Review for Unit 2 Exam

Gross Domestic Product

Unemployment

1. What are the components of GDP? What kinds

of transactions fall in each category?
2. What is/is not included in GDP?
3. Define real GDP. What is the difference
between nominal GDP and real GDP?
4. Calculate nominal GDP, real GDP, and the
change in GDP.
5. What is the difference between GDP and GDP
per capita? What does each measure?

11. Define labor force. Who makes up this group?

12. Define unemployed. What groups are
included/not included?
13. Determine labor force participation rate.
14. Determine the unemployment rate.
15. What are the criticisms of unemployment rate
statistics?
16. Categorize scenarios in terms of types of
unemployment.
17. Define natural rate of unemployment.
18. Calculate the natural rate of unemployment.
19. How would the imposition of a minimum wage
affect unemployment?

Business Cycle
6. Define peak and trough.
7. Recognize peaks and troughs in written and
visual representations of the business cycle.
8. What are the phases of the business cycle and
how these are determined?
9. What is the relationship between GDP and
unemployment?
10. What happens when there are
increases/decreases in one sector of the
circular flow model?

Inflation
20. What are the results of inflation (including
winners and losers)?
21. Categorize scenarios in terms of types of
inflation costs.
22. Calculate the real wage and explain impact of
inflation change.
23. Calculate CPI and the change in CPI.
24. Why are some government programs indexed
to the CPI?

Practice Questions
1. In which category is each of the following included in the calculation of gross domestic product, or
is this transaction excluded?
a. A used economics textbook from the bookstore
b. New harvesting equipment for the farm
c. 1,000 shares of stock in a computer firm
d. A car produced in a foreign country
e. A chocolate bar purchased at a convenience store
f. An Army retirement check sent to an injured veteran
g. Homework help provided by a teacher to her own child
h. A construction company receiving state of Texas funds for expanding a roadway
i. The sale of American-made products in Mexico
j. A book publisher buys paper that will be used to print books
Calculating GDP for Year 2008
Rent
$2,40
0
Consumption Spending
$7,90
0
Social Security Benefits
$6,10
0
Investment Spending
$2,10
0
Wages and Salaries
$6,50
0

Taxes

$4,26
5
$800

Exports
Government Purchases
Imports
Purchase of Stocks

$2,60
0
$1,20
0
$6,30
0

2. Use the information above to calculate nominal GDP for year 2008.
3. If the price index in a country were 100 for the year 2000 and 120 for 2003 and nominal gross
domestic product in 2003 were $480 billion, then real gross domestic product for 2003 in 2000
dollars would be ___________.
4. Consider an economy that only produces two goods: DVDs and DVD players. Last year, 10 DVDs
were sold at $20 each and 5 DVD players were sold at $100 each, while this year 150 DVDs were
sold at $10 each and 10 DVD players were sold at $60 each. Real GDP for this year using last year
as the base year is
.
Use this table to answer questions 5 and 6.
Product

2008 Output

Peanut Butter
Jelly

200 units
100 units

2008 Prices
(base year)
$1 per unit
$2 per unit

Product

2009 Output

2009 Prices

Peanut Butter
Jelly

250 units
100 units

$1.00 per unit

$2.50 per unit

5. A simple economy produces only peanut butter and jelly. Using the data in the table, nominal GDP
in 2009 was
and real GDP in 2009 was
.
6. Using the data in the table, from 2008 to 2009 real GDP (increased/decreased) by

%.

7. The accompanying table shows data on nominal GDP (in billions of dollars), real GDP (in billions of
year 2000 dollars), and population (in thousands) of the U.S. in 1960, 1970, 1980, 1990, 2000, and
2007, years in which the U.S. price level consistently rose.
Year

Nominal GDP
(billions of $)

Real GDP
(billions of year 2000
$)

Population
(thousands)

1960
1970
1980
1990
2000
2007

$526.4
1,038.5
2,789.5
5,803.1
9,817.0
13,841.3

$2,501.8
3,771.9
5,161.7
7,112.5
9,817.0
11,566.8

180,671
205,052
227,726
250,132
282,388
301,140

a. Why is real GDP greater than nominal GDP for all years before 2000 and lower for 2007? Does
nominal GDP have to equal real GDP in 2000?
b. Calculate the percent change in real GDP from 1960 to 1970, 1970 to 1980, 1980 to 1990, and
1990 to 2000. Which period had the highest growth rate?
c. Calculate real GDP per capita for each of the years in the table.
d. Calculate the percent change in real GDP per capita from 1960 to 1970, 1970 to 1980, 1980 to
1990, and 1990 to 2000. Which period had the highest growth rate?
e. How do the percent change in real GDP and the percent change in real GDP per capita compare?
Which is larger? Do we expect them to have this relationship?
8. In a typical business cycle, the trough is immediately followed by
cycle peak is typically immediately followed by

. The business
.

9. Economic expansion is typically associated with a (falling/rising) inflation rate and a (falling/rising)
unemployment rate. Economic contraction (recession) is typically associated with a (falling/rising)
inflation rate and a (falling/rising) unemployment rate.
10. If a country has a working-age population of 200 million, 135 million people with jobs, and 15
million people unemployed and seeking employment, the labor force participation rate is
% and the unemployment rate is
%.
11. Suppose the Bureau of Labor Statistics posted unemployment statistics for this quarter as follows:
frictional unemployment 3%, structural unemployment 2%, and cyclical unemployment 2.5%. We
could calculate the unemployment rate to be
% and the natural rate of unemployment to be
%.
12. Which one(s) of the following individuals would be considered unemployed?
a. A college student who is neither working nor looking for work
b. A construction worker who has a part-time job and would prefer to have a full-time job
c. An accountant who reads the newspaper jobs section and mails her resume to accounting firms
d. A recent college graduate who received a job offer but hasnt started working yet
e. A stay-at-home mom
f. A teacher who lost his job in a round of layoffs over a year ago, and who has now stopped
looking for work
13. Categorize the following individuals in terms of the type of unemployment (structural, frictional, or
cyclical):
a. A geologist who is permanently laid off from an oil company due to a change in company policy
b. A teacher who leaves one school district to search for a job at a school closer to her home
c. A customer support representative who loses his job when his company begins outsourcing to
India
d. A banker who loses her job because of a recession
14. The accompanying table provides data on the size of the labor force and the number of
unemployed workers for different regions of the U.S.

Region
Northeast
South

Labor force (thousands)

March 2007
March 2008
27,863.5
28,035.6
54,203.8
54,873.9

Unemployed (thousands)
March 2007
March 2008
1,197.8
1,350.3
2,300.9
2,573.8

Midwest
West

34,824.3
35,231.8

35,048.6
35,903.3

1,718.2
1,588.0

1,870.8
1,914.4

a. Calculate the number of workers employed in each of the regions in March 2007 and March
2008. Use your answers to calculate the change in the total number of workers employed
between March 2007 and March 2008.
b. For each region, calculate the growth in the labor force from March 2007 to March 2008.
c. Compute unemployment rates in the different regions of the country in March 2007 and March
2008.
15. Money (gains/loses) purchasing power in periods of high inflation. Money (gains/loses) purchasing
power in periods of low inflation.
16. An individual takes out a bank loan with an 8% rate of interest with the expectation that inflation
over the course of the loan will be roughly 3%. If the inflation rate is greater than 3%, the
(bank/borrower) benefits because
. If the inflation rate is less than 3%, the
(bank/borrower) benefits because
.
17. Which type of inflation cost does each of the following represent:
a. Because the value of money is decreasing so rapidly, Bob keeps going to the bank to trade in
his cash for gold.
b. Because a bank offered loans at a very low fixed rate of interest right before a period of high
inflation, they lost money on all of those loans.
c. Joe has to keep changing prices at his gas station due to rapidly changing fuel prices.
18. The cost of a market basket is $150 in Year 1, $120 in Year 2, and $200 in Year 3. Using a Year 3
base, the price index for Year 1 is
and the price change is
%. The price index for Year 2 is
and the price change is
%.

19. If nominal wages have risen by 50% over a ten-year period and aggregate prices have increased by
40% in that same period, then we can safely conclude that the real wages of workers have
(increased/decreased/not changed) by
%.