AP Economics

Mr. Crawford

Semester Exam Review Guide

Structure:

60 Multiple Choice questions (1 point each) in 70 minutes

3 Essays (20 points) in 60 minutes

UNIT ONE
FUNDAMENTALS OF ECONOMICS
  • CHOICE
    • EUSR=MSUW
  • OPPORTUNITY COST
    • TINSTAAFL
  • SCARCITY
    • LIMITED AND DESIRABLE
  • RATIONAL THINKING
  • COST-BENEFIT ANALYSIS
    • FUTURE UTILITY
    • INVESTMENT
  • MARGINAL THINKING
    • IMPERFECT INFORMATION
  • ECONOMIC THEORY
  • POSITIVE/OBJECTIVE
    • FACTS
    • THEORY
      • INDUCTION
      • DEDUCTION
  • NORMATIVE/SUBJECTIVE
    • POLICY
  • FALLACIES
    • POST HOC
    • COMPOSITION
    • DEFINITION
    • BIAS
UNIT TWO
THE MARKET SYSTEM
  • THE FOUR FUNDAMENTAL QUESTIONS
  • TRADITIONAL SYSTEMS
    • BARTER

ADAM SMITH

  • GREED
    • PROFIT MOTIVE
  • PRIVATE PROPERTY
  • FREEDOM OF CHOICE
  • MARKETS
  • COMPETITION
  • NO GOVT
    • "LAISSEZ FAIRE"
    • "INVISIBLE HAND"
  • CAPITALISM
    • SPECIALIZATION
    • CAPITAL
    • MONEY
  • CONSUMER SOVEREIGNTY
    • DERIVED DEMAND

UNIT THREE
SUPPLY AND DEMAND
DEMAND

Law of Demand

CHANGE IN P= CHANGE IN Qd

INVERSE

  • DMU
  • YFX
  • SFX

CHANGE IN NPD= CHANGE IN D

  • TASTES
  • INCOME
  • MORE OR FEWER BUYERS
  • EXPECTATIONS
  • RELATED GOODS' PRICES
    • SUB=SAME
    • COMP=OPPOSITE

CHANGE IN D= PQ

CHANGE IN D= PQ

SUPPLY

Law of Supply

 CHANGE IN P =  CHANGE IN Qs

DIRECT

  • DMR/IC
  • P X Q = TR

CHANGE IN NPD= CHANGE IN S

  • GOVERNMENT
    • TAXES/SUBSIDIES
    • PRICE CONTROLS
  • OTHER PROFIT OPPORTUNITIES
  • NUMBER
  • INVESTMENT IN TECHNOLOGY
  • COST OF RESOURCE
  • EXPECTATIONS

CHANGE IN S= PQ

CHANGE IN S= PQ

 

UNIT FOUR
MARKET FAILURE
KARL MARX
  • WEALTH = UTILITY
  • LABOR THEORY OF VALUE
  • ALIENATION
  • EXPLOITATION
    • SUBSISTENCE
    • PROFIT IS SURPLUS LABOR
  • FLAWS OF CAPITALISM
    • EXTERNALITIES
      • PUBLIC COSTS
    • ASYMMETRIC INFORMATION
    • PUBLIC GOODS
    • IMPERFECT COMPETITION
      • MONOPOLY
    • INEQUITY
    • BUSINESS CYCLES
  • SOLUTION
    • UNIONS
    • REVOLUTION
    • GOVERNMENT
      • PUBLIC OWNERSHIP

SOCIALISM

 

circularflowwithG.jpg
UNIT FIVE
MACROECONOMIC INSTABILITY

BUSINESS CYCLES

  • SAYS' LAW:  Y = C

  • MARX: INHERENT INSTABILITY BECAUSE

    • Y = C + S

AGGREGATE DEMAND

Law of Aggregate Demand

CHANGE IN PL = CHANGE IN NATIONAL OUTPUT (GDP, EMPLOYMENT, NATIONAL INCOME)

INVERSE

  • FOREIGN PURCHASES EFFECT
  • WEALTH EFFECT
  • INTEREST RATE EFFECT

CHANGE IN NPD= CHANGE IN AD

  • CONSUMER DEBT
  • REAL WEALTH
  • CONSUMER EXPECTATIONS

CHANGE IN AD= PLAQ

CHANGE IN AD= PLQLSHORT RUN AGGREGATE SUPPLY

Law of Aggregate Supply

 CHANGE IN PL =  CHANGE IN CHANGE IN NATIONAL OUTPUT (GDP, EMPLOYMENT, NATIONAL INCOME)

DIRECT

CHANGE IN NPD= CHANGE IN AS

  • GOVERNMENT
    • TAXES/SUBSIDIES
  • EXPECTATIONS
  • COST OF RESOURCE

CHANGE IN AS= PLAQ

CHANGE IN AS= PLAQ



LONG RUN AGGREGATE SUPPLY

 LRAS = PPF

PERFECTLY INELASTIC; UNRELATED TO CHANGES IN PL, LIMITS OF POTENTIAL PRODUCTION AT FULL EMPLOYMENT

CHANGE IN NPD= CHANGE IN LRAS

  • TRADE
  • RESOURCES
  • TECHNOLOGY

CLASSICAL THEORY

  • JOSEPH SCHUMPETER
    • Y = C + S
    • S = I
    • Y = C + I
  • CYCLES ARE TEMPORARY DISEQUILIBRIUMS IN
    • PRODUCT MARKET
    • RESOURCE MARKET
    • MONEY MARKET
  • IF AD THEN S > I
    • SURPLUS; RECESSION
    • PRICES DROP
      • DEFLATION OR DISINFLATION
    • WAGES DROP
    • INTEREST RATES DROP
    • AS AND S = I
  • IF AD THEN S < I
    • SHORTAGE; INFLATION
    • PRICES RISE
      • INFLATION
    • WAGES RISE
    • INTEREST RATES RISE
  • AS AND S = I
UNIT SIX
KEYNESIANISM

CRITIQUES OF CLASSICAL THEORY

  • SAVINGS DOES NOT EQUAL INVESTMENT
  • RATCHET EFFECT
    • DOWNWARD INFLEXIBILITY OF PRICES AND WAGES
  • KEYNESIAN CONSUMPTION MULTIPLIER

KCM = 1/MPS

NATIONAL INCOME ACCOUNTING
  • C + Ig + G + Xn = GDP
  • NY + KCA + IBT = GNP
CONSUMER PRICE INDEX
  • NOMINAL = PxQ
  • REAL = NOMINAL/CPI x 100
  • MARKET BASKET = HOLD QUANTITY CONSTANT
  • CPI = MARKET BASKET OF THIS YEAR/MARKET BASKET OF BASE YEAR x 100
UNEMPLOYMENT
  • LABOR POOL + NOT COUNTED = POPULATION
  • UNEMPLOYMENT RATE = UNEMPLOYED/LABOR POOL
  • UNEMPLOYMENT:

ACTUAL
FRICTIONAL
CYCLICAL
STRUCTURAL

OKUN'S LAW

CYCLICAL UNEMPLOYMENT x 2.5 = GDP GAP

COST

Aggregate Demand and Equilibrium
A. Equilibrium (E) is where planned and actual AD and AS are equal.
          1. Equilibrium is where all goods produced for sale are sold. 
          2. At points below equilibrium, AD < AS, inventories are building and business 
              activity is contracting. This level of economic activity was depicted by the 
              horizontal (Keynesian) range of AS explained in the previous model.
          3. At points above equilibrium AD > AS, inventories are decreasing and 
              business activity is expanding
              as depicted by the intermediate range and eventually the classical range of AS.
          4. Economic activity (Real GDP) will be wherever AD intersects AS. 
              Equilibrium seldom exists as 
              economic activity is usually
in one stage or another of the business cycle.
     B. If economic activity is not in balance, a dynamic situation
exists and will continue
             until equilibrium is reached.
    
C. Keynes believed that E could settle at a level of economic activity with large amounts of unemployment.
         1. If potential Real GDP is greater than what actual AD yields, a recessionary gap exists and may persist indefinitely. The solution to this unacceptable
             equilibrium is to increase AD.
         2. If potential Real GDP is less than what actual AD yields, an inflationary gap exists and the inflation may persist indefinitely. The solution to this unacceptable level of economic activity is to decrease AD.

 

 

 

 

 

MONETARY POLICY
MONETARY POLICY/SUPPLY SIDE
  • PERMANENT INCOME THEORY
  • EXPANSIONARY BIAS
  • CROWDING OUT
  • STRUCTURAL DEBT
  • EXPORT SHOCK

EQUATION OF EXCHANGE

MV = PQ 

FEDERAL RESERVE MONETARY TOOLS 

  • OPEN MARKET
    • BOND PRICES
  • DISCOUNT RATE
    • DISCOUNT WINDOW
  • RESERVE RATION
    • HAMMER
    • CHANGES BOTH M AND V
  • LONG RUN
    • IF EP > 0
      • FIRMS ENTER
      • ATC
      • P
      • EP = 0
    • IF EP < 0
      • FIRMS LEAVE
      • ATC
      • P
      • EP = 0
  • LONG RUN PRODUCTIVE EFFICIENCY
  • X-EFFICIENCY
    • OVERCAPITALIZATION FOR POTENTIAL EXPANSION
  • NOT ALLOCATIVE EFFICIENT