AP Macro GDP and Growth 3 — Questions and Answers
Question 1: Which of the following would cause the production possibilities frontier (PPF) to shift outward, reflecting long-run economic growth?
- An increase in aggregate demand
- A decrease in the unemployment rate
- An improvement in technology (Correct answer)
- A reduction in the price level
Correct answer: An improvement in technology
Technological progress increases productive capacity, shifting the PPF outward and enabling the economy to produce more of all goods.
Question 2: Country A has a real GDP of $1 trillion and a population of 50 million. Country B has a real GDP of $800 billion and a population of 20 million. Which country has a higher standard of living as measured by real GDP per capita?
- Country A, because its total GDP is larger
- Country B, because its GDP per capita is higher (Correct answer)
- They are equal because both have large populations
- Cannot be determined without knowing the price level
Correct answer: Country B, because its GDP per capita is higher
Country A: $1T/50M = $20,000 per capita; Country B: $800B/20M = $40,000 per capita, so B has a higher standard of living.
Question 3: In the income approach to measuring GDP, which of the following is NOT included?
- Employee compensation
- Corporate profits
- Rental income
- Welfare transfer payments (Correct answer)
Correct answer: Welfare transfer payments
Transfer payments like welfare redistribute existing income but do not represent payments for current production, so they are excluded from GDP.
Question 4: When a car manufacturer buys steel to produce automobiles, the steel purchase is:
- Counted in GDP as an intermediate good when the steel is bought
- Not counted in GDP to avoid double-counting, since the car's value includes the steel (Correct answer)
- Counted in GDP as part of gross private domestic investment
- Counted in GDP under net exports if the steel was imported
Correct answer: Not counted in GDP to avoid double-counting, since the car's value includes the steel
To avoid double-counting, GDP counts only final goods; the value of the steel is already embedded in the final price of the automobile.
Question 5: Which of the following correctly describes the relationship between saving, investment, and economic growth in a closed economy?
- Higher saving reduces investment by lowering consumption demand
- Higher saving funds more investment, which can expand productive capacity (Correct answer)
- Investment and saving are unrelated in a closed economy
- Higher government saving always crowds out private investment
Correct answer: Higher saving funds more investment, which can expand productive capacity
In a closed economy, national saving equals investment (S = I), so increased saving provides loanable funds for investment that builds capital and supports growth.
Question 6: Which factor is most associated with sustained long-run economic growth according to mainstream growth theory?
- Repeated increases in aggregate demand
- Capital accumulation combined with technological progress (Correct answer)
- Persistent government budget deficits
- Declining interest rates over time
Correct answer: Capital accumulation combined with technological progress
Growth models (e.g., Solow) identify capital deepening and technological change as the primary engines of sustained long-run output growth.
Question 7: If the GDP deflator in Year 1 is 120 and in Year 2 is 126, the inflation rate between the two years is approximately:
- 6%
- 5% (Correct answer)
- 20%
- 26%
Correct answer: 5%
Inflation rate = (126 − 120) / 120 × 100 = 5%, measuring the percentage change in the overall price level.
AP Macro GDP and Growth 3
Which of the following would cause the production possibilities frontier (PPF) to shift outward, reflecting long-run economic growth?