Page 854 - Krugmans Economics for AP Text Book_Neat

S-8 SOLUTIONS TO AP REVIEW QUESTIONS

3. a c. Country A: $4,000 (There was no price increase so it is
4. b the same.)
Country B: $6,000/2 = $3,000 (Prices doubled.)
5. a d. Country A: (4,000–2,000/2,000) × 100 = 100%
Country B: (3,000–2,000/2,000) × 100 = 50%
Tackle the Test: e. Country A: 4,000/20 = $200 versus Country B:
Free-Response Question 3,000/15 = $200. It is the same.
2. This diagram should resemble Figure 10.1 plus the top
half (the Government section) of Figure 10.2. The leak- Module 12
ages in this scenario are taxes and private savings that Check Your Understanding
feed into government borrowing and the injections are
government purchases of goods and services and govern- 1. The advent of websites that enable job-seekers to find
ment transfers. jobs more quickly will reduce the unemployment rate
over time. However, websites that induce discouraged
Module 11 workers to begin actively looking for work again will lead
to an increase in the unemployment rate over time.
Check Your Understanding 2. a. Not counted as unemployed because not actively looking
1. a. In 2009 nominal GDP was (1,000,000 × $0.40) + for work, but counted in broader measures of labor
(800,000 × $0.60) = $400,000 + $480,000 = $880,000. underutilization as a discouraged worker.
The total value of sales of french fries in 2010 was b. Not counted as unemployed—considered employed
900,000 × $0.50 = $450,000. The total value of sales of because the teacher has a job.
onion rings in 2010 was 840,000 × $0.51 = $428,400. c. Unemployed: not working, actively looking for work.
Nominal GDP in 2010 was $450,000 + $428,400 = d. Not unemployed, but underemployed: working part-time
$878,400. To find real GDP in 2010, we must calculate for economic reasons. Counted in broader measures of
the value of sales in 2010 using 2009 prices: labor underutilization.
(900,000 × $0.40) + (840,000 × $0.60) = $360,000 + e. Not unemployed, but considered “marginally attached.”
$504,000 = $864,000. Counted in broader measures of labor underutilization.
b. A comparison of nominal GDP in 2009 to nominal GDP 3. Items (a) and (b) are consistent with the observed rela-
in 2010 shows a decline of (($880,000 − $878,400) / tionship between growth in GDP and changes in the
$880,000) × 100 = 0.18%. But a comparison using real unemployment rate. Item (c) is not.
GDP shows a decline of (($880,000 − $864,000) /
$880,000) × 100 = 1.8%. That is, a calculation based on Tackle the Test:
real GDP shows a drop 10 times larger (1.8%) than a cal- Multiple-Choice Questions
culation based on nominal GDP (0.18%): in this case, 1.
the calculation based on nominal GDP underestimates e
the true magnitude of the change because it incorporates 2. b
both quantity changes and price changes. 3. a
2. A price index based on 1990 prices will contain a rela- 4. d
tively low price of housing compared to a price index 5.
based on 2000 prices. This means that a 2000 price b
index used to calculate real GDP in 2010 will magnify Tackle the Test:
the value of housing production in the economy and
increase the relative size of the housing sector as a com- Free-Response Questions
ponent of real GDP. 2. a. Employed (underemployed); she is not working up to her
full potential.
Tackle the Test: b. Not in the labor force (discouraged). Once a worker stops
Multiple-Choice Questions actively seeking work, he or she falls out of the labor force.
1. d c. Employed (part-time); individuals are classified as
employed if they work full or part time.
2. b d. Not in the labor force; he is not actively seeking employment.
3. c
4. c Module 13
5. c Check Your Understanding
Tackle the Test: 1. a. Frictional unemployment is unemployment due to the
Free-Response Question time workers spend searching for jobs. It is inevitable
because workers may leave one job in search of another
2. a. Country A: (4,000–2,000/2,000) × 100 = 100% for a variety of reasons. Furthermore, there will always be
Country B: (6,000–2,000/2,000) × 100 = 200% new entrants into the labor force who are seeking a first
b. Country A: It stayed the same. job. During the search process, these individuals will be
Country B: It doubled. counted as part of the frictionally unemployed.