AP Econ Test

What is economics

behavior science concerned with how scarce resources are allocated among unlimited wants, needs, and desires

What does it mean to be scarce

Limited and wanted

What does scarcity lead to

trade-offs

What is the opposite of scarcity

abundance

What are decisions at the individual level and then the aggregate level called

microeconomics and macroeconomics

What are positive economics

How things actually are (his shirt is red)

What are normative economics

How things should be done (that shirt is a good material)

What are resources

Things used to make something else

What are the four categories resources are classified into called

The factors of production

What are the 4 factors of production

Land (natural resources + rent) Labor (workers and + wages) Capital (physical capital like machines and tools + human capital like experience and education + financial capital like money and interest) entrepreneurship (ability to combine resources to satisfy society, take risks, make decisions + profit)

What is opportunity cost

What you could have done (the next best thing)

What does the Production Possibilities Curve (PPC) represent

A simplified model of an economy producing only 2 goods

What does the PPC curve prove

How an economy is doing (dot on curve=good)

What does a dot to the right of the PPC curve show

An impossible scenario

What does a dot to the left of the PPC curve show

What would happen if the economy is not producing goods efficiently

What is absolute advantage

Producer 1 can make more than producer 2

What is comparative advantage

Producer 1 can make it while giving up less than producer 2

How to calculate opportunity cost

What are terms of trade

An agreed upon exchange rate of two goods between two producers (typically between nations)

-If X gives up one automobile, it gains 2 apples. If X trades one automobile, how many apples does it need to acquire in order for it to gain from trade?

-Y must give up 4 apples to gain one automobile. How many apples is Y willing to trade in order to gain 1 automobile?

-What are the mutually beneficial terms of trade

-Greater than 2 apples

-Less than 4 apples

-Between 2 and 4 apples

Define a competitive market

A market in which there are many buyers and sellers of the same good or service, none of whom can influence the price at which the good or service is sold

Define quantity demanded

The actual amount of a good or service consumers are willing and able to buy at some specific price

Define the law of demand

As the price increases, the corresponding quantity demanded decreases and vice versa

What does the demand curve look like

What shifts the demand curve

MERIT

Market size (number of consumers)

Expectations (expectation of a future change in price)

Related goods (Complements-goods/services purchased together Substitutes-goods/services purchased in place of other goods)

Income (normal good- if income increases, so does demand inferior good- if income increases, demand decreases)

Tastes (changes in style, trends, and/or popularity)

Define quantity supplied

The actual amount of a good or service producers/sellers are willing and able to sell at some specific price

What is the law of supply

As price increases, the corresponding quantity supplied increases

What does the supply curve look like

What shifts the supply curve

TRICE

Technology (new technology increases supply)

Related prices (complement products)

Substitutes (Products produced in place of other products)

Input prices

Competition (Increased competition increases supply)

Expectations (If producers expect prices to increase, they produce more)

Where does a market equilibrium point occur

at a point where the supply curve and the demand curve intersect

What is a subsidy

Government paying for a company to make things (ex. paying a company to keep producing solar panels)

What is a transfer payment

The government giving money back (like social security checks)

What does circular flow look like

Define gross domestic product (GDP)

Total value of all FINAL goods and services produced in the economy in a given year

What is a final good

A product you pull right off the shelf

What is a intermediate good

Goods that go into the production of other goods

What does GDP track

the health of a country’s economy

What are some things that are not included in the GDP

-used goods

-stocks and bonds

-non-market goods (like mowing someones lawn

-foreign made goods

-black market activities

-transfer payments (like social welfare programs)

What are the three ways you can measure GDP

1. Value of production of final goods and service

2. Income approach= income earned by households from firms

3. Expenditure approach= value of spending on domestically produced final goods and services

What is the expenditure approach equation

GDP=C+I+G(X-M)

Consumption (what households spend on final goods)

Investment (by businesses in capital goods)

Government spending

eXports sold

iMports bought

Define employed

currently holding a full or part-time job

Define unemployed

People who are not currently employed but are actively looking for work

What is the labor force

Employed + Unemployed

How to calculate the labor force participation rate

(labor force/16+ total population)x100

What is the unemployment rate

the percent of the total number of people in the labor force who are unemployed

What is the unemployment rate equation

(Number of unemployed workers/labor force)x100

Define discouraged workers

Capable workers who have given up looking due to job market

Define marginally attached workers

would like to work, but gave up looking

Define underemployed workers

part-time workers who want full-time positions

Who are the limitations to the unemployment rate and therefore not included in it

Discouraged, marginally attached, and under-employed workers

What is U3

The official unemployment rate reported in the media

What is U6

The broadcast measure of unemployment (includes discouraged, marginally attached, and underemployed workers)

What is frictional unemployment

Unemployment due to the time workers spend in the job search (new graduates and if you have new opportunities so you voluntarily leave)

What is structural unemployment

More job seekers than available jobs (or someone who lacks the skills needed for a job)(like if robots take over your job)

What is cyclical unemployment

This is considered the most serious- happens during recessions it means the economy is bad and there is nothing you can do about it you just have to wait it out

What are the three types of unemployment

Frictional, Strutural, and Cyclical

Define what the natural rate of unemployment is

Some degree of unemployment is inevitable

What is the natural rate of unemployment equation

frictional + structural (since there will always be these 2 types of unemployment)

Define the consumer price index (CPI)

A measure of the average change over time in the prices paid by consumers for a FIXED market basket of goods and services (tracked monthly)

Define market basket

The goods and services bought by consumers

What does the CPI show

The purchasing power of the average American family

When CPI rises, what is occurring

Inflation

What does inflation erode

The purchasing power of a given income

What 2 things do you multiply together to find market basket

Price x ORIGINAL quantity

What is the equation for the CPI using market basket values

(market basket in current year/market basket in base year)x100

What is the equation to calculate the inflation rate using the CPI

((New CPI - old CPI) / (old CPI))x100

What does nominal mean

Not adjusted for inflation

What does real mean

Has been adjusted for inflation

Deflating salary equation

Real value= nominal value / (price index/100)

What are the shortcomings of the CPI

Substitution bias-(when prices get too high, find an alternative, don’t buy expensive thing anymore)

Introduction of new goods- (greater variety, need for fewer dollars to maintain lifestyle)

Unmeasured quality changes- (the CPI doesn’t account for improvements of goods like cars getting seatbelts)

Volatile product prices- (goods like gas can misrepresent inflation)

Why does it matter if the CPI overstates or understates the true inflation rate

Many government programs use the CPI to adjust for changes in the overall level of prices (aka cost-of-living adjustments)

When inflation is higher what is lower

The purchasing power of a given amount of money

Who are winners of inflation

Anyone paying money at a FIXED amount, like borrowers

Who are losers of inflation

Anyone receiving money at a FIXED amount, like lenders or individuals on fixed incomes

What is the equation for nominal GDP

Price level x national income

Define nominal GDP

A measure of how much is spent on output in a given period (not adjusted for inflation)

What is real GDP

A measure of how much output is produced in a given period (adjusted for inflation)

Define peak on a graph

A turning point (increasing to decreasing)

Define recession on a graph

Output decreasing, employment falls

Define trough on a graph

Turning point (decreasing to increasing)

Define expansion on a graph

Output increases, employment rises

What does the business cycle model look like

What is aggregate demand

The quantity demanded of all goods and services

What is the one thing that doesn’t shift the demand curve

price

What happens to aggregate output demanded when the price level falls

It increases

What is the real wealth effect

A change in price level causes the purchasing power of a given amount of wealth to change

What is the interest rate effect

A change in the price level causes a change in the demand for money. This impacts interest rates, which causes a change in the cost of goods and services purchased with borrowed money

What is the exchange rate effect

A change in the price level will make a foreign country’s goods/services more or less expensive to foreign buyers. This impacts the quantity demanded for these goods/services

What 5 things will cause a change in aggregate demand

Wealth, expectations, changes in physical capital, fiscal policy (government spending and taxes), and monetary policy (the central bank’s ability to change the quantity of money)

What is the multiplier effect

The multiplier effect refers to the phenomenon where an initial change in spending leads to a larger overall impact on aggregate demand and economic output. This occurs as increased income leads to further consumption and investment, amplifying the initial stimulus

What is the marginal propensity to consume (MPC)

The proportion of any extra income that’s spent by consumers

What is the marginal propensity to save MPS

Measures the proportion of extra income that is saved on consumption

What will MPC+MPS always equal

1

What is the equation for the multiplier effect

1/MPS

If a business invests 100$ into the economy determine how much money will be added to the GDP if the MPC is .80

1-.80=.20 which is the MPS then 1/.20 is 5 and take that and multiply it by the original 100 so 500$ in new money will be injected into our GDP

What does the short run aggregate supply curve show

The relationship between aggregate price level and the quantity of aggregate output supplied by all sellers within an economy

Define aggregate

Total, whole

Define sticky wages

In the short term, many input costs tend to be fixed, meaning suppliers of products are locked into contracts for a period of time

Do wages stay sticky forever

No

What 4 factors impact aggregate supply

-Changes in productivity

-changes in input costs

-government action

-price