Transcript AP Economics Final Exam

AP Economics Final Exam
Review
The Basics
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Marginal Analysis – Marginal Cost vs. Marginal
Benefit
Opportunity Cost – What is lost when we
make certain economic decisions.
Theoretical Economics – systematically
arranging facts, interpret them, and then
generalize from them
Rational Behavior – We assume that humans
will act rationally when it comes to making
economic decisions
Economic Goals
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Economic Growth
Full Employment
Economic Efficiency
Price-Level Stability
Economic Freedom
Equitable Distribution of Income
Economic Security
Balance of Trade
Basics Continued
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Positive Economics – Fact based
statements
Normative Economics – Opinion based
statements
Post Hoc Fallacy – We cannot assume that
certain effects are the result of specific
behavior in some cases
The Economizing Problem
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Scarcity of Resources – We must develop a
system that allocates effectively the limited
amount of resources available for consumption
4 Factors of Production - Land, Labor,
Capital, Entrepreneurship
Full Employment – Understand what is meant,
desired goal is 4-6% unemployment
Production Possibilities
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Understand what a table, a graph, and a
curve could all look like and how they
depict opportunity cost as it relates to the
production of two different goods
Supply & Demand
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Law of Demand – The lower the price,
the higher the quantity demanded
(Downward sloping in Expenditure Model)
Law of Supply – Firms will produce more
of a product the higher the price for that
product (Upward sloping in Expenditure
Model)
Supply & Demand Cont’d
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Law of Diminishing Marginal Utility – As a
product is consumed in greater quantities, the
satisfaction level for that product will decrease
Demand Determinants – Consumer tastes,
number of consumers, income levels, price level,
expectations
Supply Determinants – Resource prices,
technology, taxes & subsidies, competition,
Substitute Goods vs. Complementary Goods
The Market System
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Command Economies vs. Market
Economies
Importance of private property rights
Specialization as it relates to the division
of labor
The “Invisible Hand”
The How, What, & Who question
General View of U.S Economy
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Sole Proprietorship – Single ownership
Partnership – Two or more owners
Corporations – Legally formed organization,
funds raised through sale of stock, double
taxation
LLC – Limited Liability Company
Government intervenes in the form of transfer
payments, restricting monopolies, & promoting
stability
The Global Economy
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Comparative Advantage & Specialization
Foreign Exchange Market – Currencies are
traded or exchanged so that each country may
receive its desired monetary unit when
purchasing goods and services
Exchange Rate - Rate at which one currency is
exchanged for another
Tariffs and their effect on the global economy
Measuring Domestic Output
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GDP – Measure of the total amount of
goods & services produced in a given year
within the borders of the U.S.A.
Only final goods are counted as multiple
counting must be avoided to maintain
accuracy
Transfer Payments and stock purchases
are NOT counted as a way to figure GDP
Measuring Domestic Output
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Expenditures Approach C+Ig+Xn+G=GDP
Income Approach – Rents + Interest +
Proprietor Income + Corporate Profits +
Wages - This = National Income - You
also must add Indirect Business Taxes +
Depreciation + Net Foreign Factor Income
Measuring Domestic Output
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Nominal (w/ out inflation )GDP vs. Real
(w/ inflationary adjustments) GDP
Price Index = Nominal / Real OR
Real = Nominal / Price Index (in
hundredths)
Unemployment & Inflation
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Structural Unemployment – Structure of
the market changes due to changes in
demand
Frictional Unemployment – The “Natural”
unemployment, job seekers continue
seeking work
Cyclical Unemployment – Determined by
fluctuations in the business cycle
Unemployment & Inflation
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Okun’s Law – For every 1 % that the
unemployment rate exceeds that natural rate,
GDP will decrease by 2% from the previous year
Demand-Pull Inflation – Higher streams of
income cause demand to increase which results
in an increase in the prices of goods and
services
Cost-Push Inflation – usually during recessionary
periods, the per unit cost of goods increases and
results in firms having to raise prices in order to
maintain previous profit levels
Aggregate Expenditures
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The Multiplier (Real GDP / Change in
Spending) – In short, a change in
investment spending will have an
exponential effect on GDP
Injection – Injecting $ into the economy
Leakage - $ that falls out of the spending
stream
AD/ AS Models
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Be able to express this model graphically
Downward sloping AD due to Real Balances
Effect (Higher price Level reduces purchasing
power or demand), Interest Rate Effect (Higher
price means higher interest rates which reduces
demand), and Foreign Purchases Effect (High
price level increases imports which reduces
output)
AD/ AS Models
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Three phases of AS curve:
Horizontal – Recessionary
Intermediate – Price Level and Output
both increasing, full employment not
reached
Vertical – Full employment and full
production have been achieved
Fiscal Policy
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Expansionary Policy – Expanding the role of the
government, the money supply, etc.
Contractionary Policy – Limiting the role of the
government, the money supply, etc.
Built-in Stabilizers – Economic features that
maintain economic stability throughout the
business cycle without requiring specific action
from policy makers
Fiscal Policy Continued
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Recognition Lag – Time involved in actually
recognizing the problem in an economy
Administrative lag – Time involved in between
the recognition and then when the corrective
action takes place
Operational Lag – Time involved in between in
the corrective action and then when actual
results can be seen
Money & Banking
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Money has 3 basic functions – medium of
exchange, unit of account, store of value
M1 = Currency in circulation
M2 = Savings deposits, including money
markets, and money markets
Understand that the demand for money
has an indirect relationship with interest
rates
How Banks & Thrifts Create Money
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Fractional Reserve Banking – Principle that
allows banks to lend out more money than
what they actually have as reserves
Reserve Ratio = Excess Reserves /
Required Reserves
Banks are unable to loan out required
reserves
How Banks Create Money
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Federal Funds Rate – Rate at which
banks may make overnight loans to each
other
Monetary multiplier – Similar to the
investment spending multiplier, equals 1 /
Reserve Ratio. The new multiplier then
allows to determine how much money is
available for loan in a multi-bank system
Monetary Policy
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3 Tools used by the Fed to manipulate
money supply:
Open Market Operations – Selling Bonds
Changing the Reserve Ration (rarely done)
The Discount Rate (Interest Rate)
Monetary Policy Continued
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Easy Money Policy – Actions which usually
increase the money supply
Tight Money Policy – Actions which usually
decrease the money supply
Extending Aggregate Supply
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Long run aggregate supply is shown with a
vertical line that intersect the AD/AS Model at
the equilibrium point.
Phillips Curve – Depicts relationship between
unemployment and inflation (indirect)
Laffer Curve – Depicts relationship between tax
rates and tax revenues. Direct until optimal point
is reached. Curve then retracts and is an indirect
relationship
Long Run vs Short Run