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AP Macroeconomics › Unit 2

AP Macroeconomics Unit 2: Economic Indicators and the Business Cycle

12 to 17% of the exam · 180 practice questions · 12 free-response questions

How do we know if an economy is doing well? Unit 2 answers with three measures: GDP, unemployment, and inflation. You will calculate nominal and real GDP, a price index, and the unemployment rate from given data. Questions also ask you to classify unemployment as frictional, structural, or cyclical, and to place an economy on the business cycle. Students often count intermediate goods, used goods, or transfer payments in GDP. Many also forget that people who are not looking for work are outside the labor force, not unemployed.

Practice this unit

White belt · 60 questionsRegular · 60 questionsBlack belt · 60 questionsFree response

White belt covers core terms and foundational ideas, Regular is set at exam level, and Black belt has harder multi-step questions.

Topics in this unit

Free-response questions

Sample questions

These are taken from the Regular set, with the answer and explanation shown.

Topic 2.1 The Circular Flow and GDP

1. In Country Z, consumption, investment, and government purchases add up to $900 billion, and GDP is $850 billion. Which of the following must be true?

  1. AImports exceed exports by $50 billion
  2. BExports exceed imports by $50 billion
  3. CImports are equal to $50 billion
  4. DThe government has a budget deficit of $50 billion
  5. EInvestment spending was negative

Answer: A. GDP = C + I + G + (X − M), so net exports = $850 billion − $900 billion = −$50 billion. Negative net exports mean imports exceed exports by $50 billion. Nothing given tells us the level of imports or the government's budget balance.

Common trap: Concluding that imports equal $50 billion. You only know the gap between exports and imports, not either one.

Topic 2.3 Unemployment

2. During a long recession, many unemployed workers become discouraged and stop searching for work. Compared with a situation in which they keep searching, the reported unemployment rate will be

  1. Aunchanged, because discouraged workers count as employed
  2. Bhigher, so it overstates the job market's weakness
  3. Clower, so it overstates the job market's weakness
  4. Dunchanged, because discouraged workers count as unemployed
  5. Elower, so it understates the job market's weakness

Answer: E. Discouraged workers leave the labor force, so they drop out of both the number unemployed and the labor force, which lowers the unemployment rate. The labor market is no stronger, so the lower rate understates how weak it is.

Common trap: Reading a lower rate as a stronger job market. Here it fell only because people stopped looking.

Topic 2.6 Real vs. Nominal GDP

3. From one year to the next, nominal GDP increases by 4% while real GDP decreases by 1%. The price level, as measured by the GDP deflator, has approximately

  1. Aincreased by 5%
  2. Bdecreased by 3%
  3. Cincreased by 3%
  4. Dincreased by 4%
  5. Edecreased by 5%

Answer: A. Percent change in nominal GDP ≈ percent change in real GDP + percent change in the price level, so 4% ≈ −1% + inflation, and inflation ≈ 5%. Prices rose enough to raise spending even though output fell.

Common trap: Subtracting 1% instead of −1%, which gives 3%. Real GDP fell, so subtracting its change adds to the result.

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