Unit AP Macro Review Guide
Unit I
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The basic economic problem
Define Scarcity
Define opportunity cost
Command Economy
Market Economy
Mixed Economy
Capital goods
Consumer goods
4 factors of production
How does the PPC and the concept of opportunity cost represent the basic economic problem?
Understand the Production Possibilities Curve - Linear vs. Concave/Bowed out
a. Constant opportunity cost vs. increasing opportunity costs
Points of underemployment, economic efficiency, unobtainable points
a.List factors that could increase or shift outward vs. decrease or shift inward the PPC. Be able to graph as well
Define Comparative Advantage
Define Absolute Advantage
Know how to identify output vs. input methods to find a country’s comparative advantage
Determinants of demand
Determinants of supply
Difference between quantity supplied and supply on a graph
Difference between quantity demanded and demand on a graph
How is price & quantity affected by demand shift (graph)
How is price & quantity affected by supply shift (graph)
Complimentary goods
Substitute goods
Elasticity of demand co-efficiency test
How to determine if demand is : elastic, unit elastic, inelastic
Unit II
1) Draw a Circular Flow Diagram
2) What is the Product Market?
3) Who are the buyers and sellers in the Product Market?
4) What is the resource market?
5) Who are the buyers and sellers in the resource market?
5a) Govt’s role in circular flow diagram with firms and households
6) What is a transfer payment?? Give at least 2 examples
7) Define Gross Domestic Product?
8) What does GDP measure?
9) List examples of what is included in the calculation of the GDP
10) list examples of what is NOT included in the calculation of the GDP
11) Give an example of a final good
12) Give an example of an intermediate good
13) List the two ways that GDP can be calculated?
14) Define Inflation
15) Who suffers from inflation?
16) Who is likely to benefit from inflation?
17) Define deflation
18) Define Consumer Price Index…
19) Give an example of what CPI might measure
20) Know how to find Consumer Price Index… find formula in ACT 11
21) know how to determine price change.. find formula ACT 11
20) Why might CPI tend to overstate true changes in the cost of living?
21) Define Producer Price Index
22) Give an example of what PPI might measure
23) Difference between Nominal GDP and real GDP
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Give an example showing formula to find Real GDP… find formula ACT 11
Define Labor Force
know how to determine the Unemployment rate… find formula in ACT 11…
Describe the criteria to be considered unemployed
Define Structural Unemployment?
Give examples of structural unemployment
Define cyclical unemployment
List examples of cyclical unemployment
Define Frictional Unemployment
list examples of Frictional Unemployment
Why is full employment not defined as zero unemployment????
- what types of unemployment may still exist?
34) What is the unemployment rate at full employment called?
35) List the 4 phases of the business cycle.
Unit III
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Define Aggregate Supply
Why is Aggregate Supply up-ward sloping?
Define Aggregate Demand
Why is Aggregate Demand down-ward sloping?
Describe and graph the Investment demand curve
Determinants that could shift the Investment curve
Describe & graph the Aggregate Expenditure model
a. Graph an increase in consumption on the expenditure model
Define Marginal Propensity to Consume
What is the relationship of the MPC to MPS
Describe the theory behind the multiplier effect.
Formula for the Investment and Government Spending Multiplier
Graph & Describe three different lines on the AS curve
Graph & Describe Relationship between LRAS curve & PPC
List the four components of Aggregate Demand
Determinants shifting (increasing ) & (decreasing) AD curve
Determinants shifting (increasing) & (decreasing) AS curve
Determinants shifting LRAS curve
Graph & label how shifts in AD with AS remaining constant effect PL & rGDP & Unemployment
Graph & label how shifts in AS with AD remaining constant effect PL & rGDP & Unemployment
Explain & graph a Contractionary Fiscal policy strategy
Explain & graph a Expansionary Fiscal policy strategy
What is a budget surplus?
What is a budget deficit?
Describe what can happen in an economy if Aggregate Demand were to increase starting at full employment.. ( What
do economists believe will happen in the long run? Graph
What does a balanced budget multiplier indicate?
What is stagflation
Graph what stagflation looks like using an AS / AD model
Automatic stabilizer - give examples
What must automatic stabilizers do to taxes in
a. recession periods
b. inflationary periods
What is a Discretionary stabilizer
Unit IV
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List the 3 functions of money
Medium of Exchange, (Unit of Account or Standard Value),Store of Value
M1 definition of money includes
M2 definition of money includes
The paper money used in the United States is issued by the
Largest component of M1 is
What is the Money Supply backed by?
The equilibrium rate of interest in the money market is determined by the intersection of the:
Draw and label a T-Account or Balance sheet… use a sample from the book
a. List common assets that a commercial bank has
b. List common liabilities that a commercial bank has
What is currently one of the biggest deterrents to bank panics in the U.S?
How do banks (Monetize) create money?
The U.S’s modern day banking system is based on what type of system
What is the difference between; actual, required, and excess reserves?
What happens to the required reserves of a bank when a check is drawn and cleared against it?
Formula of the simple deposit expansion multiplier?
What is the formula to find the maximum amount of new demand deposit money that can be created by the banking
system?
Limitations on the expansion multiplier theory with bank excess reserves?
Who is in charge of Monetary Policy in the United States?
What is the Federal Funds Rate?
What is the discount rate?
How is the real interest rate determined?
What similarities do vault cash and reserve accounts have?
The term neutrality of money refers to the situation where – increases in the money supply eventually result in no
change in real output
How does expansionary monetary policy affect interest rates in the short term?
How does contractionary monetary policy affect interest rates in the short term?
List the 3 tools of monetary policy
List how the 3 tools can be used for expansionary purposes.
List how the 3 tools can be used for contractionary purposes.
Graph money market, investment demand, and AS/AD showing cause and effect relations for tight or contractionary
Graph money market, investment demand, and AS/AD showing cause and effect relations for easy or expansionary
monetary policy
If the economy were experiencing a recession what would be a proper monetary policy?
If the Federal Reserve authorities were attempting to reduce demand pull inflation, what would be the proper
monetary policy?
Unit V
1. List the Expansionary Fiscal Policy options – & graph what happens to AD in short run.
2. List the Contractionary Fiscal Policy options & graph what happens to AD in short run.
3. List the Expansionary Monetary Policy options -- & graph what happens to AD in short run.
4. List the Contractionary Monetary Policy options -- & graph what happens to AD in short run.
5. Describe the Crowding-out effect
6. Illustrate graphically the crowding out effect
7. What does the Federal Reserve typically try to do to remedy the crowding out effect?
8. Illustrate what the short run Aggregate supply curve looks like
9. Illustrate what the long run Aggregate supply curve looks like
10. Expansionary monetary policy that can lead to long term growth if it increases which one of the four components that
typically increase aggregate demand?
11. When the Fed buys bonds on the open market….Understand the impact on.. Interest rates , Investment, Real GDP, &
Price Level
12. When the Fed sells bonds on the open market .. Understand the impact on … interest rates, investment, Real GDP, &
Price Level
13. Graph &the short run Phillips curve and what it suggests
14. Graph the Long Run Phillips curve?? And what does this mean?
15. Discuss the trade-off between unemployment and inflation in the short run. Why does this trade-off pose a dilemma
for policy makers? What trade-off exists between inflation and unemployment in the long run?
16. Factors that can cause the Production Possibilities Curve & LRAS to shift outward causing economic growth
17. Explain why an increase in the rate of money supply can lead to inflation
18. Theory of rational expectations
19. Using monetary and fiscal policies, outline an expansionary policy that would encourage long-run growth and explain
why the policies will encourage this growth.
20. Explain the effects on long term economic growth of using fiscal policy to fight recession and monetary policy to fight
inflation.
21. What impact can an increase in capital stock have on Aggregate Supply?
22. Describe two fiscal policy actions that could be used to alleviate high inflation. Illustrate the fiscal policy actions
graphically on the AD/AS model, Loanable funds market, & the Money Market
23. Describe monetary policy actions that could be used to alleviate a major inflationary problem? Illustrate the monetary
policy actions graphical on the AD/AS model, Loanable funds market, & the Money Market
Unit VI
1. What is a balance of trade deficit?
2. What is a balance of trade surplus?
3. What is recorded in the Current Account?
4. What is recorded in the Capital Account?
5. Appreciation
6. Depreciation
7. How does a contractionary monetary policy in the U.S causing interest rates to increase relative to Mexico impact the value
of the dollar to the peso?
8. Using info from previous question how will the balance of trade be impacted in the short run?
9. What happens to net exports and Aggregate Demand when a nations’s currency depreciates?
10. What happens to net exports and Aggregate Demand when a nation’s currency appreciates?
11. What happens to a country’s currency value when the goods from that country are highly demanded relative to the country
they are trading with?
12. What is a likely outcome when nations choose to specialize and trade?
13. Solve the following problem using either the output or input method.
15. Explain how price level increase / decrease in a domestic country relative to other nations could impact imports?
16. Explain how interest rates increases / decreases in a domestic economy relative to other nations could impact imports /
exports?
17. Explain how an increase in per capita real income in a domestic economy relative to other nations could impact imports /
exports?