PRINCIPLES OF ECONOMICS ACTUAL EXAM
PAPER 2026 QUESTIONS WITH SOLUTIONS
GRADED A+
◉ What is structural unempoyment? Answer: Job eliminated,
accumulated experience is no longer valued in the labor market.
◉ What is cyclical unemployment? Answer: Laid off due to a recession
◉ How do you calculate the unemployment rate? Answer: (# of
unemployed/labor force) x 100
◉ How do you calculate the labor force participation rate? Answer:
(labor force / population) x 100
◉ Who is in the labor force? Answer: Those who are employed and
those who are actively looking for work.
◉ Another term for having no cyclical unemployment. Answer: Full
employment
,◉ How are the terms "full employment" and "natural rate of
unemployment" related? Answer: Both are used to describe the situation
where there is zero cyclical unemployment.
◉ Does full employment mean that there is no unemployment? Answer:
No. There will always be frictional and structural unemployment.
◉ What do households do in the factors market? Answer: Households
sell land, labor, capital and entrepreneurship in the factors market.
◉ Which groups provide inflows to the financial market? Answer:
Financial market inflows are made up of private savings from
households and foreign lending from the rest of the world.
◉ What is investment? Answer: business spending on physical capital
(tools), new homes, and inventories (products)
◉ Which is the most volatile component of GDP? Answer: Investment
spending
◉ Which component of GDP is the largest? Answer: Consumption
spending
◉ How do you calculate GDP? Answer: GDP = C + I + G + (X-M)
,◉ How do you compare living standards between countries or over
time? Answer: Real GDP per Capita
◉ Will a change in spending shift AD or AS? Answer: AD
◉ Will a change in resources shift AD or AS? Answer: AS
◉ Why are only final goods counted in GDP? Answer: Intermediate
goods are not included in the GDP to avoid over-counting.
◉ Identify three things that contribute to quality of life but are not
counted in GDP. Answer: 1. Environmental quality
2. Political freedom
3. Leisure time
◉ What two groups are hurt by unexpected inflation? Answer: Lenders
and those on fixed incomes
◉ Identify three costs of inflation Answer: 1. Menu costs
2. Shoe leather costs
3. Loss of purchasing power
, ◉ What is the most cited measurement of inflation in the US? Answer:
Consumer Price Index
◉ What is the difference between nominal and real GDP? Answer: Real
GDP is calculated using prices from a selected base year. Nominal GDP
is calculated using existing prices. Real GDP is nominal GDP adjusted
to remove the influence of inflation.
◉ Sticky prices and wages mean AS has what kind of slope? Answer:
Positive, upward sloping
◉ Rapidly adjusting prices and wages mean LRAS has what kind of
slope? Answer: Vertical
◉ What kind of policy should the government use to fight a recession?
Answer: Expansionary fiscal policy
◉ What kind of policy should the government use to fight inflation?
Answer: Contractionary fiscal policy
◉ What happens to AS/AD when government increases spending?
Answer: AD shifts right
◉ What happens to AS/AD when government cuts taxes? Answer: AD
shifts right
PAPER 2026 QUESTIONS WITH SOLUTIONS
GRADED A+
◉ What is structural unempoyment? Answer: Job eliminated,
accumulated experience is no longer valued in the labor market.
◉ What is cyclical unemployment? Answer: Laid off due to a recession
◉ How do you calculate the unemployment rate? Answer: (# of
unemployed/labor force) x 100
◉ How do you calculate the labor force participation rate? Answer:
(labor force / population) x 100
◉ Who is in the labor force? Answer: Those who are employed and
those who are actively looking for work.
◉ Another term for having no cyclical unemployment. Answer: Full
employment
,◉ How are the terms "full employment" and "natural rate of
unemployment" related? Answer: Both are used to describe the situation
where there is zero cyclical unemployment.
◉ Does full employment mean that there is no unemployment? Answer:
No. There will always be frictional and structural unemployment.
◉ What do households do in the factors market? Answer: Households
sell land, labor, capital and entrepreneurship in the factors market.
◉ Which groups provide inflows to the financial market? Answer:
Financial market inflows are made up of private savings from
households and foreign lending from the rest of the world.
◉ What is investment? Answer: business spending on physical capital
(tools), new homes, and inventories (products)
◉ Which is the most volatile component of GDP? Answer: Investment
spending
◉ Which component of GDP is the largest? Answer: Consumption
spending
◉ How do you calculate GDP? Answer: GDP = C + I + G + (X-M)
,◉ How do you compare living standards between countries or over
time? Answer: Real GDP per Capita
◉ Will a change in spending shift AD or AS? Answer: AD
◉ Will a change in resources shift AD or AS? Answer: AS
◉ Why are only final goods counted in GDP? Answer: Intermediate
goods are not included in the GDP to avoid over-counting.
◉ Identify three things that contribute to quality of life but are not
counted in GDP. Answer: 1. Environmental quality
2. Political freedom
3. Leisure time
◉ What two groups are hurt by unexpected inflation? Answer: Lenders
and those on fixed incomes
◉ Identify three costs of inflation Answer: 1. Menu costs
2. Shoe leather costs
3. Loss of purchasing power
, ◉ What is the most cited measurement of inflation in the US? Answer:
Consumer Price Index
◉ What is the difference between nominal and real GDP? Answer: Real
GDP is calculated using prices from a selected base year. Nominal GDP
is calculated using existing prices. Real GDP is nominal GDP adjusted
to remove the influence of inflation.
◉ Sticky prices and wages mean AS has what kind of slope? Answer:
Positive, upward sloping
◉ Rapidly adjusting prices and wages mean LRAS has what kind of
slope? Answer: Vertical
◉ What kind of policy should the government use to fight a recession?
Answer: Expansionary fiscal policy
◉ What kind of policy should the government use to fight inflation?
Answer: Contractionary fiscal policy
◉ What happens to AS/AD when government increases spending?
Answer: AD shifts right
◉ What happens to AS/AD when government cuts taxes? Answer: AD
shifts right
