Mr. Maurer
AP Economics
Name: __________________________
Review for Chapter 7, 8, and 9 Test
Chapter 7
1. Explain the difference between nominal GDP and real GDP.
2. Identify the items that are included in calculating GDP using the expenditure approach.
3. Identify the items that are specifically excluded from calculating GDP using the expenditure approach.
4. Why are government transfer payments excluded from GDP?
For questions 1 – 4, check your textbook for answers.
5. If both nominal GDP and the price index increased by 5%, what was the change in real output?
0 – No change in real output. If the price index and nominal GDP both go up by equal amounts,
then the entire change in nominal GDP is due to the change in prices.
6. If nominal GDP increased 10% and the price index increased 15%, would the change in real output be
positive, zero, or negative? It would be negative. If the price index increases more than nominal
GDP, then output as actually decreased.
7. If nominal GDP increased 15% and the price index increased 10%, would the change in real output be
positive, zero, or negative? Positive. Since nominal GDP increased more than the price index, there
was real growth. For both of these. 8. If C + Ig + G = 103% of GDP, what does that tell you about Xn?
9. Under what category is the purchase of a new home counted when calculating GDP? Investment
10. How does an increase in imports affect GDP? It decreases GDP, because GDP includes net
exports, which is exports – imports.
11. Exactly what does the consumer price index (CPI) measure? The price of a specific “market
basket” of goods, which the “typical urban consumer” is supposed to typically purchase in a typical
year.
Chapter 8
1. Construction workers who have been laid off due to a slowdown in home construction because of a
downturn in the economy are experiencing __cyclical_____________________ unemployment.
2. Autoworkers who lose their jobs because they have been replaced by robots are experiencing
___structural_____________________ unemployment.
3. College graduates looking for work, but who haven’t found it yet, are experiencing ____frictional
(assuming there are jobs available for them)___________________ unemployment.
4. Provide your own examples of frictional, cyclical, and structural unemployment:
5. How do economists define the “labor force?” see p. 136
6. How do economists define the “unemployment rate?” see p. 136
7. If a worker’s nominal wage goes from $100 to $120 per day and at the same time the general price
level increases by 10%, what is the effect on the worker’s real wage? 10% (20% nominal raise – 10%
inflation = 10% increase in real wage.)
8. If banks are charging 7% interest on loans and the anticipated inflation rate is 4%, what is the real
interest rate? 3%
9. A consumer buys the following quantities of these three items in 2012 and 2013:
Item
Quantity
2012 Unit Price
2013 Unit Price
Food
8
$5
$6
Clothing
3
$8
$9
Shelter
4
$9
$10
What was the percentage change for in this individual’s consumer price index between 2012 and 2013?
It increased 15% (went from 100 to 115)
10. How will an increase in labor productivity affect inflation and unemployment? It will decrease both
inflation and unemployment.
11. If the actual inflation rate turns out to be less than the anticipated inflation rate? Which groups of
people would be hurt? Which groups would be helped? See p. 144 – 145.
12. What groups of people benefit from unanticipated inflation? See p. 144 – 145.
13. What are the factors that can lead to long-term economic growth? See p. 132.
14. List the phases of the business cycle in the correct order. See p. 134
15. If people are able to find a new job more quickly, which type of unemployment would most likely be
reduced? Frictional
16. What effect will inflationary expectations have on nominal interest rates? Nominal interest rates will
increase if people expect higher inflation. (p. 146)
17. What usually causes hyperinflation? (See p. 148)
Chapter 9
1. Identify the determinants, other than disposable income, that affect levels of consumer spending and
the effect that each determinant has on consumer spending. Listed on p. 156 - 157
2. Given that the marginal propensity to consume (MPC) is 0.8, calculate each of the following:
a. the marginal propensity to save (MPS) 1 – 0.8 = 0.2 MPS = 0.2
b. the investment spending multiplier 1/MPS = 5
c. the government spending multiplier 1/MPS = 5
d. the tax multiplier –MPC/MPS = -4
e. the increase in GDP that would be created by a $100 billion increase in investment spending
$500 Billion
f. the increase in GDP that would be created by a $50 billion reduction in taxes $200 Billion
g. the increase in GDP that would be created by a $200 billion increase in government spending
$1 Trillion (1000 Billion)
3. If the marginal propensity to consume is 0.75 and disposable income increases by $1 billion, what will
the initial change in consumption spending be? $750 Billion
4.
a. If the marginal propensity to consume is 0.8, how much would a $1 billion tax increase reduce
consumption spending GDP? 4 Billion
b. If the government then spent all of that $1 billion tax increase, what would be the resulting
change in total spending GDP? 5 Billion
c. Given your answers to b and c above, if the government increases taxes and government
spending by the same amount, will the overall effect on GDP be positive, zero, or negative?
GDP increases by the same amount as the tax increase/spending increase.