AP MACROECONOMICS FINAL MCQ

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Expenditures Approach

Measures how much is spent in the economy.

Income Approach

Measures how much income is earned.

What does the Income Approach include:

• Wages

• Rent

• Interest

• Profit

What is the formula for Expenditure Approach?

GDP = C + I + G + (X − M)

• C (Consumption) → household spending

• I (Investment) → business spending (factories, machines, new homes)

• G (Government) → government spending on goods/services

• X − M (Net Exports) → exports minus imports

What is included in the GDP

• Final goods and services

• New goods

• Market transactions

• Legal production

What is excluded in the GDP?

• Used goods

• Financial transactions (stocks, bonds)

• Transfer payments (Social Security, welfare)

• Illegal activity

• Household work (cleaning your own room)

What is Nominal GDP?

• Measured using current prices

• Inflation can make GDP look bigger even if output didn’t change

What is Real GDP

• Adjusted for inflation

• Shows true economic growth

Formula for Real GDP

Nominal GDP ÷ Price index × 100

What are the types of Unemployment?

• Frictional

• Structural

• Cyclical

What is Frictional Unemployment?

• Between jobs

• Normal and healthy

What is Structural Unemployment?

• Skills don’t match available jobs

• Technology changes

What is Cyclical Unemployment?

• Caused by recessions

• Only type eliminated when economy improves

What is the Labor Force?

People working or actively looking for work

What is the Unemployment Rate?

% of labor force unemployed

What is the Labor Force Participation Rate?

% of population that is in the labor force

What is a Discouraged Worker?

Gave up looking → not counted as unemployed

What is Underemployed?

Working below skill level or part-time but want full-time

Does the Demand Shift curve move entirely?

Yes

What happens when the Demand Shifts to the Right?

More Demand

What is the result of the Demand Shifting to the Right?

• Higher income (normal goods)

• More consumers

• Price of substitutes rises

• Price of complements falls

What happens when the Supply Curve Shifts to the Right?

More Supply

What is the result of the Supply Curve shifting to the Right?

• Lower costs

• Better technology

• Subsidies

• More producers

What happens to the Curve when there is a Change in Demand/Supply?

The entire curve shifts

What happens to the curve when there is a Change in Quantity Demanded/Supplied?

There is movement along the curve

What causes a Change in Quantity Demanded/Supplied?

Caused by price change

What causes a Change in Demand/Supply?

Caused by non-price factors

What does the PPC show?

Maximum output with current resources

What does it mean when the Points in a PPC are on the Inside of the Curve?

It is inefficient (unemployment)

What does it mean when the Points in a PPC are on the Outside of the Curve?

It is impossible (right now)

What does it mean when the Points in a PPC are on the On the Curve?

It is efficient

What does an Outwards Shift of the PPC mean?

Economic growth

What does an Inward Shift of the PPC mean?

Loss of resources

What is Absolute Advantage?

Produce more with fewer resources

What is Comparative Advantage?

Lower opportunity cost

What are Gains from Trade?

• Specialize in comparative advantage

• Trade benefits both parties

What does it mean when the AD shifts to the Right?

More spending

What does it mean when the AD shifts to the Left?

Less spending

What does it mean when the SRAS shifts to the Right?

Lower production costs

What does it mean when the SRAS shifts to the Left?

Higher production costs

Is LRAS vertical?

Yes (it is vertical)

What causes the LRAS to Shift?

• Technology

• Resources

• Education/productivity

During a Recessionary Gap what happens to the Short Run Aggregate Supply (SRAS) when Wages Fall?

SRAS shifts right

During an Inflationary Gap what happens when Wages Rise?

SRAS shifts left

During a Recessionary Gap is the potential GDP greater than the Output (Reap GDP)?

Yes (Output < potential GDP)

During an Inflationary Gap is the Output greater than the Potential GDP?

Yes (Output > potential GDP)

What happens to the Fiscal Policy during a Recession?

• Increase government spending

• Cut taxes

What happens to the Fiscal Policy during a Inflation?

• Decrease government spending

• Raise taxes

What are Substitute Goods?

• Used instead of each other

• Price ↑ of A → demand ↑ for B

What are Complementary Goods?

• Used together

• Price ↑ of A → demand ↓ for B

What does the CPI Measure?

• Inflation

• Cost of living

What are the Problems with CPI?

• Substitution bias

• Quality changes

• New goods

What is MPC (Marginal Propensity to Consume)?

% of extra income spent

What is MPS (Marginal Propensity to Save)?

% saved

What is the formula for the Spending Multiplier?

1 ÷ (1 − MPC)

MPC + MPS = ?

1

What is Stagflation caused by?

Caused by negative supply shocks

What is Stagflation?

• High inflation

• High unemployment

• Low growth

What is Supply Shock?

• Sudden change in production costs

• Shifts SRAS

• Example: oil price spike

What Shifts the SRAS?

Supply Shock

What is Demand Shock?

• Sudden change in AD

• Caused by panic, stimulus, crashes

Supply Shocks are for Shifting what?

SRAS shifting

Demand Shocks are for Shifting what?

AD shifting

What is the Formula for GDP (Expenditures Approach)?

GDP=C+I+G+(X−M)

What is the Formula for GDP (Income Approach)?

GDP=Wages + Rent + Interest + Profit​

What is the Formula for Real GDP?

What is the Formula for Inflation Rate?

What is the Formula for Unemployment Rate?

What is the Formula for Labor Force Participation Rate?

What is the Formula for Real Wage?

What is the Formula for Marginal Propensity to Consume (MPC)?

What is the Formula for Marginal Propensity to Save (MPS)?

What is the Formula for MPC & MPS Relationship?

What is the Formula for Spending Multiplier?

What is the Formula for Tax Multiplier?

What is the Formula for Change in GDP (Spending)?

What is the Change in GDP (Taxes)?

What is the Formula for Net Exports?

X

Exports

M

Imports

ΔC

change in consumption

ΔY

change in income

ΔS

change in savings

ΔY

change in GDP

ΔG

change in government spending

ΔT

change in taxes