AP Macro Economic Indicators 3 — Questions and Answers
Question 1: Which of the following would be included in U.S. GDP?
- A Japanese firm's production in a factory located in Ohio (Correct answer)
- Wages earned by a U.S. citizen working in Canada
- A used car sold between two private citizens
- Stock dividends paid to U.S. shareholders
Correct answer: A Japanese firm's production in a factory located in Ohio
GDP measures output produced within a country's borders regardless of ownership, so a Japanese-owned factory in Ohio counts.
Question 2: Core inflation differs from headline inflation in that core inflation excludes:
- Housing and rent costs
- Volatile food and energy prices (Correct answer)
- Import prices
- Wages and salaries
Correct answer: Volatile food and energy prices
Core inflation strips out food and energy because their prices are highly volatile and can obscure underlying inflation trends.
Question 3: If the velocity of money increases while the money supply stays constant, the quantity theory of money (MV = PQ) predicts:
- A decrease in nominal GDP
- No change in prices
- An increase in nominal GDP (Correct answer)
- A fall in real output only
Correct answer: An increase in nominal GDP
Since MV = PQ (nominal GDP), holding M constant and increasing V must raise PQ, i.e., nominal GDP rises.
Question 4: A nation has 150 million working-age adults; 100 million are employed and 10 million are unemployed. The unemployment rate is:
- 6.7%
- 10%
- 9.1% (Correct answer)
- 7.7%
Correct answer: 9.1%
Unemployment rate = unemployed / labor force = 10 / (100 + 10) = 10/110 ≈ 9.1%.
Question 5: Which business cycle phase is characterized by falling real GDP, rising unemployment, and declining consumer spending?
- Expansion
- Peak
- Recession (Correct answer)
- Trough
Correct answer: Recession
A recession is defined as a period of declining economic activity, typically two or more consecutive quarters of falling real GDP.
Question 6: The index of leading economic indicators (LEI) is used primarily to:
- Measure past economic performance
- Predict the future direction of the economy (Correct answer)
- Calculate the current unemployment rate
- Determine the real interest rate
Correct answer: Predict the future direction of the economy
The LEI aggregates variables like stock prices, building permits, and consumer expectations to forecast near-term economic trends.
Question 7: Which of the following is an example of a coincident economic indicator?
- Building permits issued
- Average duration of unemployment
- Industrial production (Correct answer)
- Money supply (M2)
Correct answer: Industrial production
Industrial production moves simultaneously with the overall economy, making it a coincident indicator.
AP Macro Economic Indicators 3
Which of the following would be included in U.S.
GDP?