AP Macro MACRO: Measurement of Economic Performance 2 — Questions and Answers
Question 1: Which of the following transactions would be EXCLUDED from GDP calculations?
- A firm buys new machinery for its factory
- A government pays soldiers' salaries
- A homeowner sells a house built in 1985 (Correct answer)
- A restaurant sells meals to customers
Correct answer: A homeowner sells a house built in 1985
GDP only counts newly produced goods and services; resale of existing assets like a previously built house is excluded.
Question 2: If nominal GDP grows by 8% and the GDP deflator rises by 5%, what is the approximate growth rate of real GDP?
- 13%
- 8%
- 3% (Correct answer)
- 5%
Correct answer: 3%
Real GDP growth ≈ nominal GDP growth minus inflation, so 8% − 5% = 3%.
Question 3: Which component of GDP is most volatile over the business cycle?
- Government spending
- Net exports
- Consumption
- Investment (Correct answer)
Correct answer: Investment
Investment (especially business fixed investment and inventories) fluctuates most sharply with economic conditions.
Question 4: A country's CPI basket was determined in 2015. A weakness of using this fixed basket through 2025 is that it:
- Understates inflation by using current prices
- Ignores new goods and substitution behavior (Correct answer)
- Overstates real wages by using base-year quantities
- Counts only durable goods in the price index
Correct answer: Ignores new goods and substitution behavior
A fixed-basket CPI suffers substitution bias and new-goods bias because it does not update to reflect consumer responses to relative price changes.
Question 5: In the circular flow model, which of the following represents a leakage from the spending stream?
- Investment spending by firms
- Government transfer payments
- Household saving (Correct answer)
- Export revenue received by firms
Correct answer: Household saving
Saving represents income that exits the circular flow without being immediately spent on domestic output.
Question 6: The underground economy is NOT counted in official GDP figures. What is the most direct consequence?
- Real GDP is overstated relative to potential GDP
- The price level is underestimated
- Official GDP understates the true level of economic activity (Correct answer)
- Unemployment is overstated
Correct answer: Official GDP understates the true level of economic activity
Unreported transactions (illegal activity, off-the-books work) are excluded, so measured GDP is lower than actual production.
Question 7: A U.S. auto company produces cars at its factory in Mexico. This output is included in:
- U.S. GDP and U.S. GNP
- Mexico's GDP and Mexico's GNP
- Mexico's GDP and U.S. GNP (Correct answer)
- U.S. GDP and Mexico's GNP
Correct answer: Mexico's GDP and U.S. GNP
GDP is location-based (production in Mexico) while GNP is ownership-based (U.S. company), so it enters Mexico's GDP and U.S. GNP.
AP Macro MACRO: Measurement of Economic Performance 2
Which of the following transactions would be EXCLUDED from GDP calculations?