Unit 2 practice test: Economic Indicators and the Business Cycle

The PPC shows what the economy can produce with full use of its resources, so it shifts out when resources or technology grow: potential output rises.

• A rise in the inflation rate: Faster price increases do not add workers, capital or technology.
• Correct: More workers and better technology: Right: more resources or better technology let the economy produce more of both goods, so the PPC and potential output grow.
• A recession that leaves factories idle: A recession moves production to a point inside the PPC; the curve itself does not move.
• A boom in which firms pay overtime: A boom pushes output above potential for a while; it does not add resources.

Potential output corresponds to the PPC: producing on the curve is full employment, and an outward shift is growth in potential output.

• It stayed the same, because just the curve moved: The curve is what the economy can produce at full employment; when it moves out, potential output rises.
• It can't be told from a PPC: Points on the PPC are full-employment output, so its shift shows the change in potential.
• Correct: It increased: Right: an outward PPC shift means the economy can produce more at full employment.
• It decreased: A decrease would be an inward shift of the curve.

A recession is a point inside the PPC; the economy at full employment is on it; growth in potential output shifts the curve out.

• At a point on the original curve: On the curve means full employment; a recession has cyclical unemployment.
• At a point outside the original curve: Points outside the curve can't be reached with the resources the economy had.
• On the new curve, because of the shift: The new curve shows later, larger potential; in the recession it was below even the old one.
• Correct: At a point inside the original curve: Right: idle workers and machines mean output below what the economy could produce.

GDP per capita divides output by the number of people, so a small country can produce more per person than a large one.

• Correct: Berovia, at about 30,000 dollars per person: Right: $300 \text{ billion} / 10 \text{ million}$$= 30{,}000$, more than Halvet (20,000) or Cestia (15,000).
• Cestia, because its total GDP is the largest: Cestia has the most output in total but twice as many people as Halvet, so only 15,000 per person.
• Halvet, because it is in the middle on both counts: Halvet's 20,000 per person is below Berovia's 30,000.
• They are equal once population is taken into account: Dividing each GDP by its population gives 20,000, 30,000 and 15,000: not equal.

Total GDP measures the size of an economy. To compare material living standards, divide by population.

• Its people work the most hours, because output is the largest: The table shows nothing about hours worked; a big total mostly reflects a big population.
• Correct: Output per person is the lowest of the three countries: Right: 1,200 billion shared by 80 million people is 15,000 each, the least in the table.
• Living standards are the highest, because total output is the highest: Total GDP ignores how many people share it; per person, Cestia is lowest.
• Living standards are impossible to compare using GDP data: GDP per capita is a reasonable first comparison of material living standards, with limits.

GDP per capita says nothing about how output is shared, so it can hide large differences between the average and the typical person.

• Both countries count GDP in dollars: Using the same unit makes the comparison fairer, not weaker.
• Halvet's total GDP is larger than Berovia's: Total GDP is not the measure the student used; per person, Berovia is higher.
• Correct: Most of Berovia's income goes to a small share of its people: Right: GDP per capita is an average. If income is very unequal, the typical person can earn far less than the average.
• Berovia has a smaller population than Halvet: The table already shows that, and per capita figures account for it.