AP Macroeconomics chapter practice15 questions

07 Nominal GDP, Real GDP, Price Indexes, and Inflation

These questions come directly from the chapter practice in the book. Choose the best answer, check your reasoning, and use the explanation to correct any gap.

Question 1

Question 1 of 15

Nominal GDP in Country X is 840 and real GDP for the same year is 800. The GDP deflator equals

Dividing nominal output by real output and scaling gives (840)/(800) 100=105. Choice A reports the raw 40-unit gap, B inverts the ratio and lands near 95, C assumes prices never moved, and E adds the gap to the base of 100.
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D. 105

Dividing nominal output by real output and scaling gives (840)/(800) 100=105. Choice A reports the raw 40-unit gap, B inverts the ratio and lands near 95, C assumes prices never moved, and E adds the gap to the base of 100.

Question 2

Question 2 of 15

A representative market basket costs 600 in one year and 624 in the next year. The cost of the basket rises by

The basket costs 24 more on a base of 600, and (24)/(600)=0.04. Choice A divides by the later cost of 624, C reports the 24-unit change as though it were already a rate, D slips the decimal in 0.04, and E gives the index level (624)/(600) 100 rather than the change in it.
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B. 4 percent

The basket costs 24 more on a base of 600, and (24)/(600)=0.04. Choice A divides by the later cost of 624, C reports the 24-unit change as though it were already a rate, D slips the decimal in 0.04, and E gives the index level (624)/(600) 100 rather than the change in it.

Question 3

Question 3 of 15

Disinflation and deflation are often confused. Which of the following situations is correctly called disinflation?

Disinflation means prices are still rising, only more slowly, which is what a fall from 6 percent to 3 percent describes. Choice A is deflation, B is accelerating inflation, D is a constant inflation rate, and E reports a level below the base year, which says nothing about the current rate.
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C. Inflation falls from 6 percent to 3 percent.

Disinflation means prices are still rising, only more slowly, which is what a fall from 6 percent to 3 percent describes. Choice A is deflation, B is accelerating inflation, D is a constant inflation rate, and E reports a level below the base year, which says nothing about the current rate.

Question 4

Question 4 of 15

Inflation turns out higher than the parties to a nominal contract expected. Which of the following parties benefits?

Borrowers repay in dollars that buy less than either side expected, so the real burden of a fixed repayment falls. Choice A collects those cheaper dollars, B holds a nominal income stream that never adjusts, C watches idle balances lose value, and E is insulated by indexation and so neither gains nor loses.
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D. Borrowers with fixed-rate loans

Borrowers repay in dollars that buy less than either side expected, so the real burden of a fixed repayment falls. Choice A collects those cheaper dollars, B holds a nominal income stream that never adjusts, C watches idle balances lose value, and E is insulated by indexation and so neither gains nor loses.

Question 5

Question 5 of 15

The consumer price index and the GDP deflator can move differently in the same year. Which feature of the consumer price index produces that difference?

The consumer price index prices what households actually buy, and households buy imports, which the deflator leaves out. Choice A denies that services appear in the basket, B hands the index the deflator's current-year weights, C swaps the two categories of goods, and D asserts a ranking that need not hold.
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E. It prices a consumer basket that may include imports.

The consumer price index prices what households actually buy, and households buy imports, which the deflator leaves out. Choice A denies that services appear in the basket, B hands the index the deflator's current-year weights, C swaps the two categories of goods, and D asserts a ranking that need not hold.

Question 6

Question 6 of 15

The nominal interest rate is 7 percent and expected inflation is 3 percent. Using the standard approximation, the real interest rate is

Subtracting expected inflation from the nominal rate gives 7-3=4 percent. Choice A reverses that subtraction, B and D repeat one of the two inputs, and E adds the rates instead of taking their difference.
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C. 4 percent

Subtracting expected inflation from the nominal rate gives 7-3=4 percent. Choice A reverses that subtraction, B and D repeat one of the two inputs, and E adds the rates instead of taking their difference.

Question 7

Question 7 of 15

Real GDP rises between two years while nominal GDP is unchanged. Which of the following must be true of the GDP deflator?

Nominal GDP equals real GDP times the deflator over 100. With the product fixed and real output rising, the price measure has to fall. Choice B reverses that, C would force nominal GDP to rise alongside real output, D confuses the price measure with the quantity measure, and E wrongly adds a second condition even though unchanged nominal GDP already determines the deflator's direction.
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A. It falls.

Nominal GDP equals real GDP times the deflator over 100. With the product fixed and real output rising, the price measure has to fall. Choice B reverses that, C would force nominal GDP to rise alongside real output, D confuses the price measure with the quantity measure, and E wrongly adds a second condition even though unchanged nominal GDP already determines the deflator's direction.

Question 8

Question 8 of 15

Deflation is a specific movement in the overall price level. Which of the following changes represents it?

Deflation is a decline in the overall price level, and 120 to 117 is such a decline. Choice A describes disinflation, prices still rising but at a slower pace, B reports a wage change rather than a price-level change, C mistakes one relative price for the general level, and D describes falling output.
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E. The price level falls from 120 to 117.

Deflation is a decline in the overall price level, and 120 to 117 is such a decline. Choice A describes disinflation, prices still rising but at a slower pace, B reports a wage change rather than a price-level change, C mistakes one relative price for the general level, and D describes falling output.

Question 9

Question 9 of 15

The consumer price index prices a basket whose quantities are held fixed between revisions. That construction can overstate cost-of-living growth because it

A fixed basket cannot show buyers moving away from goods whose relative prices rose, so the index overstates the cost of holding living standards constant. Choice B states the opposite of a fixed basket, C denies that services appear in it, D describes a chained index, and E hands the consumer index the deflator's domestic-production coverage.
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A. misses consumers' substitution toward cheaper goods

A fixed basket cannot show buyers moving away from goods whose relative prices rose, so the index overstates the cost of holding living standards constant. Choice B states the opposite of a fixed basket, C denies that services appear in it, D describes a chained index, and E hands the consumer index the deflator's domestic-production coverage.

Question 10

Question 10 of 15

Nominal GDP grows 9 percent over a year while the price level grows about 4 percent. Real GDP grows by approximately

Real growth is roughly nominal growth minus inflation: 9-4=5 percent. Choice A reverses the subtraction, B repeats the inflation rate, D repeats nominal growth, and E adds the two rates.
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C. 5 percent

Real growth is roughly nominal growth minus inflation: 9-4=5 percent. Choice A reverses the subtraction, B repeats the inflation rate, D repeats nominal growth, and E adds the two rates.

Question 11

Question 11 of 15

A worker's nominal wage rises 3 percent over a year while the price level rises 5 percent. The worker's real wage

Real pay tracks the gap between the two rates: 3-5=-2 percent. Choice A adds the rates, B reports the nominal raise and ignores prices entirely, C reverses the subtraction, and E reports the inflation rate itself as the loss.
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D. falls by about 2 percent

Real pay tracks the gap between the two rates: 3-5=-2 percent. Choice A adds the rates, B reports the nominal raise and ignores prices entirely, C reverses the subtraction, and E reports the inflation rate itself as the loss.

Question 12

Question 12 of 15

Payments under a fully indexed pension are adjusted each year with a price index. What does that indexation protect against?

Raising the payment with the price index keeps its purchasing power roughly intact, which is the whole point of indexation. Choice A names insurance against job loss, B names a recession, C names a bond-price risk, and D names an exchange-rate effect; a price index tracks none of the four.
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E. Loss of purchasing power as prices rise

Raising the payment with the price index keeps its purchasing power roughly intact, which is the whole point of indexation. Choice A names insurance against job loss, B names a recession, C names a bond-price risk, and D names an exchange-rate effect; a price index tracks none of the four.

Question 13

Question 13 of 15

The GDP deflator excludes the price of an imported consumer automobile. Which of the following explains that exclusion?

The deflator covers output produced inside the country, and this car was not. Choice A names durability, C names the buyer, and D names the existence of a price; all three are true of the car and none of them decides its treatment. Choice E miscategorizes a household purchase as investment.
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B. The automobile was produced abroad.

The deflator covers output produced inside the country, and this car was not. Choice A names durability, C names the buyer, and D names the existence of a price; all three are true of the car and none of them decides its treatment. Choice E miscategorizes a household purchase as investment.

Question 14

Question 14 of 15

Nominal GDP is 1,200 and the GDP deflator is 120, with the base year set at 100. Real GDP equals

Real GDP is 1,200120 100=1,000. Choice A repeats the deflator instead of deflating with it, C takes 10 percent off rather than dividing by 1.20, D leaves nominal GDP unadjusted, and E multiplies by 1.20 where the arithmetic calls for division.
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B. 1,000

Real GDP is 1,200120 100=1,000. Choice A repeats the deflator instead of deflating with it, C takes 10 percent off rather than dividing by 1.20, D leaves nominal GDP unadjusted, and E multiplies by 1.20 where the arithmetic calls for division.

Question 15

Question 15 of 15

Inflation exceeds the rate written into existing nominal contracts. Which of the following parties is most harmed?

The lender collects a fixed number of dollars whose purchasing power has fallen below what the contract assumed. Choice B gains from that same erosion, C and D adjust with the price level under a free price and an indexed wage, and E holds assets whose nominal value tends to rise with it.
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A. A lender receiving fixed nominal payments

The lender collects a fixed number of dollars whose purchasing power has fallen below what the contract assumed. Choice B gains from that same erosion, C and D adjust with the price level under a free price and an indexed wage, and E holds assets whose nominal value tends to rise with it.

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