Unemployment & Inflation Practice Questions

8 representative multiple-choice questions on unemployment & inflation for AP Macroeconomics, drawn from our 15-question bank for this module. Work through each one, then open “Show answer” for the correct choice and an explanation. For scored, timed practice across the full bank, take a full practice test.

1. 1. A computer programmer who loses their job when their company moves operations overseas is an example of:

   • A. Frictional unemployment
   • B. Structural unemployment
   • C. Cyclical unemployment
   • D. Seasonal unemployment
   Show answer

   Correct answer: B. Structural unemployment

   Structural unemployment occurs when workers' skills or locations no longer match what employers need. When operations relocate overseas, the domestic worker faces a fundamental mismatch that retraining or relocation can't quickly fix. This is distinct from frictional (temporary job-switching), cyclical (demand-driven by recessions), or seasonal unemployment (predictable patterns).

2. 2. The labor force includes all of the following EXCEPT:

   • A. Workers currently employed full-time
   • B. Workers currently employed part-time
   • C. Individuals actively searching for work
   • D. Discouraged workers who have stopped looking for jobs
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   Correct answer: D. Discouraged workers who have stopped looking for jobs

   The BLS definition requires either employment or active job search to be counted in the labor force. Discouraged workers have stopped looking, so they're excluded from the labor force entirely. This exclusion is a well-known limitation of the official unemployment rate because it drops as workers give up, even though the underlying job market hasn't improved. Part-time workers, by contrast, ARE counted as employed.

3. 3. The short-run Phillips curve shows:

   • A. A positive relationship between unemployment and inflation
   • B. An inverse relationship between unemployment and inflation
   • C. That unemployment and inflation are unrelated
   • D. That unemployment always equals the natural rate
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   Correct answer: B. An inverse relationship between unemployment and inflation

   The short-run Phillips curve is downward-sloping: lower unemployment is associated with higher inflation, and vice versa. This reflects the short-run tradeoff policymakers face, because aggregate demand policy can reduce unemployment only at the cost of higher inflation. In the long run, this tradeoff breaks down, and the Phillips curve becomes vertical at the natural rate.

4. 4. A negative supply shock, such as a sudden increase in oil prices, would:

   • A. Shift the short-run Phillips curve to the left
   • B. Shift the short-run Phillips curve to the right and upward
   • C. Move the economy along a fixed Phillips curve
   • D. Have no effect on the Phillips curve
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   Correct answer: B. Shift the short-run Phillips curve to the right and upward

   Negative supply shocks raise production costs across the economy simultaneously, pushing up inflation at any given unemployment level. On a Phillips curve graph, the SRPC shifts up and to the right, creating stagflation. The 1973 OPEC embargo quadrupled oil prices within months and produced exactly this pattern. Demand-side policy can't address both problems at once, which is why the Keynesian Phillips curve framework largely collapsed during the 1970s.

5. 5. Which of the following best describes cyclical unemployment?

   • A. Workers between jobs due to normal career transitions
   • B. Unemployment caused by a mismatch of skills and available jobs
   • C. Unemployment caused by recessions and declines in aggregate demand
   • D. Seasonal variations in employment like farm work in winter
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   Correct answer: C. Unemployment caused by recessions and declines in aggregate demand

   Cyclical unemployment is tied directly to the business cycle. When aggregate demand falls during recessions, firms cut production and lay off workers across many industries simultaneously. The 2008-2009 financial crisis and the early weeks of the COVID pandemic in 2020 produced dramatic spikes in cyclical unemployment. When the economy recovers to potential GDP, cyclical unemployment disappears. Option A describes frictional unemployment. Option B describes structural unemployment.

6. 6. If the economy experiences an inflation rate of 5% and nominal wages rise by 3%, real wages have:

   • A. Increased by 2%
   • B. Decreased by 2%
   • C. Increased by 8%
   • D. Remained unchanged
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   Correct answer: B. Decreased by 2%

   Real wages reflect purchasing power. The real wage change is approximately the nominal wage change minus inflation: 3% - 5% = -2%. Workers' purchasing power falls by 2% because prices rose faster than paychecks. This is why unanticipated inflation is especially harmful to workers on fixed nominal contracts, pensioners on non-indexed benefits, and creditors holding fixed-rate loans, because their real incomes erode with each price level increase.

7. 7. Which of the following situations would cause the short-run Phillips curve to shift rightward (upward)?

   • A. A decrease in expected inflation
   • B. A technological breakthrough that reduces production costs
   • C. An increase in expected inflation due to expansionary monetary policy
   • D. An increase in aggregate demand
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   Correct answer: C. An increase in expected inflation due to expansionary monetary policy

   The SRPC shifts based on changes in expected inflation or supply shocks. When expected inflation rises, workers demand higher wages and firms set higher prices, which produces higher actual inflation at every unemployment rate. The whole curve shifts up. Option A would shift the curve leftward/downward (good news). Option B is a positive supply shock, which also shifts the curve down. Option D causes movement ALONG the SRPC (from one point to another), not a shift of the curve itself. Distinguishing shifts from movements is a common AP exam trap.

8. 8. An economy has a CPI of 120 in Year 1 and 126 in Year 2, and its real GDP grew by 2.5% over the same period. What happened to nominal GDP?

   • A. Nominal GDP grew by approximately 2.5%
   • B. Nominal GDP grew by approximately 5.0%
   • C. Nominal GDP grew by approximately 7.5%
   • D. Nominal GDP declined by 2.5%
   Show answer

   Correct answer: C. Nominal GDP grew by approximately 7.5%

   Inflation rate = (126 - 120) / 120 × 100 = 5.0%. The approximation that nominal growth equals real growth plus inflation gives: 2.5% + 5.0% = 7.5%. This relationship (nominal ≈ real + inflation) is central to macroeconomic measurement. Rearranged, it explains why the Fed watches both GDP deflator and CPI to distinguish real economic activity from price-level changes. Rising nominal GDP during inflationary periods can mask stagnant or even declining real output.