AP_Krugman_Textbook

c.Country A: $4,000 (There was no price increase so it is

the same.)

Country B: $6,000/2 =$3,000 (Prices doubled.)

d.Country A: (4,000–2,000/2,000) × 100 =100%

Country B: (3,000–2,000/2,000) × 100 =50%

e.Country A: 4,000/20 =$200 versus Country B:

3,000/15 =$200. It is the same.

Module 12

Check Your Understanding

1. The advent of websites that enable job-seekers to find
   jobs more quickly will reduce the unemployment rate
   over time. However, websites that induce discouraged
   workers to begin actively looking for work again will lead
   to an increase in the unemployment rate over time.


2. a.Not counted as unemployed because not actively looking
   for work, but counted in broader measures of labor
   underutilization as a discouraged worker.
   b.Not counted as unemployed—considered employed
   because the teacher has a job.
   c.Unemployed: not working, actively looking for work.
   d.Not unemployed, but underemployed: working part-time
   for economic reasons. Counted in broader measures of
   labor underutilization.
   e.Not unemployed, but considered “marginally attached.”
   Counted in broader measures of labor underutilization.


3. Items (a) and (b) are consistent with the observed rela-
   tionship between growth in GDP and changes in the
   unemployment rate. Item (c) is not.
   Tackle the Test:
   Multiple-Choice Questions


4. e


5. b


6. a


7. d


8. b
   Tackle the Test:
   Free-Response Questions


9. a.Employed (underemployed); she is not working up to her
   full potential.
   b.Not in the labor force (discouraged). Once a worker stops
   actively seeking work, he or she falls out of the labor force.
   c.Employed (part-time); individuals are classified as
   employed if they work full or part time.
   d.Not in the labor force; he is not actively seeking employment.

Module 13

Check Your Understanding

1. a.Frictional unemployment is unemployment due to the
   time workers spend searching for jobs. It is inevitable
   because workers may leave one job in search of another
   for a variety of reasons. Furthermore, there will always be
   new entrants into the labor force who are seeking a first
   job. During the search process, these individuals will be
   counted as part of the frictionally unemployed.


2. a


3. b


4. a

Tackle the Test:

Free-Response Question

2. This diagram should resemble Figure 10.1 plus the top
   half (the Government section) of Figure 10.2. The leak-
   ages in this scenario are taxes and private savings that
   feed into government borrowing and the injections are
   government purchases of goods and services and govern-
   ment transfers.

Module 11

Check Your Understanding

1. a.In 2009 nominal GDP was (1,000,000 ×$0.40)+
   (800,000×$0.60)=$400,000+$480,000=$880,000.
   The total value of sales of french fries in 2010 was
   900,000×$0.50=$450,000. The total value of sales of
   onion rings in 2010 was 840,000 ×$0.51 =$428,400.
   Nominal GDP in 2010 was $450,000 +$428,400=
   $878,400. To find real GDP in 2010, we must calculate
   the value of sales in 2010 using 2009 prices:
   (900,000×$0.40)+(840,000 ×$0.60)=$360,000+
   $504,000 =$864,000.
   b.A comparison of nominal GDP in 2009 to nominal GDP
   in 2010 shows a decline of (($880,000 − $878,400) /
   $880,000)× 100 =0.18%. But a comparison using real
   GDP shows a decline of (($880,000 − $864,000) /
   $880,000)× 100 =1.8%. That is, a calculation based on
   real GDP shows a drop 10 times larger (1.8%) than a cal-
   culation based on nominal GDP (0.18%): in this case,
   the calculation based on nominal GDP underestimates
   the true magnitude of the change because it incorporates
   both quantity changes and price changes.


2. A price index based on 1990 prices will contain a rela-
   tively low price of housing compared to a price index
   based on 2000 prices. This means that a 2000 price
   index used to calculate real GDP in 2010 will magnify
   the value of housing production in the economy and
   increase the relative size of the housing sector as a com-
   ponent of real GDP.

Tackle the Test:

Multiple-Choice Questions

1. d


2. b


3. c


4. c


5. c

Tackle the Test:

Free-Response Question

2. a.Country A: (4,000–2,000/2,000) × 100 =100%
   Country B: (6,000–2,000/2,000) × 100 =200%
   b.Country A: It stayed the same.
   Country B: It doubled.

S-8 SOLUTIONS TO AP REVIEW QUESTIONS