AP Economics

Mr. Crawford

Semester Exam Review Guide

Structure:

40 Multiple Choice questions (1 point each) in 50 minutes

3 Essays (20 points) in 50 minutes

UNIT ONE
FUNDAMENTALS OF ECONOMICS

• CHOICE
  • EUSR=MSUW
• OPPORTUNITY COST
  • TINSTAAFL
• SCARCITY
  • LIMITED AND DESIRABLE
• RATIONAL THINKING
• COST-BENEFIT ANALYSIS
  • FUTURE UTILITY
  • INVESTMENT
• MARGINAL THINKING
  • IMPERFECT INFORMATION
• ECONOMIC THEORY
• POSITIVE/OBJECTIVE
  • FACTS
  • THEORY
    • INDUCTION
    • DEDUCTION
• NORMATIVE/SUBJECTIVE
  • POLICY
• FALLACIES
  • POST HOC
  • COMPOSITION
  • DEFINITION
  • BIAS

UNIT TWO
THE MARKET SYSTEM

• THE FOUR FUNDAMENTAL QUESTIONS
• TRADITIONAL SYSTEMS
  • BARTER

ADAM SMITH

• GREED
  • PROFIT MOTIVE
• PRIVATE PROPERTY
• FREEDOM OF CHOICE
• MARKETS
• COMPETITION
• NO GOVT
  • "LAISSEZ FAIRE"
  • "INVISIBLE HAND"

• CAPITALISM
  • SPECIALIZATION
  • CAPITAL
  • MONEY
• CONSUMER SOVEREIGNTY
  • DERIVED DEMAND

UNIT THREE
SUPPLY AND DEMAND

DEMAND

Law of Demand

CHANGE IN P= CHANGE IN Qd

INVERSE

• DMU
• YFX
• SFX

CHANGE IN NPD= CHANGE IN D

• TASTES
• INCOME
• MORE OR FEWER BUYERS
• EXPECTATIONS
• RELATED GOODS' PRICES
  • SUB=SAME
  • COMP=OPPOSITE

CHANGE IN D = P Q

CHANGE IN D = P Q

SUPPLY

Law of Supply

 CHANGE IN P =  CHANGE IN Qs

DIRECT

• DMR/IC
• P X Q = TR

CHANGE IN NPD= CHANGE IN S

• GOVERNMENT
  • TAXES/SUBSIDIES
  • PRICE CONTROLS
• OTHER PROFIT OPPORTUNITIES
• NUMBER
• INVESTMENT IN TECHNOLOGY
• COST OF RESOURCE
• EXPECTATIONS

CHANGE IN S = P Q

CHANGE IN S = P Q

UNIT FOUR
MARKET FAILURE

KARL MARX

• WEALTH = UTILITY
• LABOR THEORY OF VALUE
• ALIENATION
• EXPLOITATION
  • SUBSISTENCE
  • PROFIT IS SURPLUS LABOR
• FLAWS OF CAPITALISM
  • EXTERNALITIES
    • PUBLIC COSTS
  • ASYMMETRIC INFORMATION
  • PUBLIC GOODS
  • IMPERFECT COMPETITION
    • MONOPOLY
  • INEQUITY
  • BUSINESS CYCLES
• SOLUTION
  • UNIONS
  • REVOLUTION
  • GOVERNMENT
    • PUBLIC OWNERSHIP

SOCIALISM

UNIT FIVE
MACROECONOMIC INSTABILITY

BUSINESS CYCLES

• SAYS' LAW:  Y = C
• MARX: INHERENT INSTABILITY BECAUSE
  • Y = C + S

AGGREGATE DEMAND

Law of Aggregate Demand

CHANGE IN PL = CHANGE IN NATIONAL OUTPUT (GDP, EMPLOYMENT, NATIONAL INCOME)

INVERSE

• FOREIGN PURCHASES EFFECT
• WEALTH EFFECT
• INTEREST RATE EFFECT

CHANGE IN NPD= CHANGE IN AD

• TAXES/SUBSIDIES/ INCOME
• REAL WEALTH
• EXPECTATIONS/FUTURE Y AND PL
• DEBT

CHANGE IN AD = PL AQ

CHANGE IN AD = PL QL SHORT RUN AGGREGATE SUPPLY

Law of Aggregate Supply

 CHANGE IN PL =  CHANGE IN CHANGE IN NATIONAL OUTPUT (GDP, EMPLOYMENT, NATIONAL INCOME)

DIRECT

CHANGE IN NPD= CHANGE IN AS

• COST OF RESOURCE
• UNEXPECTED SHOCKS
• TAXES/SUBSIDIES

CHANGE IN AS = PL AQ

CHANGE IN AS = PL AQ

LONG RUN AGGREGATE SUPPLY

 LRAS = PPF

PERFECTLY INELASTIC; UNRELATED TO CHANGES IN PL, LIMITS OF POTENTIAL PRODUCTION AT FULL EMPLOYMENT

CHANGE IN NPD= CHANGE IN LRAS

• TRADE
• INVESTMENT/TECHNOLOGY
• MORE/LESS RESOURCES

CLASSICAL THEORY

• JOSEPH SCHUMPETER
  • Y = C + S
  • S = I
  • Y = C + I
• CYCLES ARE TEMPORARY DISEQUILIBRIUMS IN
  • PRODUCT MARKET
  • RESOURCE MARKET
  • MONEY MARKET
• IF AD THEN S > I
  • SURPLUS; RECESSION
  • PRICES DROP
    • DEFLATION OR DISINFLATION
  • WAGES DROP
  • INTEREST RATES DROP
  • AS AND S = I
• IF AD THEN S < I
  • SHORTAGE; INFLATION
  • PRICES RISE
    • INFLATION
  • WAGES RISE
  • INTEREST RATES RISE
• AS AND S = I

UNIT SIX
KEYNESIANISM

Keyneisan AD/AS and Long Run Equilibrium

Equilibrium could settle at a level of economic activity with large amounts of unemployment or Inflation due to the Ratchet Effect and Cascade failure.

- If potential Real GDP is greater than what actual AD/AS equilibrium, a recessionary gap exists and may persist indefinitely. The solution to this unacceptable equilibrium is to increase AD through FISCAL POLICY.

- If potential Real GDP is less than AD/AS Equlibrium, an inflationary gap exists and the inflation may persist indefinitely. The solution to this unacceptable level of economic activity is to decrease AD with FISCAL POLICY.

MONETARY POLICY

MONETARY POLICY/SUPPLY SIDE

• STRUCTURAL DEBT
• EXPANSIONARY BIAS
• CROWDING OUT
• EXPORT SHOCK\
• PERMANENT INCOME THEORY

EQUATION OF EXCHANGE

MV = PQ

FEDERAL RESERVE MONETARY TOOLS 

• OPEN MARKET
  • BOND PRICES
• DISCOUNT RATE
  • DISCOUNT WINDOW
• RESERVE RATIO
  • HAMMER
  • CHANGES BOTH M AND V

TIGHT MONEY DECREASES THE MONEY SUPPLY, INCREASES r AND DESCREASES INVESTMENT, LOWERING AD, GDP, AND EMPLOYMENT

EASY MONEY INCREASES THE MONEY SUPPLY, DECREASES r AND INCREASES INVESTMENT, INCREASING AD, GDP, AND EMPLOYMENT, AND IN THE LONG RUN SHIFTING AS TO THE RIGHT.

FOREIGN EXCHANGE

BALANCE OF TRADE: EXPORTS – IMPORTS

BALANCE OF PAYMENTS (CURRENT ACCOUNT): INCOME – EXPENDITURES

FIXED EXCHANGE RATES (PEGGED OR GOLD STANDARD) REINFORCE/WORSEN CYCLES:

-PEAK CAUSES INCREASED PURCHASES OF FOREIGN GOODS LEADS TO LESS CURRENCY IN HOME COUNTRY = DEFLATION, RECESSION

-DECREASED PURCHASES OF FOREIGN GOODS LEADS TO INCREASED CURRENCY IN HOME COUNTRY = INFLATION

COUNTRIES COULD DEVALUE (DECREASE) OR REVALUE (INCREASE) THE THEIR CURRENCIES WHICH LED TO CURRENCY WARS IN THE 60s AND 70s

FLOATING EXCHANGE RATES

THE PRIMARY DETERMINANT OF VALUE OF CURRENCY IS COMPARATIVE INTEREST RATES.

RECESSION:

FISCAL POLICY

DEFICIT (G>TAXES)

-GOVERNMENT BORROWS

-INTEREST RATES INCREASE

-FOREIGNERS WANT HOME CURRENCY TO INVEST, BUY HOME BONDS

BALANCE OF PAYMENTS SURPLUS

-DEMAND FOR HOME CURRENCY INCREASES

-HOME CURRENCY APPRECIATES (MORE VALUABLE); FOREIGN CURRENCY DEPRECIATES (LESS VALUABLE)

-FOREIGN GOODS CHEAPER: X DECREASE, M INCREASES

BALANCE OF TRADE DEFICIT

MONETARY POLICY

EASY MONEY (BOND PRICES UP, DISCOUNT r DOWN, RR DOWN)

-INTEREST RATES DECREASE

-HOME WANTS FOREIGN CURRENCY FOR INVESTMENT, BONDS

BALANCE OF PAYMENTS DEFICIT

-DEMAND FOR HOME CURRENCY DECREASES

-HOME CURRENCY DEPRECIATES (LESS VALUABLE); FOREIGN CURRENCY APPRECIATES (MORE VALUABLE)

-FOREIGN GOODS MORE EXPENSIVE: X INCREASES, M DECREASES

BALANCE OF TRADE SURPLUS