AP ECONOMICS
Final Exam Review by Unit
Final Exam
Format:
When:
Importance:
60 multiple choice & 3 Free Response Questions
1st: Tuesday Dec 15th
2nd: Wednesday Dec 16th
25% of Grade
UNIT #1
Introduction to Economics and Supply & Demand
5th: Thursday Dec. 17th
Textbook Chapters: 1, 2 & 3
Topic I:
Basic Economic Concepts:
Economics, scarcity, trade-offs, opportunity cost, opportunity benefit, explicit costs, implicit costs, marginal cost, marginal
benefit, property rights, incentives, Economic Systems, 3 basic questions, economic goals, Circular Flow of Economy,
macroeconomics, microeconomics, externality, assumptions, “it depends”, long run, short run, efficiency, positive statement,
normative statement
Trade: Production Possibilities Frontier (PPF), Specialization, comparative advantage, absolute advantage, David Ricardo
Textbook Chapter 4
Topic II:
Supply & Demand
Supply, Demand, Utility, Equilibrium, Determinants of Demand (TIPSEN), Determinants of Supply (TINE-TP) , Complements,
Substitutes, normal good, inferior good, Invisible Hand, Price Ceilings, Price Floors, Surplus, Shortage, Change in Demand,
Change in Quantity Demanded, Complements, Substitutes, Marginal Utility, Diminishing Marginal Utility,
Intro questions:
1) Draw the Circular Flow of the Economy
2) What 3 questions must every economic system answer?
3) Draw a PPF curve and label points above, below & on the curve (constant cost PPF vs. increasing cost PPF)
4) What is the long run goal of an economy in regard to a PPF curve?
5) Why do countries trade? (absolute vs. comparative advantage)
6) How is trade mutually beneficial
Supply & Demand Questions:
7) What is the difference between a change in quantity demanded & a change in demand
8) What causes the Demand Curve to shift? The Supply Curve?
9) When BOTH curves shift: when is the effect on price & quantity indeterminate
10) What do price ceilings above market equilibrium lead to? Below market equilibrium
11) Same thing for Price Floors…
Key points:
 Know all the terms listed above
 Be prepared for Free Response questions on Free Trade and Supply/Demand curve shifts
 Understand Floors/Ceilings & shifting Supply/Demand
Qty
Food
10
.
---------- B
-----------
5
5
10
Qty
Shelter
UNIT #2
Measuring Economic Growth
Topic I:
Gross Domestic Product (GDP) & National Income
Chapter 23
GDP, GDP deflator, Real GDP, Nominal GDP, What counts in GDP calculation, Final Goods, GDP = C + I + G + (X-M)
Topic II:
Inflation
Chapter 24
Real vs. Nominal, Consumer Price Index (CPI), base year, market basket, cost-push inflation, demand-pull inflation
Topic II:
Unemployment & Business Cycle
Chapter 28
Theory of Full Employment, 4-types of unemployment: seasonal, frictional, structural, cyclical, Business Cycle, Determinants of
long run economic growth
Make sure you:
o
o
o
o
o
o
o
o
o
o
o
Understand how to compute GDP from base year calculations
What counts in GDP? What does not?
GDP = C + I +G + NX
What does GDP not measure (think Bhutan)
Understand the difference between nominal & real interest rates
Understand who is helped & hurt by inflation
CPI vs. GDP deflator….(what counts in each one…)
Understand 4-types of unemployment
Why can’t the natural rate of unemployment fall to zero
Understand how human/physical capital is critical to productivity
Understand the Determinants of Long Run Economic Growth
UNIT #3
Aggregate Demand & Supply
Topic I:
Aggregate Demand & Supply
Chapter 33
(739-772)
Aggregate Demand (AD), Aggregate Supply (AS), Long Run Aggregate Supply (LRAS), natural rate of output, stagflation,
sticky-wages, sticky-prices, interest rate effect, wealth effect, exchange rate effect, Determinants of AD, Determinants of AS,
3 models of AS/AD: Keynesian, Classical & New Classical
Topic II:
Savings & Investment
Chapter 26
(575-592)
Marginal Propensity to Save (MPS), Marginal Propensity Consume (MPC), Autonomous Consumption, Savings Function,
Dissaving, Loanable Funds market, Deficit, Debt, Crowding Out,
Topic III:
Fiscal Policy
Chapter 34
(only pgs 787-797)
Expansionary Fiscal Policy, Contractionary Fiscal Policy, Money Multiplier, Crowding Out, Supply Side
Topic IV:
Short Run Trade Offs: Inflation & Unemployment
Chapter 35
(801-825)
Short-Run Phillips Curve, Long-Run Phillips Curve, Supply Shock
LRAS1
Price
Level
SRAS1
Real
Interest
Rate
--------------
-------------
R1
S1
AD1
Real
GDP
1)
2)
3)
4)
5)
6)
E1
Q1
D1
Qty
Loanable Funds
Explain why the SRAS is upward sloping & the LRAS is vertical
Explain why the AD is downward sloping.
What shifts both the LRAS & SRAS
What only shifts the SRAS
What is the loanable funds market? (sum of private & public savings)
Explain the difference between a government deficit and a government debt.
a.
b.
Which is more dangerous
What are the current levels in the USA today
7) Why does Savings = Investment in a closed economy
(T = Taxes)
• Y=C+I+G
• National saving: income left after paying for consumption &
government purchases:
Y– C–G=I
• So,
S=I
(savings = investment)
• Public Savings = T – G
• Private Savings = Y – T - C
Inflation
Rate
Inflation
Rate
(percent
per year)
B
6
A
2
Long-run
Phillips curve
High
inflation
B
Low
inflation
A
2. . . . but unemployment
remains at its natural rate
in the long run.
Phillips curve
0
4
7
Unemployment
Rate (percent)
0
Natural rate of
unemployment
Unemployment
Rate
UNIT #4
Money & Monetary Policy
Terms by Chapter:
Topic I:
Money Growth & Inflation
Chapter 29
(641-658)
Federal Reserve, money, medium of exchange, unit of account, store of value, liquidity, fiat money, currency, demand deposits,
central bank, money supply, required reserves, excess reserves, fractional-reserve banking, money multiplier, open market
operations, reserve requirements, discount rate, reserve ratio, M1, M2, M3, federal funds rate, T-account, assets, liabilities
Topic II
Monetary Policy
Chapter 34 (only pages
777-786)
Expansionary Monetary Policy, Contractionary Monetary Policy, Quantity Theory of Money, Theory of liquidity preference,
Milton Friedman, Money Market Model,
Topic II:
Money Growth & Inflation
Chapter 30
(661-685)
Monetary neutrality, velocity of money, equation of exchange MV = PQ, inflation tax, Fisher effect, nominal interest rates, real
interest rates, quantity theory of money
What you need to be successful:










Nominal
Interest
Rate
i2
Understand & be able to draw the AD/AS model
Understand & be able to draw the Money Market Model
Understand what a Fractional Reserve Banking System is and how this leads to money creation
o T-account calculations
Understand the 3-functions of Money
Understand the components of M1, M2, & M3
Understand the money multiplier theory
Understand the 2-conflicting goals of monetary policy
Understand the 3-tools of monetary policy & how the Fed implements each tool
Understand the equation MV = PQ & the quantity theory of money
Understand the difference between nominal & real interest rates
MS2
--------MD
Qty of $
UNIT #5
International Economics
Topic I:
International Economies
Chapter 31 (pages 691-713)
Open Economy, Closed Economy, Current Account, Capital Account, Official Reserves, Net Capital Outflow,
Exchange Rates, Purchasing Power Parity, Trade Deficit, Trade Surplus, appreciation, depreciation, NX = NCO
1)
2)
3)
4)
What is included in the current account?
What is included in the capital account?
In theory, why must they equal
How can an open economy all the U.S. to consume more than it produces?
a. recall that in a closed economy this would not be possible: Savings = Investment
5) Market for exchange rates:
a. Think of the market below as located in the middle of the ocean
b. You must go to the “House of Money” to get (demand) currency or to give (supply)
c. Someone living in France would Supply Euros if they needed (demanded) dollars
S1
Dollar Price
of a Euro
--------------
--------------
1.3 Dollars
Q1
D1
Qty of Euros
• Y = C + I + G + NX
• National saving: income left after paying for consumption &
government purchases:
Y – C – G = I + NX
• So,
• Then:
S = I + NX
S = I + NCO
• Savings = Id + If
(d= domestic
f = foreign)