AP®︎ Macroeconomics: Unit 2 Practice Test
Prepare for your quiz, test, or the AP exam with focused practice questions on Unit 2 of AP Macroeconomics – Economic Indicators and the Business Cycle.
Questions List
Unit 2 (All Topics)
Question 1 Topic 2.1Easy
This question tests the following: MEA-1.A.2
What is the circular flow diagram?
What You’re Being Tested On:
Explore the learning objectives taken directly from the College Board’s AP® Macroeconomics Curriculum. Ensure you’re prepared for the exact topics covered on the AP® exam, in-class tests, and quizzes, and gain confidence in your mastery of the material.
Unit 2: Economic Indicators and the Business Cycle
This unit focuses on how to measure economic performance using indicators like GDP, unemployment, and inflation, and how they relate to the business cycle.
Topic 2.1: The Circular Flow and GDP
Learning Objective: MEA-1.A
a. Define (using the circular flow diagram as appropriate) how GDP is measured and its components. b. Calculate nominal GDP.
Essential Knowledge: MEA-1.A.1
GDP is a measure of final output of the economy.
Essential Knowledge: MEA-1.A.2
GDP as a total flow of income and expenditure can be represented by the circular flow diagram.
Essential Knowledge: MEA-1.A.3
There are three ways of measuring GDP: the expenditures approach, the income approach, and the value-added approach.
Topic 2.2: Limitations Of GDP
Learning Objective: MEA-1.B
Define the limitations of GDP.
Essential Knowledge: MEA-1.B.1
GDP is a useful indicator of a nation’s economic performance, but it has some limitations, such as failing to account for nonmarket transactions.
Topic 2.3: Unemployment
Learning Objective: MEA-1.C
a. Define the labor force, the unemployment rate, and the labor force participation rate. b. Explain how changes in employment and the labor market affect the unemployment rate and the labor force participation rate. c. Calculate the unemployment rate and the labor force participation rate.
Essential Knowledge: MEA-1.C.1
The unemployment rate is the percentage of the labor force that is out of work.
Essential Knowledge: MEA-1.C.2
The labor force participation rate is another measure of the labor market activity in an economy. The labor force participation rate is the percentage of the adult population that is in the labor force.
Learning Objective: MEA-1.D
Define the limitations of the unemployment rate.
Essential Knowledge: MEA-1.D.1
The measured unemployment rate is often criticized for understating the level of joblessness because it excludes groups such as discouraged workers and part-time workers.
Learning Objective: MEA-1.E
a. Define the types of unemployment and the natural rate of unemployment. b. Explain changes in the types of unemployment.
Essential Knowledge: MEA-1.E.1
Economists primarily focus on three types of unemployment: cyclical, frictional, and structural.
Essential Knowledge: MEA-1.E.2
The natural rate of unemployment is the unemployment rate that would exist when the economy produces full-employment real output. It is equal to the sum of frictional and structural unemployment.
Essential Knowledge: MEA-1.E.3
The deviation of the actual unemployment rate from the natural rate is cyclical unemployment.
Essential Knowledge: MEA-1.E.4
The natural rate of unemployment can gradually change over time because of such things as changes in labor force characteristics.
Topic 2.4: Price Indices and Inflation
Learning Objective: MEA-1.F
a. Define the consumer price index (CPI), inflation, deflation, disinflation, the inflation rate, and real variables. b. Explain how price indices can be used to calculate the inflation rate and to compare nominal variables over time periods. c. Calculate the CPI, the inflation rate, and changes in real variables.
Essential Knowledge: MEA-1.F.1
The consumer price index (CPI) measures the change in income a consumer would need in order to maintain the same standard of living over time under a new set of prices as under the original set of prices.
Essential Knowledge: MEA-1.F.2
The CPI measures the cost of a fixed basket of goods and services in a given year relative to the base year. Exclusion: Calculating the producer price index (PPI) is beyond the scope of the course and AP Exam.
Essential Knowledge: MEA-1.F.3
The inflation rate is determined by calculating the percentage change in a price index, such as CPI or the GDP deflator.
Essential Knowledge: MEA-1.F.4
Real variables, such as real wages, are the nominal variables deflated by the price level.
Learning Objective: MEA-1.G
Define the shortcomings of the CPI as a true measure of inflation.
Essential Knowledge: MEA-1.G.1
The CPI as a measure of inflation has some shortcomings, such as substitution bias, causing it to overstate the true inflation rate.
Topic 2.5: Costs of Inflation
Learning Objective: MEA-1.H
Explain the costs that unexpected inflation (deflation) imposes on individuals and the economy.
Essential Knowledge: MEA-1.H.1
Unexpected inflation arbitrarily redistributes wealth from one group of individuals to another group, such as lenders to borrowers.
Topic 2.6: Real v. Nominal GDP
Learning Objective: MEA-1.I
Define nominal GDP and real GDP.
Essential Knowledge: MEA-1.I.1
Nominal GDP is a measure of how much is spent on output. Real GDP is a measure of how much is produced.
Essential Knowledge: MEA-1.I.2
Nominal GDP measures aggregate output using current prices. Real GDP measures aggregate output using constant prices, thus removing the effect of changes in the overall price level.
Learning Objective: MEA-1.J
Calculate real GDP and the GDP deflator.
Essential Knowledge: MEA-1.J.1
One way of measuring real GDP is to weigh final goods and services by their prices in a base year. Because this can lead to overstatement of real GDP growth, statistical agencies actually use different methods.
Essential Knowledge: MEA-1.J.2
Nominal GDP can be converted to real GDP by using the GDP deflator.
Topic 2.7: Business Cycles
Learning Objective: MEA-2.A
a. Define (using graphs and data as appropriate) turning points and phases of the business cycle. b. Explain (using graphs and data as appropriate) turning points and phases of the business cycle.
Essential Knowledge: MEA-2.A.1
Business cycles are fluctuations in aggregate output and employment because of changes in aggregate supply and/or aggregate demand.
Essential Knowledge: MEA-2.A.2
The phases of a business cycle are recession and expansion.
Essential Knowledge: MEA-2.A.3
The turning points of a business cycle are peak and trough.
Essential Knowledge: MEA-2.A.4
The difference between actual output and potential output is the output gap.
Essential Knowledge: MEA-2.A.5
Potential output is also called full-employment output. It is the level of GDP where unemployment is equal to the natural rate of unemployment. [See EK MEA-1.E.2]
