Study Guide for AP Economics Test 3
Formulas you need to know for this test!
Income Approach GDP = C+I+G+NX
Expenditure Approach GDP = W+R+I+P
Unemployment Rate= Number of employed/number in workforce x 100
MPC = 1-MPS
MPS= 1-MPC
Spending Multiplier= 1/MPS or 1/1-MPC
Tax Multiplier= MPC/MPS
Change in GDP=Tax Multiplier x Tax Change
Change in GDP= Spending Multiplier x Change in Spending
Key Terms and Concepts you need to know for this test!
Aggregate Demand vs. Aggregate Supply and what causes each to shift
Natural Rate of Unemployment—what is it?
Keynesian vs. Classical Economics and sticky wages
Recessionary Gap—what causes it, how does it fix itself in the long run, how can government
intervention fix it
Inflationary Gap—what causes it, how does it fix itself in the long run, how can government intervention
fix it
Stagflation—what happens to unemployment, what happens to output or GDPr
Demand Pull inflation vs. Cost Push inflation—what does each graph look like?
Discretionary vs. Nondiscretionary fiscal policy—what are the differences and what are some examples
of each
Aggregate Demand and Aggregate supply in the short run AND long run
Expansionary vs. Contractionary policies—what are examples of each policy and when do we use them
(inflationary or recessionary gaps?)
Marginal Propensity to Consume and Marginal Propensity to Save
Spending Multiplier Effect vs. Tax Multiplier Effect when you use each of them
Crowding out effect
Real GDP
Graphs you need to know for this test!
Business Cycle Graph
Production Possibilities Frontier and where we are at NRU, high unemployment, and low unemployment
ADAS Graph showing the short run and long run
Phillips Curve showing short run and long run
Aggregate Demand
1. What causes aggregate demand to shift? _____________________________________________
2. Provide an example of aggregate demand shifting to the right?
______________________________________________________________________________
3. Provide an example of aggregate demand shifting to the left?
______________________________________________________________________________
4. What happens to output or GDPr when AD shifts to the left?
______________________________________________________________________________
5. What happens to the price level when AD shifts to the left?
______________________________________________________________________________
6. What happens to price level when AD shifts to the right?
______________________________________________________________________________
7. What happens to aggregate demand when government spending increases?
______________________________________________________________________________
8. What happens to aggregate demand when tax rates go up?
______________________________________________________________________________
9. What happens to aggregate demand when foreign incomes increase?
______________________________________________________________________________
10. What happens to aggregate demand when consumer spending decreases?
______________________________________________________________________________
11. In a recession, classical economics says what will happen to wages?
______________________________________________________________________________
12. What is a sticky wage?
______________________________________________________________________________
Aggregate Supply
13. What causes aggregate supply to shift? ______________________________________________
14. Provide an example of aggregate supply shifting to the left?
______________________________________________________________________________
15. Provide an example of aggregate supply shifting to the right?
______________________________________________________________________________
16. What happens to aggregate supply when wages increase?
______________________________________________________________________________
17. What happens to aggregate supply when a company receives better equipment?
______________________________________________________________________________
18. What happens to prices when aggregate supply shifts to the left?
______________________________________________________________________________
19. What happens to unemployment when AS shifts to the left?
______________________________________________________________________________
ADAS Graph
20. Draw an ADAS graph at equilibrium (INCLUDE THE LRAS CURVE)
21. Draw a ADAS graph in a recessionary gap
22. Draw an ADAS graph in an inflationary gap
23. Draw an ADAS graph showing STAGFLATION
24. Show what happens to ADAS in the long run when there is a decrease in government spending.
Phillips Curve
25. Draw a Phillips Curve (INCLUDING LRPC)
26. Show what happens on the graph during a recessionary gap, label it point B.
27. Show what happens on the graph during an inflationary gap, label it point C.
28. Draw a Second Phillips Curve (INCLUDING LRPC)
29. Show what happens during STAGFLATION on the Phillips curve
Business Cycle Graph
30. Draw the Business Cycle Graph
31. Label the troughs, peaks, and trending line
32. Label points A (Inflation), B (Recession), and C (Full Employment)
Fiscal Policy
33. In a recessionary gap, which type of fiscal policy should we use? (Expansionary or
contractionary?)
______________________________________________________________________________
34. What type of fiscal policy should be used in an inflationary gap?
______________________________________________________________________________
35. What two things can the government do to assist the economy in an inflationary gap?
______________________________________________________________________________
36. What two things can the government do to assist the economy in a recessionary gap?
______________________________________________________________________________
37. What is the different between discretionary and nondiscretionary fiscal policy?
______________________________________________________________________________
______________________________________________________________________________
Multiplier Effect
38. What is the definition for marginal propensity to consume?
______________________________________________________________________________
39. What does the MPC and MPS always equal? __________________________________________
40. When the MPC is .9, what is the MPS? _______________________________________________
41. When the MPC is .4, what is the MPS? _______________________________________________
42. When the MPS is .2, what is the MPC? _______________________________________________
43. When the MPS is .5, what is the MPC? _______________________________________________
44. What is the Spending Multiplier when the MPS is .2? ___________________________________
45. What is the Spending Multiplier when the MPS is .5? ___________________________________
46. What is the Spending Multiplier when the MPS is .1? ___________________________________
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What is the Taxing Multiplier when the MPC is .5? _____________________________________
What is the Taxing Multiplier when the MPC is .1? _____________________________________
What is the Spending Multiplier when the MPC is .2? ___________________________________
What is the Taxing Multiplier when the MPC is .1 and the MPS is .9? _______________________
How much will the government have to increase spending when they need to increase GDP by
50 million and the MPC is .2? ______________________________________________________
How much will the government have to increase spending when they need to increase GDP by
200 million and the MPS is .5? _____________________________________________________
How much will the government have to decrease spending when they need to cut GDP by 500
million and the MPC is .1? _________________________________________________________
How much will the government have to decrease spending when they need to cut GDP by 300
million and the MPS is .2? _________________________________________________________
How much will the government have to cut taxes if they wish to increase GDP by 30 million and
the MPS is .5? __________________________________________________________________
How much will the government have to increase taxes if they wish to decrease GDP by 100
million and the MPC is .1? _________________________________________________________
Videos sites to watch:
Khanacademy.org
Youtube Channel—ACDC Learning Unit 3 Macro
Reffonomics.com