JEN FILOSA: Hi, everyone, my name is Jen Filosa.
I teach AP macroeconomics in Owings Mills, Maryland.
Today, we're going to do a session on multiple choice
for Macro unit 2.
And if you want to follow along with me,
there's a PDF link here that you can click on and open
the questions.
Roughly, you'll have a minute, 9 seconds per multiple choice.
And I have 10 multiple choice here for you.
So we're going to knock them out.
And we'll do a little annotating along the way.
So here we go.
Question one, which of the following groups of people
would benefit from unanticipated inflation?
Savers, borrowers, or lenders.
One of the things I like to do with my kids,
my students is what do we already
know before we get to the multiple choice answers?
So what do we know about unanticipated inflation?
It hurts those who are expecting a real rate of return
on their savings and their investments.
People that invest or banks that may lend
are expecting a real rate of return
on those savings or investments.
So savers and lenders are both worse off.
However, unanticipated inflation does
benefit those who are borrowing loans at fixed nominal interest
rates.
And that's what we're looking for.
Who benefits?
Borrowers.
So your answer choice is here.
Leave us to know B is the only appropriate response.
Let's take a look at question two.
Which of the following would be true?
If the actual rate of inflation were less than the
expected rate of inflation.
We just had a similar question but in reverse.
So what do we know?
If actual inflation is less than expected inflation,
savers and lenders are now going to be better off.
And borrowers will be worse off.
Let's take a look at our answers then.
A is not correct because inflation had not
been under predicted, it was over predicted.
The real interest rate is not going
to exceed the nominal interest rate when actual inflation is
less than expected inflation.
This is not true.
The real interest rate had been negative.
Maybe part D is the best answer here.
People who borrowed funds at the nominal interest rate
during this time period would lose.
In fact, that is the best answer.
But let's look at E. The economy would
expand because of the increased investment and spending.
That's not something that will happen
when the actual rate of inflation
is less than expected.
So D is our best answer option.
On to question three.
In an economy, the price index in 2006 was 100.
And the real GDP was $1,000.
In 2010, the price index was 110 and the nominal GDP was 2,200.
Based on that information, which of the following
can be inferred about the economy's nominal GDP in 2006
and real GDP in 2010.
What do we already know?
First, we know that the price index of 100 in 2006
indicates that we are in a base year.
So in a base year, nominal and real GDP
are equal to one another.
So we know that 2006 nominal and real GDP are both $1,000.
When we look at our answer choices,
now we can eliminate A, C, and E. Nominal GDP in 2006
is $1,000 in both B and D. Now, we
need to figure out what was real GDP in 2010.
In order to do that, we have to take the GDP deflator, 110,
and set it equal to nominal GDP divided by real GDP times
100, which is our equation to solve for real GDP.
110 is equal to 2,200 divided by real GDP times 100.
When you solve for real GDP, you get $2,000.
So B is our best answer choice.
When you see a problem like this,
before you even look at the answer options, figure out,
what do you know about the content
and try to solve and eliminate answer choices
to get to your best option?
Question four, if a worker's nominal wage rate increases
from $10 to $12 per hour and at the same time,
the general price level increases
by 10%, then what happened to the worker's real wage?
What do we know?
We know that prices, nominal wages for workers,
rose from $10 to $12, which is a 20% increase
in their nominal wage.
We also know that the general price level rose 10%.
So while nominal wages rose 20, general prices and inflation
rose 10.
So there's still an increase in the workers ability
to spend money and get real value back for their dollar.
Real wages have to do with an individual's purchasing power.
Workers have more purchasing power
if their nominal wages outpace general price level increases.
So we can eliminate A and B because real wage did not
decrease, it rose.
And we can eliminate E. So with choices C and D,
we just need to be mindful that if nominal wages rose
20% and inflation rose 10%, you want
to find the difference there to see that real wage rose by 10%.
Question five, as a measure of economic welfare,
gross domestic product underestimates
a country's production of goods and services
when there's an increase in?
Well, what do we know?
We know that GDP is equal to C plus I plus G plus Nx.
When you have several answer options,
we need to figure out which one is being underestimated.
A, the production of military goods is counted in G.
B, the production of anti-pollution devices
frequently is going to be a business investment.
It could also be counted on government spending,
if that's a priority or an initiative of the government.
C, crime prevention services could be consumption
or government spending.
Household production, not quite sure where that might fit.
But legal services could fall under C, I, or G.
What is household production?
Well, for example, if I fix my own leaky pipes under my sink,
I provided myself with a service,
but I did not get paid for it.
And I did not spend money on someone coming in
to do that for me.
So household production is underestimated
in a nation's GDP calculation.
Question six, the circular flow of economic activity
between consumers and producers includes
which of the following?
Well, circular flow is households and firms.
And they're interacting in two different markets.
In the factor and resource market,
household sell firms factors of production, land, labor,
and capital.
So that's option two, household sell factors
of production to firms.
They do not buy them.
So we can eliminate option one.
In the other market, the market for goods and services
or the product market, households
buy products from firms.
So here, that's option three.
Households buy outputs from firms.
They do not sell outputs to firms.
So the two options here are two and three.
That means answer D is the only correct option.
Now to question seven.
Which of the following best explains
why transfer payments are not included in the calculation
of gross domestic product?
When we're calculating GDP, we are
seeing the transfer of money for goods and services.
A transfer payment itself is payment
by a government that's going to not
include a receipt of any type of good and service in return.
So that's what we know.
The definition of a transfer payment
is a payment made by the government,
but no good or service is returned or exchanged
for the payment.
Looking at our answer options, there's
something wrong with all of them, except for one.
A, transfer payments are used to pay for intermediate goods.
They're not used to pay for goods.
That's part of the definition of a transfer payment.
Answer B, transfer payments are a government expenditure.
And government expenditures are excluded from GDP.
Government expenditures are not excluded from GDP.
C, recipients of transfer payments
have not produced or supplied goods or services in exchange
for these payments.
That is the definition of a transfer payment
and why it is not included in GDP.
On to Question eight, during recessions
caused by changes in aggregate demand,
the economy typically experiences?
I'm going to sketch in my margin like I
would if I was taking the test.
Here's my aggregate supply, aggregate demand.
I'm not labeling anything right now
because it's a quick sketch during multiple choice.
My horizontal axis is a measure of real GDP, also
a nation's income.
And the vertical axis is our price level, our CPI.
I have that there because of the answer choices
that we're looking at.
So recessions caused by aggregate demand
indicate that AD will fall, leading
to a decrease in the price level and a decrease in real GDP.
This also means a decrease in national income or decrease
in employment.
So when we look at our answer options, income is falling.
So we can eliminate A, B, and C. Leaving us with D and E.
We do have falling income.
And we have falling employment.
We do not have a rising price level,
so we could also eliminate E. D is our best answer.
Question nine, the business cycle diagram
below shows a cyclical movement of actual real GDP
relative to potential GDP over time
for the nation of Galactica.
Potential real GDP is the straight upward sloping
line that is associated with the natural rate of unemployment.
The curved line is our business cycle.
It's our actual ups and downs and flows
of our economy or this economy.
The economy of Galactica is expanding
and the actual unemployment rate exceeds the natural rate
of unemployment for which you're in the above diagram,
but it's below.
So where is actual unemployment higher than the natural rate?
It's where this part of the business cycle
is intersecting the potential real GDP.
So it's going to be in year 2002.
In any other part of the business cycle,
actual unemployment is less than potential real GDP
in the natural rate of unemployment.
Last question, suppose that a typical consumer
buys the following quantities of three commodities in 1993
and 1994, which of the following can be concluded
about the consumer price index for this individual
from 93 to 94?
So the CPI is a measure of inflation.
And we see that our basket of goods, our quantities
are fixed in both years.
So what do we know?
We should know how to calculate the basket of goods
for each year and then find the CPI.
In 1993, the basket is $80.
You find that by multiplying the quantities of each good times
their price and adding them up.
But that's not the CPI.
The CPI is the current year's basket over the base year
basket times 100.
In this problem, our base year is probably our first year.
So our base year here is going to be 1993,
giving us a CPI of 100.
Calculating our basket in 1994, you take the same quantities,
but now multiply them by the prices in 1994,
getting a basket of $100.
When you take the current basket, 100 divided
by the base of your basket of 80 times 100,
you get a CPI of 125.
So CPI is going to increase by the change between 100 to 125.
That percent change is 25%.
It is asking about the change in the consumer
price index, which is the percent
change between 100 and 125.
All right, thanks so much.
See you in the next video.