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AP Economics
Chapter 26
Practice test
1. The recurrent ups and downs in the level of economic activity extending over several
years are referred to as:
A. Recessions
B. Business troughs
C. Business cycles
D. Noncyclical fluctuations
4. Refer to the above diagram. The straight line E drawn through the wavy lines would
provide an estimate of the:
A. Recession fluctuation
B. Growth trend
C. Natural rate of unemployment
D. Recovery trend
5. Which phase of the business cycle would be most closely associated with an economic
contraction?
A. Peak
B. Recession
C. Trough
D. Recovery
8. In the expansion phase of a business cycle:
A. The inflation rate decreases, but productive capacity increases
B. The inflation rate and productive capacity decrease
C. Employment increases, but output decreases
D. Employment and output increase
12. Which of the following groups declares the start and end of recessions in the U.S.?
A. The Business Cycle Monitoring Committee of the Federal Reserve System
B. The Business Cycle Tracking Agency of the Department of Commerce
C. The Business Cycle Dating Committee of the National Bureau of Economic Research
D. The Committee on Business Cycles of the Council of Economic Advisers
13. Some economists prefer to use the term business fluctuations rather than business
cycles to describe the historical growth record in the United States because:
A. Cycles include a trough phase while fluctuations do not
B. Cycles imply regularity while fluctuations do not
C. Fluctuations include an expansion phase while cycles do not
D. Fluctuations are relatively predictable events
14. Most economists agree that the immediate cause of the majority of cyclical changes
in the level of real output is unexpected changes in the:
A. Level of total spending
B. Rate of unemployment
C. Rate of inflation
D. Stock market price indexes
16. In which industry or sector of the economy is output least likely to be affected by the
business cycle?
A. Housing construction
B. Automobile production
C. Agricultural commodities
D. Capital goods production
18. The unemployment rate is interpreted as the percentage of the:
A. Adult population who are unemployed
B. Labor force that are not employed
C. Able-bodied population who are not working
D. Work force that have been laid off
19. The full-time homemakers and retirees are classified in the BLS data as:
A. Employed
B. Unemployed
C. Part of the labor force
D. Not in the labor force
26. The total adult population of an economy is 175 million, the number of employed is
122 million, and the number of unemployed is 17 million. The percent of adults who are
not in the labor force is:
A. 25.3 percent
B. 20.6 percent
C. 30.3 percent
D. 13.9 percent
28. In calculating the unemployment rate, "discouraged" workers who are not actively
seeking employment are:
A. Excluded from the labor force
B. Included as part of the unemployed
C. Treated the same as part-time workers
D. Used to determine the size of the labor force
31. The best example of a "frictionally unemployed" worker is one who:
A. Reduces productivity by causing frictions in a business
B. Is laid off during a recessionary period in the economy
C. Is in the process of voluntarily switching jobs
D. Is discouraged and not actively seeking work
31. The best example of a "frictionally unemployed" worker is one who:
A. Reduces productivity by causing frictions in a business
B. Is laid off during a recessionary period in the economy
C. Is in the process of voluntarily switching jobs
D. Is discouraged and not actively seeking work
32. A worker who loses a job at a call center because business firms switch the call center
to another country is an example of:
A. Frictional unemployment
B. Structural unemployment
C. Cyclical unemployment
D. Disguised unemployment
35. A headline states: "Real GDP falls again as the economy slumps." This condition is
most likely to produce what type of unemployment?
A. Structural
B. Cyclical
C. Frictional
D. Natural
45. "Full employment" refers to the situation when there is:
A. 100% employment of the labor force
B. 0% unemployment rate
C. No frictional or structural unemployment
D. No cyclical unemployment
46. The full-employment rate of unemployment is also called the:
A. Potential rate of unemployment
B. Cyclical rate of unemployment
C. Frictional rate of unemployment
D. Natural rate of unemployment
49. The full-employment unemployment rate for the United States economy is now
generally considered to be:
A. 2 percent of the labor force
B. 3 percent of the labor force
C. 4 to 5 percent of the labor force
D. 6 to 7 percent of the labor force
53. If the GDP gap is positive, then:
A. The inflation rate is falling
B. The unemployment rate is rising
C. Potential GDP is greater than actual GDP
D. Actual GDP is greater than potential GDP
56. If the unemployment rate for the United States economy rises from 7 to 11 percent
during a year, we can conclude that:
A. Actual GDP exceeds potential GDP
B. Actual GDP is less than potential GDP
C. The economy is experiencing only frictional unemployment
D. The natural rate of unemployment for the United States economy has risen
59. Okun's law indicates that for:
A. Every 1 percent that the actual unemployment rate exceeds the natural unemployment
rate, a 2 percent GDP gap is generated
B. Every 1 percent that the actual unemployment rate exceeds the natural unemployment
rate, a 5 percent GDP gap is generated
C. A 5 percent GDP gap, a 1 percent increase in the natural unemployment rate is
generated
D. A 2 percent GDP gap, a 2 percent increase in the actual unemployment rate is
generated
61. A high unemployment rate most likely means that there is a:
A. High rate of inflation in the economy
B. Low rate of interest in the economy
C. Large GDP gap in the economy
D. Small GDP gap in the economy
66. "Depression means idleness. And idleness means loss of skills, loss of self-respect,
plummeting morale, family disintegration, and sociopolitical unrest." This quote
describes some of the:
A. Consequences of the hyperinflation that accompanies a recession
B. Reasons for the natural rate of unemployment
C. Noneconomic costs of unemployment
D. Characteristics of structural unemployment
68. Inflation is a rise in:
A. The general level of prices over time
B. The standard of living over time
C. Industrial production over time
D. Real GDP over time
70. The CPI compiled by the Bureau of Labor Statistics is used in the computations for:
A. Unemployment rate
B. Inflation rate
C. Interest rate
D. Foreign exchange rate
73. The inflation rate measures the percentage growth rate of:
A. Real GDP from the base period 1982-84 to a given year
B. Real GDP from one year to the next
C. CPI from the base period 1982-84 to a given year
D. CPI from one year to the next
76. If the Consumer Price Index was 125 in one year and 120 in the following year, then
the rate of inflation is approximately:
A. 4.0 percent
B. 4.2 percent
C. -4.0 percent
D. -4.2 percent
77. If the Consumer Price Index was 90 in one year and 100 in the following year, then
the rate of inflation is about:
A. 9 percent
B. 10 percent
C. 11 percent
D. 12 percent
85. Inflation caused by an increase in aggregate spending is referred to as:
A. Cost-push inflation
B. Anticipated inflation
C. Demand-pull inflation
D. Hyperinflation
87. A statement that is often used to describe demand-pull inflation is:
A. "A rising tide lifts all boats"
B. "Money is easily earned, but not easily saved"
C. "Too much money chasing too few goods"
D. "There is no such thing as a free lunch"
89. Inflation caused by a rise in the prices of inputs is referred to as:
A. Cost-push inflation
B. Demand-pull inflation
C. Unanticipated inflation
D. Hyperinflation
90. When oil and energy prices rise, the economy tends to experience:
A. Natural inflation
B. Demand-pull inflation
C. Cost-push inflation
D. Unanticipated inflation
91. Only two resources, capital and labor, are used in an economy to produce an output of
600 million units. If the total cost of capital resources is $300 million and the total cost of
labor resources is $100 million, then the per-unit production costs in this economy are:
A. $0.67
B. $1.50
C. $2.00
D. $3.00
93. When total input costs rise slower than the total units of output produced, then the
per-unit production costs:
A. Will decrease
B. Will increase
C. Would be unaffected
D. May either increase or decrease
96. Core inflation refers to the inflation picture after stripping away the:
A. Capital goods prices
B. Food and energy prices
C. Government-regulated prices
D. Service-sector prices
97. For a given amount of nominal income, the real income will:
A. Fall if the price level rises
B. Fall if the price level falls
C. Be unaffected if the price level falls
D. Rise as the price level rises
100. In Year 1, the price level was 120 and the average nominal income was $30,000. In
Year 2, the price level was 125 and the average nominal level of income was $32,000.
What happened to real income from Year 1 to Year 2?
A. It fell by $400
B. It rose by $400
C. It rose by $600
D. It rose by $2,000
101. If a person's nominal income increases by 5% while the price level increases by 2%,
then that person's real income:
A. Increases by 3%
B. Increases by 5%
C. Decreases by 7%
D. Decreases by 2%
105. For a person to keep his real income steady at a certain level from one year to the
next, his nominal income must:
A. Rise if the price index falls
B. Stay the same as the price index rises
C. Fall if the price index rises
D. Rise as fast as the price index
107. Unanticipated inflation arbitrarily:
A. "Subsidizes" those who receive fixed money incomes
B. "Taxes" those who receive fixed money incomes
C. "Penalizes" those who borrow money
D. "Benefits" those who save money
109. Assume that there is a fixed rate of interest on contracts for borrowers and lenders. If
unanticipated inflation occurs in the economy, then:
A. Both lenders and borrowers benefit
B. Both lenders and borrowers are hurt
C. Borrowers are hurt, but lenders benefit
D. Lenders are hurt, but borrowers benefit
112. A worker would be hurt least by inflation when the:
A. Worker anticipates inflation and increases savings at the bank
B. Worker is protected by a cost-of-living adjustment clause in an employment contract
C. Worker is protected by fixed annual increases in wages and benefits in an employment
contract
D. Government increases the level of social security retirement benefits to correct for the
effects of anticipated inflation
115. You are given the following information about the economy: (1) nominal interest =
8 percent; (2) real rate of interest = 6 percent. The inflation premium is:
A. 2 percent
B. 6 percent
C. 8 percent
D. 14 percent
120. In the 1920s, Germany after the First World War experienced an economic
condition which can be best described as:
A. Hyperinflation
B. Cost-push inflation
C. Unanticipated inflation
D. Anticipated inflation
122. What are the primary effects of cost-push inflation?
A. It raises real output, and redistributes an increased level of real income
B. It reduces real output and redistributes a decreased level of real income
C. It raises real output, but redistributes a decreased level of real income
D. It reduces real output, but redistributes an increased level of real income