AP Economics Unit 2 Study Guide
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Read the Chapters 23 – 26 PowerPoints several times, taking notes as you go through the
PowerPoints.
Read the notes you took during class several times, comparing your notes to the PowerPoints.
Read Chapters 23 – 26 in your textbook. (Note: chapters are a little different if you have a newer
version of the textbook. Make sure you read the chapters that correspond to the PowerPoints.)
Go over all of the worksheets for this unit.
Watch the videos posted on my website for this unit.
Formulas
GDP (Nominal)
C + I + G + Xn
Real GDP
(Nominal GDP ÷ CPI) x 100
(Price in a given year ÷ price in base year) x 100
Labor inputs (i.e. hours of work) x Labor productivity (i.e. average output per hour)
CPI (Consumer Price Index)
(Total spending in year 1 ÷ total spending in base year) x 100
Economic Growth
(∆ Real GDP ÷ beginning Real GDP) x 100
Economic Growth Per Capita
(∆ Real GDP per capita ÷ beginning Real GDP per capital) x 100
Rule of 70 (used to determine how many years it will take for some economic indicator to double)
70 ÷ annual percentage
Unemployment Rate
(Unemployed ÷ labor force) x 100
Inflation Rate
(∆ CPI ÷ beginning CPI) x 100
(Δ total spending ÷ beginning spending) x 100
Okun’s Law
For every 1% that the actual unemployment is greater than the NRU, the GDP decreases 2%.
GDP Gap
Potential GDP – Actual GDP
Concepts
1. Relationship between saving and investment
2. Demand shocks v. Supply shocks
3. Reasons prices are sticky
4. GDP is a monetary measure
5. How to avoid double counting (GDP)
6. Definition of final goods
7. Definition of intermediate goods
8. GDP excludes non-production transactions (i.e. financial and secondhand sales)
9. Definition of transfer payments
10. Expenditures Approach method for calculating GDP
11. Types of transactions
a. Personal consumption
b. Private investment
c. Government purchases
d. Net exports
12. Nominal GDP v. Real GDP
13. Price index (i.e. CPI)
14. Problems with GDP
15. Transactions that would understate/overstate GDP
16. Economic growth
a. Using real GDP
b. Using real GDP per capita
17. Importance of economic growth (from macro perspective)
18. Rule of 70
19. Institutional structures that promote economic growth (which one is most important?)
20. Determinants of Economic Growth
a. Supply factors
b. Demand factor
c. Efficiency factor
21. Economic Growth and the PPC
a. Causes of a shift
b. Causes of a movement
22. Alternative formula for calculating real GDP (labor inputs x labor productivity)
23. Most important factors that impact economic growth (i.e. Accounting for Growth)
24. Definition of human capital
25. Definition of economies of scale
26. Arguments against economic growth
27. Arguments in favor of economic growth
28. Characteristics of the business cycle phases
29. Causes of the business cycle
30. Which businesses are affected the most by the business cycle? The least?
31. Definition of labor force
32. Problems with how the unemployment rate is calculated
33. Definition of discouraged workers
34. Definition of underemployed
35. Types of unemployment (characteristics, which one is the worst, which one is least concerning)
a. Frictional
b. Structural
c. Cyclical
36. Full-employment (natural rate of unemployment—NRU)
37. Economic cost of unemployment
a. GDP gap
b. Okun’s law
c. Uneven distribution
38. Non-economic costs of unemployment
39. Definition of inflation
40. Demand-pull inflation v. Cost-push inflation
41. Stagflation
42. Why a little demand-pull inflation is a good thing
43. Why cost-push inflation is self-limiting
44. Individuals hurt by inflation
45. Individuals helped by inflation