AP Economics:
Economic Measurements FRQs
January 2016
Economic Measurement FRQs
1.
2009
Quantity
_______
Food
6
Clothes
5
Entertainment
2
2009
Price
(base year)
$2.50
$6
$4
2010
Quantity
_______
8
10
5
2010
Price
_____
$2.50
$10
$5
a) The outputs and prices of goods and services in Country X are shown
in the table above. Assuming that 2009 is the base year, calculate
each of the following.
i) The nominal gross domestic product (GDP) in 2010 $145
ii) The real GDP in 2010 $100
b) If in one year the price index is 50 and in the next year the price index
is 55, what is the rate of inflation from one year to the next? 10%
c) Assume that next year’s wage rate will be 3 percent higher than this
year’s because of inflationary expectations. The actual inflation rate is
4 percent. At the beginning of next year, will the real wage be higher,
lower, or the same as today? Lower
d) Assume that Sara gets a fixed-rate loan from a bank when the
expected inflation rate is 3 percent. If the actual inflation rate turns
out to be 4 percent, who benefits from the unexpected inflation:
Sara, the bank, neither, or both? Explain. Sara benefits. She will be
paying back dollars 4% less purchasing power, but the interest rate
she paid only accounted for 3% reduction in purchasing power.
2. Explain how some individuals are helped and others harmed by unanticipated
inflation as they participate in each of the following markets:
a) Credit markets Borrowers are helped and lenders hurt. The dollars
used to repay loans have less purchasing power than the interest
rate paid assumed.
b) Labor markets Workers are hurt and firms helped. Real wages will
decline, reducing purchasing power for workers but reducing real
costs and increasing profits for the firm
c) Product markets Consumers are hurt and firms benefit. Consumers
have less purchasing power than expected. Firms benefit as profits
grow when sales revenues grow faster than the resource (input)
costs.