Mr. Maurer
AP Economics
Name: ____________________
Review for Quiz on Chapters 7 & 8
GDP and Economic Growth
1. What is the major difference between real and nominal GDP?
Real GDP is adjusted for inflation. Nominal GDP is not.
2. Choose two of the following to best make this sentence accurate: An increase in (nominal/real) (per
capita GDP/GDP) would best reflect an increase in the standard of living in an economy.
Real per capita GDP.
3. Choose two of the following to best make this sentence accurate: An increase in (nominal/real) (per
capita GDP/GDP) would best reflect an increase in the total output of an economy.
National Economic Figures (billions of dollars)
Consumption
Government purchases of goods and services
Gross private domestic investment
Depreciation
Exports
Imports
Indirect business taxes
$ 3,000
1,000
700
300
300
500
0
4. Based on the economic figures in the table above, what is the value of gross domestic product, in
billions of dollars? 3000 + 1000 + 700 + 300 – 500 = 4500 billion.
5. How would changes in the stock market affect consumer spending? (See “The Last Word on p. 149)
Don’t have my text with me, so I can’t be sure what the article says, but an increase in stock values
should increase people’s perceived wealth and lead to increased consumer spending.
6. What items are excluded from GDP calculations when using the expenditures approach?
Financial transactions. Non-productive transactions. Second-hand sales.
7. Why aren’t government transfer payments included in GDP?
The recipient hasn’t done anything productive in exchange.
8. How will an increase in labor productivity affect employment and inflation rates?
It will increase employment and decrease inflation rates. More productive employees decrease
marginal costs for business. Increasing output and decreasing prices.
9. What would happen to real GDP (increase, decrease, or stay the same) in each of the following cases if
the price index were to rise by 10% in a given year?
a. Nominal GDP increases by 5%. decreases
b. Nominal GDP increases by 10%. Stays the same
c. Nominal GDP increases by 15%. increases
10. If personal consumption, gross private investment, and government purchases totaled 102% of GDP
in a given year, what would that tell you about the fourth component of GDP?
Net exports would have to be negative (imports > exports)
13. What factors can lead to increased economic growth in the future? Population growth, increase in
available resources, increase in productivity.
Unemployment
14. Why do some critics argue that the official unemployment rate actually understates the true level of
unemployment in the economy? It doesn’t count people who have given up looking for work. Doesn’t
count people who are underemployed or employed part time.
15. Who is counted as officially unemployed? (Describe the characteristics necessary, don’t name
someone who doesn’t have a job.)
Part of the labor force (see definition in text) who doesn’t have a job and is looking for a job.
16. Define structural, cyclical, and frictional unemployment.
Structural – unemployment due to a lack of skills (not equipped to take a job that does exist)
Cyclical – unemployment due to a downturn in the business cycle leading to a lack of jobs for
people who want them.
Frictional – temporary unemployment as a person looks for a new job.
Inflation
17. Unanticipated inflation generally helps which groups of people?
Debtors – The money they pay back is worth less than the money they borrowed and their nominal
interest rate will not have reflected the inflation, since it was unanticipated. Their real interest rate
will be lower than it would have been if the inflation had been anticipated.
18. Unanticipated inflation generally hurts which groups of people?
Creditors (for the opposite reason from above), people on a fixed income.
19. How is the consumer price index calculated?
Value of the market basket of goods in the given year divided by value of the market basket in the
base year (1982 – 1984), then multiply by 100.
20. If a worker’s annual wage went from $40,000 to $44,000, and during the same period the general
price level rises 5%, what is the change in the worker’s real income?
Approximately 5%. Change in nominal income is 10% - 5% inflation = 5% increase in real income.
21. If banks are charging a nominal interest rate of 5% for fixed-rate mortgages, and the expected rate of
inflation is 2.8%, what is the real interest rate for fixed-rate mortgages?
2.2%
22. What causes hyperinflation? Central bank prints excessive amounts of money.
23. Suppose that a typical consumer buys the following quantities of three commodities in 1993 and 1994.
Commodity
Food
Clothing
Shelter
Quantity
5 units
2 units
3 units
1993 per Unit Price
$5.00
$9.00
$19.00
1994 per Unit Price
$4.00
$11.00
$21.00
What was the change in the consumer price index (CPI) for this individual from 1993 to 1994?
Looks like the price of the market basket went from 100 to 105 (total up the quantity bought of
each good in the basket and multiply by the price) That’s a 5% change.
The Business Cycle
24. Identify the four phases of the business cycle in the proper order.
Peak, contraction, trough, expansion. (doesn’t matter which one you start with, just has to be that
order.