Macro AP Unit 2

Question 1

Explain why transfer payments are not included inReal GDP

Answer 1

GDP measures goods and servicesproduced. Transfer payments are not included becausenothing new is purchased or produced.

Question 2

Explain why the official unemployment rate might not reflect true joblessness in an economy.

Answer 2

The official unemployment rate ignores discouraged workers. These are jobless people that have given up looking for work. They are not counted as unemployed because theyare not in the labor force.

Question 3

Explain why full employment (or the natural rate of unemployment) is not 0% unemployment.

Answer 3

0% is not possible. The economy will always have some frictional and structural unemployment. Full employment is when there is no cyclical unemployment.

Question 4

Explain why an increase in unexpected inflation helps borrowers

Answer 4

When inflation increases, borrowers pay back loans with dollars that have a lower purchasing power

Question 5

Explain the difference between the annual inflation rate and the consumer price index (CPI).

Answer 5

The inflation rate shows how prices changed compared to last year. The CPI shows how prices changed compared to a base year. Unlike the inflation rate, the CPI is not a percentage. It is an index number.

Question 6

Explain why a recessionary gap, or negative output gap, is not the same as a recession.

Answer 6

An official recession is when real GDP is decreasing. A recessionary gap is when the actual real GDP is less than the potential (or full employment) real GDP even if real GDP can be increasing.