PRINCIPLES OF ECONOMICS EXAM
QUESTIONS AND CORRECT ANSWERS.
VERIFIED 2025/2026.
What is frictional unemployment? - ANS Between jobs, moving towards a better job.
(Module 7)
What is structural unempoyment? - ANS Job eliminated, accumulated experience is no longer
valued in the labor market.
What is cyclical unemployment? - ANS Laid off due to a recession
How do you calculate the unemployment rate? - ANS (# of unemployed/labor force) x 100
How do you calculate the labor force participation rate? - ANS (labor force / population) x
100
Who is in the labor force? - ANS Those who are employed and those who are actively looking
for work.
Another term for having no cyclical unemployment. - ANS Full employment
How are the terms "full employment" and "natural rate of unemployment" related? -
ANS Both are used to describe the situation where there is zero cyclical unemployment.
1 @COPYRIGHT 2025/2026 ALLRIGHTS RESERVED.
,Does full employment mean that there is no unemployment? - ANS No. There will always be
frictional and structural unemployment.
What do households do in the factors market? - ANS Households sell land, labor, capital and
entrepreneurship in the factors market.
Which groups provide inflows to the financial market? - ANS Financial market inflows are
made up of private savings from households and foreign lending from the rest of the world.
What is investment? - ANS business spending on physical capital (tools), new homes, and
inventories (products)
Which is the most volatile component of GDP? - ANS Investment spending
Which component of GDP is the largest? - ANS Consumption spending
How do you calculate GDP? - ANS GDP = C + I + G + (X-M)
How do you compare living standards between countries or over time? - ANS Real GDP per
Capita
Will a change in spending shift AD or AS? - ANS AD
Will a change in resources shift AD or AS? - ANS AS
Why are only final goods counted in GDP? - ANS 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. - ANS 1.
Environmental quality
2 @COPYRIGHT 2025/2026 ALLRIGHTS RESERVED.
, 2. Political freedom
3. Leisure time
What two groups are hurt by unexpected inflation? - ANS Lenders and those on fixed
incomes
Identify three costs of inflation - ANS 1. Menu costs
2. Shoe leather costs
3. Loss of purchasing power
What is the most cited measurement of inflation in the US? - ANS Consumer Price Index
What is the difference between nominal and real GDP? - ANS 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? - ANS Positive, upward sloping
Rapidly adjusting prices and wages mean LRAS has what kind of slope? - ANS Vertical
What kind of policy should the government use to fight a recession? - ANS Expansionary
fiscal policy
What kind of policy should the government use to fight inflation? - ANS Contractionary fiscal
policy
What happens to AS/AD when government increases spending? - ANS AD shifts right
What happens to AS/AD when government cuts taxes? - ANS AD shifts right
3 @COPYRIGHT 2025/2026 ALLRIGHTS RESERVED.
QUESTIONS AND CORRECT ANSWERS.
VERIFIED 2025/2026.
What is frictional unemployment? - ANS Between jobs, moving towards a better job.
(Module 7)
What is structural unempoyment? - ANS Job eliminated, accumulated experience is no longer
valued in the labor market.
What is cyclical unemployment? - ANS Laid off due to a recession
How do you calculate the unemployment rate? - ANS (# of unemployed/labor force) x 100
How do you calculate the labor force participation rate? - ANS (labor force / population) x
100
Who is in the labor force? - ANS Those who are employed and those who are actively looking
for work.
Another term for having no cyclical unemployment. - ANS Full employment
How are the terms "full employment" and "natural rate of unemployment" related? -
ANS Both are used to describe the situation where there is zero cyclical unemployment.
1 @COPYRIGHT 2025/2026 ALLRIGHTS RESERVED.
,Does full employment mean that there is no unemployment? - ANS No. There will always be
frictional and structural unemployment.
What do households do in the factors market? - ANS Households sell land, labor, capital and
entrepreneurship in the factors market.
Which groups provide inflows to the financial market? - ANS Financial market inflows are
made up of private savings from households and foreign lending from the rest of the world.
What is investment? - ANS business spending on physical capital (tools), new homes, and
inventories (products)
Which is the most volatile component of GDP? - ANS Investment spending
Which component of GDP is the largest? - ANS Consumption spending
How do you calculate GDP? - ANS GDP = C + I + G + (X-M)
How do you compare living standards between countries or over time? - ANS Real GDP per
Capita
Will a change in spending shift AD or AS? - ANS AD
Will a change in resources shift AD or AS? - ANS AS
Why are only final goods counted in GDP? - ANS 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. - ANS 1.
Environmental quality
2 @COPYRIGHT 2025/2026 ALLRIGHTS RESERVED.
, 2. Political freedom
3. Leisure time
What two groups are hurt by unexpected inflation? - ANS Lenders and those on fixed
incomes
Identify three costs of inflation - ANS 1. Menu costs
2. Shoe leather costs
3. Loss of purchasing power
What is the most cited measurement of inflation in the US? - ANS Consumer Price Index
What is the difference between nominal and real GDP? - ANS 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? - ANS Positive, upward sloping
Rapidly adjusting prices and wages mean LRAS has what kind of slope? - ANS Vertical
What kind of policy should the government use to fight a recession? - ANS Expansionary
fiscal policy
What kind of policy should the government use to fight inflation? - ANS Contractionary fiscal
policy
What happens to AS/AD when government increases spending? - ANS AD shifts right
What happens to AS/AD when government cuts taxes? - ANS AD shifts right
3 @COPYRIGHT 2025/2026 ALLRIGHTS RESERVED.
