AP Macroeconomics — Unit 2: Economic Indicators and the Business Cycle

What AP Macroeconomics Unit 2 covers

The College Board Course and Exam Description breaks Unit 2 into 7 topics:

1. 2.1 The Circular Flow and GDP
2. 2.2 Limitations of GDP
3. 2.3 Unemployment
4. 2.4 Price Indices and Inflation
5. 2.5 Costs of Inflation
6. 2.6 Real vs. Nominal GDP
7. 2.7 Business Cycles

AP Macroeconomics Unit 2 practice questions

• The US produced $25 trillion in value last year. What single number captures that — and what exactly does it count?

  GDP is the market value of all final goods and services a nation makes yearly. It counts only final output produced within the country — the economy's main scorecard.

• To calculate total GDP, economists add up all spending across four categories. What are they?

  GDP = C + I + G + Xn. Consumer spending + Investment (business spending on capital) + Government spending on goods/services + Net exports (exports minus imports).

• Which of these counts toward GDP: buying Tesla stock, hiring a tutor, a garage sale, building a new apartment complex?

  Only the tutor (service) and the new apartment complex count. Tesla stock is a financial transaction; a garage sale is a used good — neither is new production.

• In the circular flow model, which direction does money flow between households and businesses in the product market?

  Money flows from households to businesses (households buy goods/services). In return, goods and services flow from businesses to households.

• A family buys a brand new house. Which component of GDP does this fall under — C (consumption) or I (investment)?

  Investment (I) — new home construction is residential investment. Even though a household buys it, GDP classifies new construction as I, not C.

• You spend your entire Saturday volunteering at a food bank. Does your work show up in GDP?

  No — volunteer work and other non-market activities aren't counted in GDP. GDP only measures market transactions where money changes hands.

• 10 million people are unemployed in a labor force of 170 million. What’s the unemployment rate — and what mistake do most students make when calculating it?

  (Unemployed / labor force) × 100. The labor force = employed + unemployed, NOT the total population.

• A recent college grad turns down two job offers because she’s holding out for a better fit. What type of unemployment is this?

  Frictional — she's between jobs, searching for a match. The jobs exist; she just hasn't taken one yet. It's temporary and healthy.

+ 23 more AP Macroeconomics cards in the app.

Key terms in Unit 2

These 9 terms show up in the Unit 2 cards. Each one links to its definition in the AP Macroeconomics key-term reference.

• cyclical unemployment
• deflation
• frictional unemployment
• full employment
• inflation
• monetary policy
• Phillips curve
• recession
• structural unemployment