AP Macroeconomics
CH 1 - 3 TEST REVIEW
Mr. Kelley
1a. Define a Price ceiling. See Pg 61
1b. Draw and label an S and D graph in equilibrium. THEN Label as P2 a price that
would be considered a Price Ceiling.
See Fig 3.8 on pg. 61.
2. For which of the following statements are both the price change and quantity change
determinable (for a particular good)?
A. Both the supply and demand for the good increase
B. Both the supply and demand for the good decrease
C. The supply increases and the demand for the good decreases
D. The supply decreases and the demand for the good increases
E. None of the above
See pg 60
AP Macroeconomics
CH 1 - 3 TEST REVIEW
Mr. Kelley
3. Subsidies create an increase in supply AND a
A. Shortage
B. Surplus
C. Market price
See pg 55
4. Write the Law of Demand: There is an inverse relationship between the price of a
good and the QUANTITY demanded.
5. Use the following chart to answer question #7
OUTPUT
COUNTRY
France
England
1.
2.
3.
4.
5.
WHEAT
20
60
FISH
5
20
AA WHEAT = England
AA FISH = England
CA Wheat = France {.25:1 vs .333:1}
CA Fish = England {3:1 vs 4:1}
ToT is 3.5 Fish per 1 Wheat, France makes wheat and England
catches fish, then they trade
AP Macroeconomics
CH 1 - 3 TEST REVIEW
Mr. Kelley
6. What will happen to the equilibrium price and equilibrium quantity of Good Z when
the price of Good X, which is a close substitute for Z, rises?
This is Factor of Demand, Substitute Good.
A. The equilibrium price will rise and the equilibrium quantity will fall
B. The equilibrium price will fall and the equilibrium quantity will rise
C. The equilibrium price and the equilibrium quantity will both fall
D. The equilibrium price and the equilibrium quantity will both rise
E. There is not enough information to answer definitively
7. If labor costs rise in the automobile industry, which of the following would happen to
car prices and the quantity of cars sold (demanded)?
Supply price increases due to Factor of Supply, Change in Resource
Prices; then Quantity Demanded decreases due to the Law of
Demand
Price
Quantity sold (demanded)
A.
Decrease
Decrease
B.
Decrease
Decrease
C.
Increase
Decrease
D.
Increase
Increase
E.
Increase
No Change
8. For each of the following, determine if there would be an inward, outward, or no shift
of a PPF.
8a. An increase in the labor force - OUTWARD: Additional resources
8b. A decrease in the quantity of inputs required to produce a unit of output:
OUTWARD – lower production costs
8c. A decrease in the quality of human capital (labor) - INWARD: less efficient
resources
AP Macroeconomics
CH 1 - 3 TEST REVIEW
Mr. Kelley
9. What does ‘ceteris parabus’ mean?
OTHER THINGS BEING EQUAL
10. Which of the following statements about the simple circular flow model of a market
economy is correct?
A. Households are on the demand side of the product market and the supply
side of the resource market
B. Firms are on the supply side of both the product market and the resource market
C. Households receive income in the form of wages, and firms receive income in the
form of investment
D. Exports and investment expenditures are examples of leakage from the circular
flow, whereas imports and savings are injections
E. Circular flow models are used primarily to explain why money is necessary to any
economic system
11. What are the five fundamental economic questions?
SEE PG 34
12. In a command economy, how are the five fundamental economic questions
answered? The Government dictates it.
AP Macroeconomics
CH 1 - 3 TEST REVIEW
13. List the five (6) Determinants of Demand. SEE PG 52
1.
2.
3.
4.
5.
6.
14. List the six (6) Determinants of Supply. SEE PG 56
1.
2.
3.
4.
5.
6.
Mr. Kelley
AP Macroeconomics
CH 1 - 3 TEST REVIEW
Mr. Kelley
PART III: FRQs
FRQ 1: For this FRQ I highly recommend that you sketch out your Supply (S1) and
Demand (D1) curves, and then sketch in the shifts (S2 and D2) as indicated. If you then
observe the graph, you will see the effect on equilibrium price and quantity.
For each of the following simultaneous changes in demand and in supply for
a product, indicate the effect on equilibrium price and equilibrium quantity.
A. increase in demand and an increase in supply
Price – Indeterminate; Quantity - Increase
B. decrease in demand and a decrease in supply
Price – Indeterminate; Quantity - Decrease
C. increase in demand and a decrease in supply
Price – Increase; Quantity - Indeterminate
AP Macroeconomics
CH 1 - 3 TEST REVIEW
Mr. Kelley
FRQ II.
Consider the Circular Flow model to answer the following:
1. Discuss why or why not the following statement is true.
“ALL interaction among players must be through a market.”
FALSE: Players are HH and Firms. They interact directly with the
Government by paying taxes and receiving services, subsidies, transfer
payments etc. HH and Firms receive services whether they use them or
not…they pay taxes whether they utilize the services or not. There is
nowhere that HH and Firms “meet” with the Gov’t to decide how much
taxes they are wiling to pay for which services.
AP Macroeconomics
CH 1 - 3 TEST REVIEW
Mr. Kelley
FRQ III.
C
A
R
S
TRACTORS
Using the diagram above, answer the following questions.
a. If the two countries specialize and trade with each other, which country
will import (or receive) cars? Explain why. This requires you to determine
the CA in each product.
CA Tractors = Xanadu {.5:1 vs 3:1}
CA Cars = Atlantis {.333:1 vs 2:1}
Therefore, Xanadu should receive cars since Atlantis has the CA is
cars and can make then at a lower opportunity cost.
b. If the terms of trade are such that one car can be exchanged for one
tractor, give a detailed explanation how Atlantis will benefit from such a
trade.
If Atlantis were to NOT trade, they would give up 3 cars to get 1
tractor. If they trade, they instead make 1 car (which they still give
up when they trade it away) but they get 1 tractor for only 1 car!
They “save” 2 cars.
AP Macroeconomics
CH 1 - 3 TEST REVIEW
Mr. Kelley
FRQ IV:
Choose two of the five fundamental questions.
CONTRAST how these fundamental economic questions are addressed in
command versus market economies.
{Note: when directions say “contrast…” it means specifically to discuss
differences…not similarities}
This is for each of you to write. Good Luck!
AP Macroeconomics
CH 1 - 3 TEST REVIEW
Mr. Kelley
FRQ V:
Briefly explain the “coordination” problem when it comes to a command
economy.
See page 38/39
FRQ VI:
Write an argument FOR the benefits of a command economy in small
sized or isolated communities.
This is a personal answer, written as normative economics. Good Luck!