Transcript Top 10 AP Econ Mistakes

Top 10 Most Common Errors
AP Economics
2009
Overview of Trouble Spots
10. Monopolistic
Competition and
Economies of Scale
9. A Tax Reduces
Allocative Efficiency
8. Capital Flight Decreases
SLF and Increases r.
7. A Lump-Sum Tax Doesn’t
Effect Q* because it
Doesn’t Effect MC
6. Elasticity Calculation and
Interpretation
5. Money/Deposit Multiplier
4. An Increase in the Money
Supply Results (via #3) in a
Decrease in Real Wages
3. Real Wages Fall due to an
Increase in the Price Level
2. Link between Growth and
Capital Formation
1. SRPC Shifts due to
Changes in Inflationary
Expectations
10. Overseas Micro 1 (e)
Question: In the long run, will the
[monopolistically competitive] company be
operating in a region where economies of
scale exist? Explain.
Answer: Yes (52 percent answered
correctly), because the firm produces a
quantity of output on the downward
sloping portion of its long-run ATC.
(27 percent answered correctly)
Monopolistic Competition
Marginal Cost
$/unit
Long-Run
Average Cost
P
Demand
Q
Quantity
Marginal
Revenue
Monopolistic Competition
Marginal Cost
$/unit
Economies of Scale
Long-Run
Average Cost
P
Demand
Q
Quantity
Marginal
Revenue
Question:
Assuming no
externalities, how does
the tax affect allocative
efficiency? Explain.
Price ($)
9. Micro 2 (d)
S + Tax
$8
S
$6
$5
$4
$2
D
60 90
(22% answered
correctly)
Price ($)
Answer: Due to the
tax, the outcome is
no longer allocatively
efficient.
The tax creates
deadweight loss.
OR
The total surplus
decreases.
$8
S + Tax
Deadweight
Loss
S
$6
$5
$4
$2
D
60 90
8. Macro 2 (b)
Question: Using a correctly labeled graph of
the loanable funds market in Tara, show
the impact of this decision by investors [to
move their funds out of the country of
Tara] on the real interest rate in Tara.
The Graph
Real
interest
rate
SLF
r
DLF
Q
Loanable funds
40% Correct
The Shift and Change
Real
interest
rate
SLF’
SLF
r'
r
DLF
Q’
Q
Loanable funds
22% Correct
7. Micro 1 (b)
Question: Assume that the government grants
CableNow a lump-sum subsidy of $1 million.
Will this policy change CableNow’s profit
maximizing quantity of cable services?
Explain.
Answer: No (46% answered correctly—note
that guessing would yield 50% correct),
because the lump-sum tax will not affect
marginal cost (or marginal revenue, the two
determinants of Q*).
18% answered correctly
6. Micro 2 (c)
Question: Is the demand price elastic,
inelastic, or unit elastic between the prices
of $5 and $6? Explain.
Price ($)
The Graph Provided
S + Tax
$8
S
$6
$5
$4
$2
D
60 90
Quantity
Answer: The demand is price elastic because
elasticity is [(60-90)/75]/[(6-5)/5.5] = -2.2
which is less than -1
OR
because total revenue decreased from $5 x
90 = 450 to $6 x 60 = $360 when price
increased from $5 to $6.
(15% answered correctly)
5. Macro 3 (a) ii
Question: Assume that the reserve requirement is
20 percent and banks hold no excess reserves.
Assume that Kim deposits $100 of cash from her
pocket into her checking account. Calculate the
maximum change in demand deposits in the
banking system.
Answer: (The money multiplier of) 5 x $100 =
$500.
(14% answered correctly.)
3. and 4. Macro 3 (c)
Question: Given the increase in the money
supply in part (b), what happens to real
wages in the short run?
Answer: Real wages fall (20% answered
correctly) because the increase in the
money supply raises the price level (or
inflation).
(15% answered correctly)
2. Macro 2 (c)
Question: Given your answer in part (b) [that
interest rates increase], what will happen
to Tara’s rate of economic growth?
Explain.
Answer: The growth rate will fall (61%
correct) because investment spending
decreases, and as a result, capital
formation will decrease.
9% answered correctly
1. Macro 1 (f) i
Question: Assume the Federal Reserve
action [to reduce inflation] is successful.
What will happen to each of the following
as the economy approaches a new longrun equilibrium?
(i) The short-run Phillips curve. Explain.
(ii) The natural rate of unemployment.
The Phillips Curve
Inflation
Long-Run
Phillips
Curve
SRPC
w/High Expected Inflation
SRPC
w/Low Expected Inflation
Natural
Rate
Unemployment
Answer: The SRPC will shift to the left (28%
answered correctly) because the Fed policy
will lower inflationary expectations.
(2% answered correctly)
The natural rate of unemployment will not
change. (24% answered correctly)