate.
22 A This is frictional UE because the person voluntarily chose to move and find a new job.
23 C Recessions are part of the business cycle, hence cyclical unemployment being the reference to
jobs lost due to downturns in economic activity.
24 B This should have read A person who is unemployed because of a change in productive
technique or technology that creates a mismatch between the quantity of labor supplied and the
quantity of labor demanded is experiencing what type of unemployment. Thus, this incidence of
unemployment would be structural because the industry he or she belonged to was impacted by a
specific change that rendered his or her skills less desirable than before.
25 D The natural rate of unemployment (NRU) is the normal and healthy rate which includes the
levels of frictional and structural UE but it never equals 0% since there is always some level of
frictional and structural UE present as job creation and destruction is perpetual.
26 E Ignore this problem; this information is above and beyond and what is required for the AP Exam
and I cut coverage of this portion to save some time.
27 C If your income was $40,000 in 2001 and $80,000 in 2011, you might be proud of the fact that you
make more $ (at least nominally) than you did back in the day. However, if prices doubled,
your real income is actually unchanged. To prove this, make 2001 the base year so its price index
number = 100 and 2011s price index number = 200 and then remove the effects of inflation from
the nominal income in 2011 ($80,000) as follows:
( $80,000 / 200 ) x 100 = $40,000 = real income in 2011
AP Macroeconomics

UNIT 2 REVIEW RATIONALE MULTIPLE CHOICE

28 D You find the CPI for a given year by dividing the market basket cost of the most recent year by
the same market basket cost of the base year and multiplying the remainder by 100 to create an
indexed number, so:
[ 108 / 100 ] x 100 = 1.08 x 100 = 108 = CPI # for Year 2
29 C You have to use the formula for calculating the inflation rate, so that:
[ ( 120 80 ) / 80 ] x 100 = [ 40 / 80 ] x 100 = 0.50 x 100 = 50%
30 D The CPI is both the most commonly used measure of inflation and it measures the price of a
specific market basket of goods believed to represent the typical urban American family of 4s
consumptive habits. It does not, however, give any clear insight into the consumer mindset when
prices change.
31 B The price index of a selected base year always = 100
32 D You have to use the formula for calculating the inflation rate, so that:
[ ( 198 180 ) / 180 ] x 100 = [ 18 / 180 ] x 100 = 0.10 x 100 = 10%
33 D You have to use one of the methods (Method 2, to be exact) we learned for calculating real GDP:
($2,400 / 120) x 100 = $200 x 100 = $2,000 = real GDP in Year 3
34 C You have to use one of the methods (Method 2, to be exact) we learned for calculating real GDP:
($480 billion / 120) x 100 = $4 billion x 100 = $400 billion = real GDP in 2003
35 A You have to use the formula for calculating real GDP growth, so that:
[ ( $5,200 $5,000 ) / $5,000 ] x 100 = [ $200 / $5,000 ] x 100 = 0.05 x 100 = 5%
36 E You could either divide the nominal GDP ($11.1 trillion) by each listed option until you get the
real GDP ($11 trillion) as a result or divide nominal GDP by real GDP and multiply the
remainder by 100 to find the price index number, as follows:
(12.1 / 11) x 100 = 1.1 x 100 = 110