Download Study Guide 2015

AP MACROECONOMICS-2016
Name: ____________________
Period: ____
STUDY GUIDE #1 (Macroeconomics)
Instructions:
The Study Guide is required for ALL students
DUE: Day of Unit Test Wednesday or Thursday September 14th or 15th)
Please use this packet efficiently---Use of economic short hand is welcome!
Warning: Some computers (Apple) may not print this study guide well (bad graphs, lines don’t match up) ---if so, print it at school …
Section 1:
Opportunity Cost, Incentives, Assumptions, Marginal Decision making
1) Explain the difference between an implicit opportunity cost and an explicit opportunity cost.
a. Give an example of each
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2) Rational people make a decision to do or buy something when the MB (marginal benefit) is ____________ than the MC
(marginal cost)
a. If people make decisions at the margin, explain why it makes sense for producers to provide an incentive (a cost
savings) to consumers to as they increase the quantity they purchase. (example: discount on 12 bagels)
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Section 2:
Adam Smith & Economic Systems
3) Explain how a market economy is naturally self-regulating by the invisible hand
a. How do prices serve as an effective way to regulate the quantity of goods produced? (hint: think S & D….)
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4)
What is a negative externality and provide an example. Why is this an inefficient allocation of resources
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5) Explain how higher interest rates would cause the circular flow (GDP) to slow down and how this would affect the
unemployment rate
Spending
Revenue
Goods
and services
sold
PRODUCT MARKET
Goods and
services
bought
Explanation:
HOUSEHOLDS
FIRMS
Labor, land,
capital & entrepreneurship
Factors of
production
FACTOR Market
Wages, rent,
and profit
Income
= Flow of inputs
and outputs
= Flow of dollars
1
6) Draw a business cycle and label the 4 main points
(peak, trough, expanding, contracting):
a. Label where you feel the U.S. economy is today
Section 2:
PRODUCTION POSSIBLITIES FRONTIER
Graph A
Graph B
Qty
Food
10
.
-----------
5 ---------- B
5
10
Qty
Shelter
7) The graphs above are 2 different production possibilities frontiers. Recall that the PPF curve displays trade-offs between 2
goods. It assumes a society uses all its scarce resources to produce only two goods.
a.
Graph A is classified as a _____________ cost PPF curve and Graph B would be a _____________cost PPF curve.
b.
Graph A: Any point below B would be considered an ____________________ use of scarce resources.
c.
Graph A: Any point above B would be considered _______________________ in the short run with existing
_________________________ by an economist.
d.
If society increases efficiency (productivity) this would shift the PPF curve to the right.
i. Provide an explanation of why this is true
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e.
If the unemployment rate suddenly increased, the PPF would NOT shift. : (this is important to understand!)
i. Provide an explanation of why this is true
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f.
Explain in detail why Graph B has a “bowed” shape: (this is important to understand!)
i.
Hint: What does it tell us about the workers as they move from one output to another….(are they equal?)
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2
SUPPLY & DEMAND
Section 3:
8) What is a normal good?
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9) What is an inferior good?
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10) What is the substitution effect?
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11) Determinants of Demand shift the demand curve (causes a change in demand)
a. TIPSEN stands for: __________________________________________________________
12) Determinants of Supply shift the supply curve (cause a change in supply)
a. TINE & TP stands for: ______________________________________________________
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IMPORTANT: you must understand the proper S&D terminology to understand economics. A change in demand, an increase in
demand or a decrease in demand all mean a shift in the demand curve. This can only occur when something in TIPSEN changes.
HOWEVER, a change in Quantity Demanded or Quantity Supplied is never a shift of either curve! (know this!) It occurs when only
one curve shifts and you therefore move along the existing demand or supply curve. (see graph below)
Market for Soda
Price
S1
S2
-------------- E1
P2
------------------- E2
--------------------
P1
Q1 Q2
D1
Qty
In the graph above you have a _____________ in Supply but only a change in ____________ demanded.
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13) The graph below is the market for T-Shirts. Assume there is a sudden fall in the price of casual shirts (which are a
substitute for T-shirts)
a. Shift the appropriate curve & find the new market equilibrium. Label P2, Q2 & E2
14) The graph below is the market for T-Shirts. Assume there is a sudden rise in the price of cotton (an input to producing Tshirts)
a.
Shift the appropriate curve & find the new market equilibrium.
3
Label P2, Q2 & E2
15) Modify the graph above for both events :
a.
b.
c.
1) There is a sudden rise in the taste for T-Shirts
2) There is a sudden improvement in the technology of producing T-shirts
Shift the appropriate curves & find the new market equilibrium and label it P2, Q2 & E2
What can you say about the new equilibrium Price:
(higher, lower or indeterminate)
What can you say about the new equilibrium Quantity (higher, lower or indeterminate)
Explain why one new equilibrium point is indeterminate whenever both curves shift:
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16) A price ceiling will cause a ___________ of supply when it is set _________ market equilibrium
17) A price floor will cause a ___________ of supply when it is set _________ market equilibrium
18) The market for T-Shirts is equilibrium in the graph below.
a. Assume the Gov’t imposes a price ceiling of $12 in the market for T-shirts below, describe the effect:
T-Shirts
Price
S1
-------------
$10 --------------
E1
Are more or less T-shirts sold now? Explain…..
D1
Qty
200
b.
What is the end result?
Instead assume the Gov’t then lowers the price ceiling to $8. Modify Graph and explain the effect:
T-Shirts
Price
S1
-------------
$10 --------------
200
E1
D1
Qty
4
FREE TRADE SECTION
Section 4:
19) Define comparative advantage:
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20) Define absolute advantage:
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21) Trade is based on:
a) absolute advantage
b) comparative advantage
c) both absolute & comparative
22) What is specialization and how is it related to free trade.
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BRAZIL
MEXICO
Coffee
Coffee
Wheat
Wheat
BRAZIL
MEXICO
1 Coffee = ____ Wheat
1 Coffee = _____ Wheat
1 Wheat =
1 Wheat =
____Coffee
____ Coffee
23) Brazil can produce 500 Coffee or 500 Wheat
Mexico can produce 500 Coffee or 250 Wheat
a. Fill in the opportunity cost table above
b.
Brazil has a comparative advantage in __________ and an absolute advantage in _______________
c.
Mexico has a comparative advantage in __________ and an absolute advantage in _______________
d.
Brazil should produce _____________ and Mexico should produce ______________
e.
Determine the “Terms of Trade” between Brazil & Mexico (range of mutually beneficial trade)
i. Hint: Terms of trade can be found by using the opportunity cost table. The terms of trade are greater than
and less than each country’s opportunity cost of the product.
ii. If they trade at their exact opportunity cost of a good, the country would remain on their own PPF curve.
Therefore, they must get more than they could produce on their own to benefit! (end up above their own
PPF curve)
24) My expectations for the first test are:
25) I feel well prepared for this exam:
TOTAL SCORE
Excellent Work
____
Solid A ____
A-B range ______
Strongly Agree _____
B-C range ______
Somewhat Agree ___
Disagree ____
Below C ______
I’m scared ____
________/30 PTS
Very Good Work
____
5
Good Work
____
Try harder
_____