AP MACROECONOMICS FINAL EXAM REVIEW
The following are concepts that will be assessed on the final exam. The concepts have been
broken down by category. Use your textbooks, notes and study guides to review and answer
each of the following on separate paper.
PRODUCTION POSSIBILITIES FRONTIERS
What is it? What does it illustrate? What can we determine from it?
What happens as we move along it? What causes it to shift out?
Why would a PPF be a straight line? What product combination would you have if it was a
straight line?
Why would a PPF be bowed out (curved)? What law (principle) is being illustrated when it is
bowed out (curved)? What other curve relates to the bowed out shape and that law
(principle)? Why?
SUPPLY AND DEMAND
What causes movement along a demand curve (change in QD)? What causes a shift of the
demand curve (change in demand)?
What causes movement along a supply curve (change in QS)? What causes a shift of the
supply curve (change in supply)?
How do we determine equilibrium in the market for a product?
When there is a shift in either of the curves, what happens to equilibrium price and
quantity?
How does the slope of the curves affect changes in price and quantity?
REAL GDP AND PRICE LEVELS
What is GDP? How do we measure it?
What is potential GDP?
What is inflation? How do we measure it?
When we have unanticipated inflation, who wins and who loses?
What is the historical relationship between wages and price levels?
What is the difference between the GDP deflator and the Consumer Price Index?
What is crowding out? When is it more likely to occur?
What is crowding in? When is it more likely to occur?
AS/AD DIAGRAMS
What happens to GDP and Price Levels when AD and/or AS shift?
What factors cause a change in AD and AS (shift the curves)?
What is the impact of having a very steep AS curve? A very flat AS curve?
How does the level of resource utilization affect changes in Price Levels and RGDP when there
are changes in AD?
How is Price Level related to the slope and shape of the AS and AD curves?
Does the intersection of AS and AD necessarily occur at Full Employment?
What occurs if there is an adverse shift of the AS curve?
MPS/MPC, THE CONSUMPTION FUNCTION, CONSUMPTION SCHEDULES, THE
EXPENDITURE SCHEDULE AND THE MULTIPLIER
What is the definition of the MPC? MPS?
What does the MPC tell us? The MPS?
What is the consumption function and what does it illustrate?
What causes movements along the consumption function?
How are the slope of the consumption function and the MPC related?
When are the slope of the consumption function, the consumption schedule and the
expenditure schedule all equal?
What is the formula for the oversimplified multiplier?
How does the slope of the consumption function, the consumption schedule and the
expenditure schedule affect the value of the multiplier?
What causes shifts of the expenditure schedule?
What will happen to the expenditure schedule when there is an interest rate change?
How much will the shift be?
What happens to the slope and position of the consumption schedule when the
variable tax rate changes?
What happens to the value of the multiplier when the variable tax rate changes?
What is the paradox of thrift and why does it occur?
RECESSIONARY AND INFLATIONARY GAPS AND THE SELF-CORRECTING
MECHANISM
How can you define a recessionary gap? An inflationary gap?
Describe the self-correcting mechanism for a recessionary gap. On what does it
depend?
Describe the self-correcting mechanism for an inflationary gap. On what does it
depend?
Which one is more likely to occur and why?
What is the effect on RGDP and Price Levels as the self-correcting mechanism occurs
for either of the gaps?
What is the “cost” of closing a recessionary gap with expansionary monetary or fiscal
policies rather than waiting on the self-correcting mechanism?
KEYNEIAN/FISCAL POLICY
What did Keynes believe about the economy’s ability to automatically gravitate toward
full employment?
What is the traditional Keynesian (Fiscal) Policy to cure a recessionary gap?
What is the traditional Keynesian (Fiscal) Policy to cure an inflationary gap?
When G increases, does it have any different effect on EGDP as an increase in any
other component of AD? Why?
What will be the effect of equal tax cuts and government spending cuts on AD and
RGDP?
What typically happens to the government’s budget during a recession? Why?
What would we expect to happen to the national debt during a recession? Why?
SUPPLY-SIDE ECONOMICS
A cornerstone of supply-side thinking is that some types of tax cuts can be expected to
do what?
What are the main policies included in supply-side economics?
What were the short run and long run impacts of the supply–side policies of the 1980s?
MONEY & BANKING/THE FED & MONETARY POLICY/MONETARISM
Know the oversimplified deposit creation formula – Backwards and forward
What is the Federal Reserve System?
What is the major advantage of the Fed’s institutional independence?
What are the Fed tools of monetary policy and how do they affect the money supply
and interest rates?
What affect do the tools of monetary policy have on the Keynesian model
C+I+G+(X-IM) and therefore RGDP and Price Levels?
When would expansionary policies be the most inflationary? The least inflationary?
If the Fed decides to stabilize the growth of the money supply, what does it lose control
over?
What is monetizing the debt and how does it occur?
Who are the monetarists and what are their beliefs?
What is the expression M x V = P x Y?
When looking at the Quantity Theory of Money (Equation of Exchange) what would
occur due to a large increase in the money supply when the economy is near full
employment?
PHILIPS CURVE
What explains the slope of the short run Philips curve?
What can be said about the points on the short run Philips curve?
What explains the slope of the long run Philips curve?
What can be said about the points on the long run Philips curve?
What causes a change in the position of the short run Philips curve?
INTERNATIONAL TRADE
What is the benefit of trade between nations?
Why do many US economists support free international trade?
What is absolute advantage? How is it determined?
What is comparative advantage? How is it determined?
Which matters most when discussing international trade? Why?
What would happen in the economy of a large trading partner if the US falls into a
recession? Why?
What happens in economies of trading partners when there is a change in price levels
in one country that are larger than the change in price levels in another country?
The equilibrium price in the world market for a product will be determined where?
What will happen when a tariff or a quota is used to inhibit trade?
What is the difference between the use of a tariff and the use of a quota?
How many exchange rates are there?
What are the main determinants of exchange rates in the short run, medium run and
long run?
Be able to determine what is happening with exchange rates based on given situations.
If we buy more financial instruments, goods, services and capital from a foreign nation;
-What happens to the demand for the foreign country’s currency?
-To which country is more capital flowing?
-What will happen to the value of the foreign country’s currency?
-What will happen to the price of exports in the foreign country due to the
exchange rate changes?
When there is a deficit in a country’s current account? What must be true of their
capital account?
What type of transactions would lead to a deficit in a country’s balance of payments? A
surplus in the balance of payments?