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AP ECONOMICS
TEST REVIEW: THE MARKET SYSTEM & NATIONAL INCOME
Ch. 4, 5, & 7
Use your notes, textbook, and any other available items to complete the following test review. All
items on this review will be covered on the test either directly or as a base of knowledge. This will be a
multiple choice/short answer exam that parallels the format of the AP Exam. Fully completed review
is worth 10 points extra credit on test grade.
1) Vocabulary:
 Economic Costs
 Normal Profit
 Economic Profit
 Expanding Industry
 Declining Industry
 Consumer Sovereignty
 Dollar Votes
 Guiding Function of Prices
 Creative Destruction
 Functional Distribution of Income
 Personal Distribution of Income
 Durable Goods
 Non-Durable Goods
 Sole Proprietorship
 Partnership
 Corporation
 Principal Agent Problem
 Monopoly
 Oligopoly
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Spillover Costs
Spillover Benefits
Exclusion Principle
Transfer Payments
Personal Income Tax
Marginal Tax Rate
Average Tax Rate
Payroll Tax
Corporate Income Tax
Gross Domestic Product
Intermediate Goods
Final Goods
National Income
Disposable Income
Nominal GDP
Real GDP
GDP Price Index
Consumer Price Index
2) Obviously vocabulary will comprise a significant portion of this test—you will also need to recognize
and analyze relationships between these terms (How is consumer sovereignty exercised through dollar
votes?, How does nominal GDP differ from real GDP?, etc.)
3) What are the Four Fundamental Questions that any economic system must address, and how does the
market system in particular address these questions?
4) Review your notes over the activity of sole proprietorships, partnerships, and corporations in a
competitive environment—how does competition qualify the “price taker”, “price leader”, and “price
maker”, and how must each of these act in the market?
5) We learned that the government also serves as an actor in the circular flow model. In the terms above,
you identify various avenues of government revenue in the form of taxes. Review your notes over the
categories of government expenditures (there are five), the particular items in each category, and how
policy decisions and economic/demographic trends may affect spending in these areas.
6) In the free response section of the test, be prepared to calculate national income using the expenditure
approach. This will require you to determine whether or not specific items are included or excluded in
this calculation.
7) Why must we make a distinction between nominal and real GDP, and how do price indexes help us in
this? Be sure that you can explain this relationship is linked to rates of inflation or deflation and to
purchasing power.
8) Also in the free response, you should be prepared to perform calculations to determine price indexes,
nominal GDP, & real GDP. These items will parallel those in the practice assignments we completed.
9) Circular Flow with Government included.