A worker earned $40,000 in a year when the CPI was 100 and earns $48,000 now that the CPI is 125. Compared with before, the worker's real income
costs of inflation and real vs nominal values
Review costs of inflation and real vs nominal values for AP Macroeconomics and try 2 free AP-style practice questions. 15 questions on this topic in AP Macro · Unit 2 · Economic Indicators and the Business Cycle.
7 topics106 multiple-choice4 free-response
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During periods of very high inflation, money becomes a less useful unit of account because
Sample free-response question
The table shows the prices and quantities of fish and boats, the only two goods produced in the country of Corvalia, in year 1 and year 2. Year 1 is the base year.
| Good | Year 1 Price | Year 1 Quantity | Year 2 Price | Year 2 Quantity |
|---|---|---|---|---|
| Fish | $2.00 | 100 | $2.20 | 110 |
| Boats | $50 | 4 | $55 | 4 |
(a) Calculate real GDP in Corvalia in year 2. Show your work.
(b) Calculate the percentage change in real GDP from year 1 to year 2. Show your work.
(c) What was the numerical value of the inflation rate from year 1 to year 2, as measured by the GDP deflator?
(d) Assume that the expected inflation rate between year 1 and year 2 was 2 percent.
(i) Workers in Corvalia signed contracts in year 1 that raised their nominal wages by 4 percent in year 2. Were these workers better off, worse off, or unaffected in terms of their real wages?
(ii) In year 1, a bank made a one-year loan at a fixed nominal interest rate of 6 percent. Was the bank better off, worse off, or unaffected as a result of the inflation that actually occurred? Explain.
13 more questions on this topic
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Answer, then see why
The price of gasoline rises 10% and the quantity demanded falls 5%. What happens to total revenue?
Not quite. The answer is B.
Why the other options are wrong
AI grading for free-response
Write your FRQ answer and get it scored point by point against the AP rubric, with the line from your answer that earned or missed each point.
Question 13 / 4 pts
Part a1 / 1 pts
Point 1: Earned
Grader confidence 94% sureReason: Correctly identifies demand for gasoline as inelastic.
Evidence: "The price of gasoline rises and the quantity falls only a little."
Part b2 / 3 pts
Point 1: Earned
Grader confidence 91% sureReason: Graph shows relatively inelastic demand.
Evidence: Draws a steep demand curve.
Point 2: Earned
Grader confidence 88% sureReason: Correct new equilibrium price.
Evidence: Shifts supply left, P1 → P2.
Point 3: Not earned
Grader confidence 82% sureReason: With inelastic demand, a price increase raises total revenue.
Evidence: "Revenue goes down."