AP Macro Economic Indicators 2

Question 1

Which component of GDP measures the value of goods produced but not yet sold?

Accepted Answer

Inventory investment

Answer

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:

Accepted Answer

2%

Answer

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:

Accepted Answer

Does not account for consumer substitution toward cheaper goods

Answer

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:

Accepted Answer

College enrollments surge and students stop seeking employment

Answer

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?

Accepted Answer

M2

Answer

M2 expands M1 by adding savings accounts, money market accounts, and small time deposits.

AP Practice Test