Mr. Maurer
AP Economics
Name: ____________________
Review for Quiz on Chapters 25 & 27
GDP and Economic Growth
1. What is the major difference between real and nominal GDP?
Real GDP has been adjusted for inflation while nominal GDP has not. Therefore, an increase in
nominal GDP may only reflect increased prices. An increase in real GDP shows an actual increase
in economic output.
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.
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?3,000 + 1,000 + 7000 + (300 – 500) = 3600
5. How would changes in the stock market affect consumer spending? Think about this: If the stock
market goes up, will people feel richer or poorer? Will they be likely to spend more or less money?
If the stock market goes up, it should increase consumer spending because consumers will feel
wealthier (assuming they own stock) and vice versa.
6. What items are excluded from GDP calculations when using the expenditures approach?
Non-production transactions like purely financial transactions and second-hand sales.
7. Why aren’t government transfer payments included in GDP?
They don’t reflect any actual production.
8. How will an increase in labor productivity affect employment and inflation rates?
It should increase employment and decrease inflation rates because it lowers marginal costs for
employers, which will increase the demand for labor and the supply of goods.
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%. Real GDP decreases.
b. Nominal GDP increases by 10%. Real GDP stays the same.
c. Nominal GDP increases by 15%. Real GDP 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 must be negative (so imports exceed exports).
Unemployment
11. 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,
underemployed workers, or part-time works who want a full-time job.
12. Who is counted as officially unemployed? (Describe the characteristics necessary, don’t name
someone who doesn’t have a job.) Willing and able to work, currently looking for a job.
13. Define structural, cyclical, and frictional unemployment.
Just check your textbook for this.
Inflation
14. Unanticipated inflation generally helps which groups of people?
Debtors.
15. Unanticipated inflation generally hurts which groups of people?
Creditors, people on fixed incomes, savers.
16. How is the consumer price index calculated?
Check the text.
17. 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?
5%
18. 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%
19. What causes hyperinflation?
The central bank issues to much currency, usually to pay govt. debts.
20. 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?
1993 “market basket” = 25 + 18 + 57 = 100
1994 “market basket” = 20 + 22 + 63 = 105
The changes is 5% (the “inflation rate” was 5%)
Note: we’re just using what this person bought as the “market basket.” That’s why it ask you what
the change in CPI was for this individual.
The Business Cycle
21. Identify the four phases of the business cycle in the proper order.
Expansion, peak, recession, trough. It doesn’t matter what you start with as long as they’re in that
order (it’s a cycle).