AP Economics Exam Reviewwcgwilli.weebly.com

1、ap macroeconomics exam review spring 2013/mr. petersoni.chapter i - nature & method of economics:a.fundamental economic concept is scarcity. scarcity requireschoices. “there is no such thing as a free lunch.”b macroeconomics - the study of the economy as a whole and its aggregates.c. microeconomics

2、- the study of individual sectors of the economy.ii. chapter 2 - the economizing problem:a. economic resources:1. land (gifts of nature)2. labor (people & their abilities)3. capital (things that make other things”)4. entrepreneurship (risk takers in search of profits)b. scarce resources involve choi

3、ces - an opportunity cost, which is the next best alternative choice or what you give up to get something else.c.full-employment:1. people = 5% unemployment 2. p&e = 85% capacity utilization rated.productive efficiency = producing products in the most efficientmanner or the “right way.”e.allocative

4、efficiency = producing the products society wants most or the “right products.”f.full-production: to achieve full-production an economy must achieve both allocative and productive efficiency.g. production possibilities curve: is an economic model of choices. points inside the curve are attainable wi

5、th current resources, but represent inefficient use of resources. points on the curve are attainable with current resources and represent full-production, allocative efficiency, and productive efficiency. however, movement along the curve represents a opportunity cost. increased production of one pr

6、oduct results in decreased output of the other good. points outside the curve are unattainable with the current level of resources. in order to operate outside the ppc and “push out the curve,” and “bake a bigger economic pie” an economy must either:1.utilize new and improved technology.2.increase t

7、he 4 economic resources.3.utilize international trade to increase resources.b.circular flow:the idea here is that money spent from one sector of the economy becomes income for another sector.iii. chapter 3 - demand, supply, & equilibrium: a. demand:1. law of demand: quantity demanded rises when the

8、price falls andincreases when the price declines. 2.quantity demanded - alters due to a price change and is represented by movement along a stable demand curve . 3.change in demand: results in a shift in the entire curve and is causedby a non-price factor known as a determinant, such as:a. tastes &

9、preferencesb. related good prices (substitutes & compliments)c. income changesd. population changese. expectations of the future b . supply: 1.law of supply: quantity supplied rises when the price rises anddecreases when the price declines. 2.quantity supplied- alters due to a price change and is re

10、presented by movement along a stable supply curve. 3.change in supply: results in a shift in the entire curve and is causedby a non-price factor known as a determinant, such as:a. natural/manmade phenomenonb. input costsc. competition d. expectations e. profitability of other goods in supplyf. profi

11、tability of goods in joint supply c.equilibrium: where the ad and as curves intersect, called the equilibrium price. here there are no shortages or surpluses. this is also called the “market clearing” price. when the market price is set above the “market clearing” price, surpluses exist. when the ma

12、rket price is set below the “market clearing” price, shortages exist. markets tend to seek equilibrium and eliminate shortages or surpluses. iv. chapter 4 - the market system:a.three economic questions:1. what to produce?2. how to produce it?3. for whom to produce?b.the “invisible hand.” adam smiths

13、 idea of the operation of self-interest within the economy. the idea here is that if everyone pursues their own economic self-interest, then society will be better of as a whole. vi. chapter 6 u.s. & global economy:a.absolute/comparative advantage:1.absolute advantage is when one nation/person produ

14、ces a product in the most efficient/cost effective manner.2.comparative advantage involves specialization. countries/people should specialize and produce those products with with they have the lowest opportunity cost in terms of the other product involved. 3.once countries specialize and trade on th

15、e basis of comparative advantage, both countries will be able to enjoy more output of both products involved.b.absolute/comparative advantage example:in order to determine absolute and comparative advantage, the following must be determined.1. is this an output or input problem? output involves thin

16、gs like tons produced per hour, bushels produced per acre. it involved how much one can produce given a certain input. input involves how much input it takes to produce a given output. for example, the number of hours to produce 1 car or number of workers to produce 1 tv.2. for output, absolute adva

17、ntage involves the country/person producing the most. for input, absolute advantage involves the country/person uses the least time, inputs, resources to come up with a given output.3.if you have one country in with the absolute advantage in one product and the other country with the absolute advant

18、age in the other product, then you have already determined comparative advantage. there is no reason to go further and utilize the formula.4.comparative advantage determines who should produce which product and why? comparative advantage involves a country specializing in the production of the produ

19、ct it has the lowest opportunity cost in terms of the other product it could produce.4.shown below are examples of comparative advantage problems for both input and output.output problem: remember, output means “over.”in one hour, the usa can produce either 10 roman togas or 20 barbie dolls. in one

20、hour, south korea can produce either 15 roman togas or 45 barbie dolls.1. which nation has the absolute advantage in togas? in barbies? why?2. which nation has the comparative advantage in togas? why?3. which nation has the comparative advantage in barbies? why?4. which nation should produce which p

21、roduct and why?to solve this problem, you can set up the following table:togasbarbie dollstogasbarbie dollsusa102020/10= 2 15/45 = 1/310/20 = 1/2south korea154545/15 = 3 1. in this problem, south korea has the absolute advantage in both products because it can produce more of each in one hour.2. aft

22、er the calculations for comparative advantage, the usa has the lowest opportunity cost when producing togas. this means that if it produced one toga it could have produced 2 barbies in the same time. therefore it has the comparative advantage because south korea would give up 3 barbies.3. south kore

23、a has the comparative advantage for barbie dolls because it has thelowest opportunity cost when producing barbies. that is, when it produces one barbie, it could have produced 1/3rd of a toga in the same time. the usa would have to give up of a toga in the same time, therefore south korea has the co

24、mparative advantage.4.because they have the lowest opportunity cost in terms of the other product (comparative advantage), the usa should produce togas and south korea should produce barbies. if they specialize in the production of these products and then trade, both will enjoy more output than if s

25、pecialization had not occurred.additional issues with this type of problem:you may be called upon to draw a ppc from the information above. ive drawn one below:domestic terms of trade:the ppc above shows the domestic terms of trade for each country. if the usa produces one toga it could trade for 2

26、barbies domestically. if south korea produces one toga, it could trade domestically for 3 barbies. the question is:if the two nations offered each other 1 toga for 2.5 barbies, would these terms of trade be mutually beneficial. they would, because if the usa specializes in toga production, it would

27、get 2.5 barbies for 1 toga via international trade versus 2 barbies for 1 toga domestically. similarly, if south korea specializes in producing barbies and engages in international trade, it only gives up 2.5 togas for 1 barbie instead of 1 barbie for 3 togas domestically.input problem:to produce on

28、e tank, it takes canada 12 hours. to produce one dove, it takes canada 3 hours. to produce one tank, it takes austria 10 hours. to produce one dove, it takes austria 2 hourstanksdovestanksdovescanada12312/3 = 4 3/12 = 1/4austria10210/2 = 52/10 = 1/5from the table above, it is evident that austria ha

29、s the absolute advantage in both tanks and doves because it produces on unit of each product faster than canada. however, canada has the comparative advantage in tanks, because in the time it takes canada to produce one tank it could have made 4 doves. 4 is less than 5, so it has the lowest opportun

30、ity cost in terms of doves when producing a tank. austria has the comparative advantage in doves because it only gives up 1/5th of a tank when producing 1 dove.additional issues with this type of problem:you may be called upon to draw a ppc from the information above. ive drawn one below: domestic t

31、erms of trade:the ppc above shows the domestic terms of trade for each country. if canada produces one tank it could trade for 4 doves domestically. if austria produces 5 doves, it could trade domestically for 1 tank. the question is:if the two nations offered each other 1 tanks for 3 doves, would t

32、hese terms of trade be mutually beneficial. if canada specializes in tanks, it would not benefit them, because they would lose 1 dove via international trade (they already get 4 doves for one tank). austria would benefit because they would only have to give up 3 doves to get 1 tank (they give up two

33、 less doves).vii. chapter 7 measuring domestic output, national income, & price level:a. gdp:1.stands for gross domestic product or the final value of all goods and services produced and sold in the u.s. at their final market prices during one year. it differs from gnp or gross national product in t

34、hat gdp involves u.s. or foreign production w/i the u.s. borders, while gnp involves the production of u.s. citizens/corps worldwide.2.gdp is a macroeconomic indicator of and economys health. 3.the two methods for calculating gdp include the following:a.expenditures approach = c + i + g + xn this is

35、 the spending for this years output.b. flow of income approach. this is the income received forthis years output. usually only general questions are asked on the ap exam for this method. however, if you did get a technical question, the most you would need to know is shown below:gdp - depreciation =

36、 net domestic product - net foreign factor income - indirect business taxes = national incomeyou could calculate this by either the build-up or tear-down methods.b. nominal & real gdp:1. is real gdp + inflation for that year.2. real gdp measures what was actually produced for that year.c.important g

37、dp formulas:real gdp=nominal gdp inflation since the base year.real gdp calculation:=nominal gdp current yr x 100 gdp deflator or price index current year note:the base year deflator is always 100 and the current year deflator will be provided.percentage change in real gdp: =real gdp current year -

38、real gdp base year x 100 real gdp base yearper-capita nominal gdp: =nominal gdp divided by populationper-capita real gdp: =real gdp divided by population d.shortcomings of gdp:1. does not include financial transactions2. does not include non-market transactions3. does not measure improved product qu

39、ality4. does not include underground economy5. does not address the composition/distribution of output6. does not address per-capita output7. does not address non-economic sources of well-beinge.cpi = consumer price index:1. it is a measure of inflation based on consumer purchases. it is a market ba

40、sket of 300 commonly purchased items by households which are weighted.2. the base year cpi is always 100. to calculate the change in inflation since the base year, you simply take the current year cpi and subtract 100.3.to compare calculate the change in inflation from one year to the next, use the

41、following formula for percentage change:cpi current year cpi other year x 100 cpi other yearthis is the old new old/old percentage change formula.viii.chapter 8 economic growth & instability:a.business cycle the ups and downs of the economy.1. 4 phases shown below: 2. cyclical impact of business cyc

42、le:durable goods industries are more severely affected than nondurable goods industries. people will cut back on big ticket items and non-necessities when there is recession. industriesinvolving necessities such as food, clothing, insurance, and other non-durables and services are somewhat protected

43、 from recessions.b.unemployment:1.unemployment rate = unemployed/labor force x 1002.labor force = unemployed (those w/o jobs, but looking for jobs) + the employed.3.types of unemployment:a.frictional people between jobsb.structural unemployed who need retraining or relocation to find jobs.c.cyclical

44、 unemployment caused by the business cycle.d.seasonal unemployment based on the time of the year.4.natural rate of unemployment = 5% unemployment. it is the combination of frictional and structural unemployment.c.inflation:1. types:a.demand-pull: caused by excessive ad. “too many dollars chasing too

45、 few goods.” this inflation will continue as long as ad increases. here the ad curve shifts right.b.cost-push inflation (“stagflation): caused by supply shocks (oil embargoes of the 1970s), wage-price spiral, monopoly monopoly power of industries, union power. this inflation results from an increase

46、 in per-unit costs, causing the sras to shift left. left alone, this inflation will eventually die out by itself due to the increase in costs resulting in higher unemployment and reduced ad/gdpr. c.quantity theory of inflation:here inflation is caused by the government printing too much money. it is

47、 based on the equation of exchange:mv = pqhere m = money supply, v = velocity of money (how many times a dollar is spent in a year), p = todays prices or inflation, and q = real gdp or output. pxq = nominal gdp.2.who is helped/hurt by inflation:helpedhurt1. flexible income people1. fixed-income peop

48、le2. debtors2. savers3. owners of real property3. creditors like real estate.d.nominal v. real interest rates:1. nominal interest rates are real interest rates + inflation. they include this years estimate of inflation by lenders. they will place an inflation premium on to a loan. 2. real interest r

49、ates are a result of competition for bank savings/deposits between depositors and financial institutions. if the pool of savings shrinks, interest rates increase. if the pool of savings increases, interest rates decrease. real interest rates are determined in the loanable funds market.ix. chapter 9

50、building the aggregate expenditures model:a.consumption function.1.defined as di goes up c goes up, but not as fast as di.2.determinants of consumption:a.most important di.b.expectationsc.keeping up with the jonesd.amount of durable goods on hande.amount of credit availablef.amount of financial asse

51、ts on handb.savings function:1. defined as di goes up, s goes up, but not as fast as di2. determinants of savings only personal habit.c.apc, aps, mpc, and mps:1.apc:average propensity to consume = consumption/di.2.aps:average propensity to save = savings/di3.mpc:marginal propensity to consume. this

52、relates to apersons propensity to spend if additional income is received. the formula is: mpc = change in consumption/change in di.4.mps:marginal propensity to save. it relates to a persons propensity to save if additional income is received. the formula is: mps = change in savings/change in did.investment:1.defined:new p&e, new construction (business & residential), and net inventory investment.2.the key factor in the quantity of investment demand (movement along a stable id curve