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

• Dividing by the wrong total. The unemployment rate divides by the labor force, not the adult population and not the number employed.
• Counting things GDP leaves out. Used goods, intermediate goods, stock purchases and transfer payments like Social Security aren't in GDP. Only final goods and services produced this year are.
• Counting discouraged workers as unemployed. They stopped looking, so they're out of the labor force. That's why the measured rate understates joblessness.
• Mixing up disinflation and deflation. Disinflation is inflation slowing, say from 4% to 2%, while prices still rise. Deflation means the price level falls.
• Expecting zero unemployment at full employment. Full employment means unemployment equals the natural rate, which still includes frictional and structural unemployment.
• Saying any inflation hurts lenders. It's unexpected inflation that moves purchasing power from lenders to borrowers. Expected inflation gets built into the interest rate.
• Reading nominal GDP growth as more output. If nominal GDP rises 5% while prices rise 3%, real output grew about 2%.
• Calling the trough a phase. The phases are expansion and recession. Peak and trough are the turning points between them.

1. Question 1 · 2.3 Unemployment

   A country has 250 million adults. 160 million have jobs, 10 million are looking for work, and the rest are neither working nor looking. What are the unemployment rate and the labor force participation rate?

   • A4.0% and 64%
   • B5.9% and 68%
   • C6.25% and 68%
   • D5.9% and 64%
   Show the answer

   B. The labor force is everyone working or looking: 160 + 10 = 170 million. Unemployment rate = 10 ÷ 170 = 5.9%. Participation = 170 ÷ 250 = 68%. 6.25% divides by the employed instead of the labor force, the most common slip. 64% leaves the job seekers out of the labor force.

2. Question 2 · 2.1 The Circular Flow and GDP

   Which of these is counted in this year's U.S. GDP?

   • AA family buys a 2019 car from a neighbor
   • BA bakery buys flour to bake bread it sells
   • CA retiree receives a Social Security check
   • DA barber is paid $30 for a haircut
   Show the answer

   D. GDP counts the market value of final goods and services produced this year, and a haircut is a final service. The used car was counted the year it was made. The flour is an intermediate good, already inside the price of the bread. Social Security is a transfer payment: nothing is produced in return.

3. Question 3 · 2.6 Real v. Nominal GDP

   Nominal GDP is $24 trillion and the GDP deflator is 120, with the base year at 100. What is real GDP?

   • A$28.8 trillion
   • B$20 trillion
   • C$24 trillion
   • D$19.2 trillion
   Show the answer

   B. Real GDP = nominal GDP ÷ deflator × 100 = 24 ÷ 120 × 100 = $20 trillion. A deflator of 120 means prices are 20% above the base year, so real GDP has to be smaller than nominal. $28.8 trillion multiplies instead of dividing. $19.2 trillion takes 20% off, which isn't the same as dividing by 1.2.

4. Question 4 · 2.4 Price Indices and Inflation

   A fixed basket of goods cost $500 in the base year, $540 in Year 1 and $567 in Year 2. What was the inflation rate from Year 1 to Year 2?

   • A5.4%
   • B13.4%
   • C5%
   • D8%
   Show the answer

   C. CPI = basket cost ÷ base-year cost × 100, so it's 108 in Year 1 and 113.4 in Year 2. Inflation is the percent change in the index: (113.4 − 108) ÷ 108 = 5%. 5.4% is the change in index points, not a percent change. 13.4% measures from the base year, and 8% is Year 1's inflation.

5. Question 5 · 2.5 Costs of Inflation

   A bank lends $10,000 for one year at a fixed 5% interest rate. Both sides expected 2% inflation. Inflation turns out to be 6%. Who comes out better than they expected?

   • AThe bank, because it collects more dollars of interest
   • BNeither, because the interest rate was fixed
   • CThe borrower, because the dollars repaid buy less than both sides planned
   • DBoth, because incomes rise with inflation
   Show the answer

   C. Unexpected inflation moves purchasing power from lenders to borrowers. The repayment was set in dollars, and those dollars now buy less than either side planned. After 6% inflation, 5% interest doesn't even make up the lost purchasing power. Unit 4 puts a number on this with the real interest rate: 5% − 6% = −1%.

6. Question 6 · 2.3 Unemployment

   A factory replaces its welders with robots. The welders are laid off, and there's little demand for their skills anywhere in the region. What type of unemployment is this?

   • AStructural
   • BFrictional
   • CCyclical
   • DSeasonal
   Show the answer

   A. Their skills no longer match the jobs available, which is structural unemployment. Frictional unemployment is the short search between jobs by people whose skills are in demand. Cyclical comes from a downturn in the business cycle, and nothing here says total output fell.

7. Question 7 · 2.7 Business Cycles

   Real GDP is above potential output. Which is most likely true?

   • AUnemployment is above the natural rate
   • BThe economy is at the trough of the cycle
   • CCyclical unemployment is positive
   • DUnemployment is below the natural rate
   Show the answer

   D. Potential output is the level of GDP where unemployment equals the natural rate. Producing more than that means firms have hired past the normal level, so unemployment is below the natural rate and cyclical unemployment is negative. That's a positive output gap, which shows up near a peak, not a trough.

Do the math by hand first. Every Unit 2 calculation is a ratio or a percent change, and a four-function calculator handles all of them. What costs points is dividing by the wrong number, so write the formula before the numbers every time.

Then look at real data, because the exam asks what a change in an indicator means. The NBER's Business Cycle Dating Committee keeps the official U.S. chronology of peaks and troughs. Its most recent recession ran from a peak in February 2020 to a trough in April 2020. For reading, chapter 6 of OpenStax's free Principles of Macroeconomics covers GDP and the business cycle, and Khan Academy's AP Macroeconomics course has videos on each indicator.

The topic list on this page comes from College Board's AP Macroeconomics course and exam description, effective fall 2026. Your teacher can also assign the unit's Progress Check in AP Classroom.

Ashore's Macro course has a lesson and practice questions for every topic in this unit. The free starting check takes about 15 minutes and shows which ones are costing you points.

• AP Macroeconomics: all 6 units, exam format and scores