AP Macro Economic Indicators 2 — Questions and Answers
Question 1: Which component of GDP measures the value of goods produced but not yet sold?
- Net exports
- Inventory investment (Correct answer)
- Government transfer payments
- Depreciation
Correct answer: Inventory investment
Inventory investment, part of the investment (I) component, captures changes in unsold goods produced during the period.
Question 2: If nominal GDP grows by 6% and the GDP deflator rises by 4%, real GDP growth is approximately:
- 10%
- 4%
- 2% (Correct answer)
- 6%
Correct answer: 2%
Real GDP growth ≈ nominal GDP growth minus inflation, so 6% − 4% = 2%.
Question 3: The Consumer Price Index (CPI) is criticized for overstating inflation primarily because it:
- Excludes food and energy prices
- Does not account for consumer substitution toward cheaper goods (Correct answer)
- Uses GDP deflator weights instead of consumer weights
- Only tracks durable goods
Correct answer: Does not account for consumer substitution toward cheaper goods
The substitution bias occurs because the CPI uses a fixed basket, ignoring consumers' shift to relatively cheaper substitutes when prices rise.
Question 4: A country's labor force participation rate would DECREASE if:
- More discouraged workers re-enter the job search
- Retirees return to part-time work
- College enrollments surge and students stop seeking employment (Correct answer)
- The unemployment rate falls
Correct answer: College enrollments surge and students stop seeking employment
Students who leave the labor force reduce both the numerator and denominator of the participation rate, causing it to fall.
Question 5: Which measure of the money supply includes savings deposits and small time deposits in addition to M1?
- M0
- M2 (Correct answer)
- M3
- The monetary base
Correct answer: M2
M2 expands M1 by adding savings accounts, money market accounts, and small time deposits.
Question 6: The Producer Price Index (PPI) is considered a leading indicator of CPI because:
- It measures retail prices before taxes are added
- Rising production costs are often passed on to consumers later (Correct answer)
- It tracks only imported goods
- It is reported monthly while CPI is quarterly
Correct answer: Rising production costs are often passed on to consumers later
When input costs rise for producers, they typically pass those costs downstream, causing consumer prices to rise with a lag.
Question 7: Okun's Law states that for every 1 percentage point the unemployment rate falls below the natural rate, real GDP is approximately:
- 1% below potential
- 2% above potential (Correct answer)
- 0.5% above potential
- Unchanged
Correct answer: 2% above potential
Okun's Law estimates that a 1 percentage point drop in unemployment below the natural rate is associated with roughly 2% more real GDP than potential.
AP Macro Economic Indicators 2
Which component of GDP measures the value of goods produced but not yet sold?