Professional Documents
Culture Documents
Microeconomics
Macroeconomics
Course Description
M ay 2 0 0 9, M ay 2 010
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Dear Colleague:
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Contents
Welcome to the AP Program . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
AP Courses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
AP Exams . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
AP Course Audit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
AP Courses and Exams. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
AP Reading. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
AP Exam Grades . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Credit and Placement for AP Grades . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Setting Credit and Placement Policies for AP Grades . . . . . . . . . . . . . . . . . . . . . . .
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AP Economics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
The Courses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Teaching the Courses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
College Courses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
The Exams . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
AP Microeconomics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Topics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
I. Basic Economic Concepts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
II. The Nature and Functions of Product Markets . . . . . . . . . . . . . . . . . . . . . . 7
III. Factor Markets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
IV. Market Failure and the Role of Government . . . . . . . . . . . . . . . . . . . . . . . . 9
Topic Outline . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Sample Multiple-Choice Questions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Answers to Multiple-Choice Questions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Sample Free-Response Questions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
AP Macroeconomics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Topics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
I. Basic Economic Concepts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
II. Measurement of Economic Performance . . . . . . . . . . . . . . . . . . . . . . . . . . 23
III. National Income and Price Determination . . . . . . . . . . . . . . . . . . . . . . . . . 24
IV. Financial Sector . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
V. Inflation, Unemployment, and Stabilization Policies . . . . . . . . . . . . . . . . . 25
VI. Economic Growth and Productivity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
VII. Open Economy: International Trade and Finance . . . . . . . . . . . . . . . . . . . 26
Topic Outline . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Sample Multiple-Choice Questions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Answers to Multiple-Choice Questions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
Sample Free-Response Questions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
Teacher Support. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
AP Central (apcentral.collegeboard.com). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
AP Publications and Other Resources. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Teachers Guides. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Course Descriptions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Released Exams . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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iii
AP Courses
Thirty-seven AP courses in a wide variety of subject areas are available now. A
committee of college faculty and master AP teachers designs each AP course to
cover the information, skills, and assignments found in the corresponding college
course. See page 2 for a complete list of AP courses and exams.
AP Exams
Each AP course has a corresponding exam that participating schools worldwide
administer in May (except for AP Studio Art, which is a portfolio assessment).
AP Exams contain multiple-choice questions and a free-response section (essay,
problem solving, or oral response).
AP Exams are a culminating assessment in all AP courses and are thus an integral
part of the Program. As a result, many schools foster the expectation that students
who enroll in an AP course will take the corresponding AP Exam. Because the
College Board is committed to providing access to AP Exams for homeschooled
students and students whose schools do not offer AP courses, it does not require
students to take an AP course prior to taking an AP Exam.
AP Course Audit
The AP Course Audit was created at the request of secondary school and college and
university members of the College Board who sought a means to provide teachers
and administrators with clear guidelines on the curricular and resource requirements
that must be in place for AP courses. The AP Course Audit also helps colleges and
universities better interpret secondary school courses marked AP on students
transcripts. To receive authorization from the College Board to label a course AP,
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schools must demonstrate how their courses meet or exceed these requirements,
which colleges and universities expect to see within a college-level curriculum.
The AP Program unequivocally supports the principle that each individual school
must develop its own curriculum for courses labeled AP. Rather than mandating
any one curriculum for AP courses, the AP Course Audit instead provides each
AP teacher with a set of expectations that college and secondary school faculty
nationwide have established for college-level courses. AP teachers are encouraged
to develop or maintain their own curriculum that either includes or exceeds each of
these expectations; such courses will be authorized to use the AP designation.
Credit for the success of AP courses belongs to the individual schools and teachers
that create powerful, locally designed AP curricula.
Complete information about the AP Course Audit is available at AP Central.
German Language
Government and Politics
Comparative Government and Politics
United States Government and Politics
History
European History
United States History
World History
Human Geography
Italian Language and Culture*
Japanese Language and Culture
Latin
Latin Literature*
Latin: Vergil
Music Theory
Physics
Physics B
Physics C: Electricity and Magnetism
Physics C: Mechanics
Psychology
Spanish
Spanish Language
Spanish Literature
Statistics
*AP Computer Science AB, AP French Literature, and AP Latin Literature will be discontinued after the May 2009
exam administration. AP Italian may also be discontinued if external funding is not secured by May 2009. Visit
AP Central for details.
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AP Reading
AP Examswith the exception of AP Studio Art, which is a portfolio assessment
consist of dozens of multiple-choice questions scored by machine, and free-response
questions scored at the annual AP Reading by thousands of college faculty and
expert AP teachers. AP Readers use scoring standards developed by college and
university faculty who teach the corresponding college course. The AP Reading
offers educators both significant professional development and the opportunity to
network with colleagues. For more information about the AP Reading, or to apply
to serve as a Reader, visit apcentral.collegeboard.com/readers.
AP Exam Grades
The Readers scores on the free-response questions are combined with the results of
the computer-scored multiple-choice questions; the weighted raw scores are summed
to give a composite score. The composite score is then converted to a grade on
APs 5-point scale:
AP GRADE
5
4
3
2
1
QUALIFICATION
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2. AP courses and exams are reviewed and updated regularly based on the results
of curriculum surveys at up to 200 colleges and universities, collaborations
among the College Board and key educational and disciplinary organizations,
and the interactions of committee members with professional organizations in
their discipline.
3. Periodic college comparability studies are undertaken in which the performance of
college students on AP Exams is compared with that of AP students to confirm that
the AP grade scale of 1 to 5 is properly aligned with current college standards.
For more information about the role of colleges and universities in the AP
Program, visit the Higher Ed Services section of collegeboard.com at professionals
.collegeboard.com/higher-ed.
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AP Economics
I n tr o d u cti o n
The AP Program offers two separate exams in economics: one in microeconomics and
one in macroeconomics. Each exam is intended for qualified students who wish to
complete studies in secondary school equivalent to a one-semester college introductory
course. Each exam presumes at least one semester of college-level preparation. Students
may take one or both exams in a given year. A separate grade is reported for each.
The material included in the Course Descriptions and in the two exams has been
selected by economists who serve as members of the AP Economics Development
Committee. In establishing the courses and exams, the committee surveyed the
economics departments of more than 200 institutions receiving the most AP grades
in economics. Using the information obtained about the content of typical
introductory college courses, the committee developed the course outline and had
the multiple-choice questions covering the outline pretested on college students
enrolled in the appropriate economics courses. The AP Course Descriptions and
exams are thus representative of college courses and are, therefore, considered
appropriate for the measurement of skills and knowledge in the fields of introductory
microeconomics and macroeconomics. Inclusion of the content, ideas, and values
expressed in the material is not intended as an endorsement of them by the College
Board or ETS.
T h e C o u rses
Teaching the Courses
AP classes require extra time on the part of the teacher for preparation, personal
consultation with students, and the reading of a much larger number of assignments
than would normally be given to students in regular classes. Accordingly, some schools
assign reduced teaching hours to any teacher offering such a class or classes. If a
teacher has only one semester to teach an AP Economics course, the Development
Committee recommends that the teacher not attempt an integrated course but
concentrate either on microeconomics or macroeconomics. To facilitate the teaching
and learning of economics, the committee also suggests that AP Economics teachers
have recent college-level economics courses as background preparation and that schools
augment the resource materials available to teachers and students in classrooms and
libraries.
Although many schools are able to set up special college-level courses, in some
schools AP study may consist of tutorial work associated with a regular course, or an
individually tailored program of independent study.
Examples of the organization and content of the AP courses in microeconomics
and macroeconomics and of equivalent college courses, as well as suggestions for
appropriate resource materials, can be found in the AP Economics Teachers Guide
and at AP Central (apcentral.collegeboard.com). The Teachers Resources section
of AP Central offers reviews of textbooks, articles, Web sites, and other teaching
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Microeconomics
College Courses
An introductory college course in microeconomics or in macroeconomics is generally
one semester in length. In both subject areas there is some variety among the
courses offered by colleges. The AP topic outline does not reflect any one specific
college curriculum for either microeconomics or macroeconomics. Rather, the aim
of an AP Economics course is to provide the student with a learning experience
equivalent to that obtained in a typical college introductory microeconomics or
macroeconomics course.
T h e E x ams
The AP Microeconomics Exam and the AP Macroeconomics Exam are each a little
over two hours long. Each exam consists of a 70-minute multiple-choice section and a
60-minute free-response section. Some questions in the free-response section require
graphical analysis. The free-response section begins with a mandatory 10-minute
reading period. During this period, students are advised to read each of the questions,
sketch graphs, make notes, and plan their answers. Students then have 50 minutes
to write their answers. The multiple-choice section accounts for two-thirds of the
students exam grade and the free-response section for the remaining one-third.
Major areas covered in each exam are discussed in this booklet.
A P M icr o ec o n o mics
The purpose of an AP course in microeconomics is to give students a thorough
understanding of the principles of economics that apply to the functions of individual
decision makers, both consumers and producers, within the economic system. It
places primary emphasis on the nature and functions of product markets, and
includes the study of factor markets and of the role of government in promoting
greater efficiency and equity in the economy. The following is a brief discussion of
these topics and some aspects of them that a teacher may choose to explore.
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Microeconomics
Topics
I. Basic Economic Concepts
The study of microeconomics requires students to understand that, in any economy,
the existence of limited resources along with unlimited wants results in the need
to make choices. An effective AP course, therefore, begins by introducing the
concepts of opportunity costs and trade-offs, and illustrates these concepts by using
the production possibilities curve or other analytical examples. The course can then
proceed to a consideration of how different types of economies determine which
goods and services to produce, how to produce them, and to whom to distribute
them. It is also important that students understand why and how specialization and
exchange increase the total output of goods and services. Students need to be able
to differentiate between absolute and comparative advantage, to identify comparative
advantage from differences in opportunity costs, and to apply the concept of
comparative advantage, in order to determine the basis under which mutually
advantageous trade can take place between countries. Specific examples from actual
economic situations can be used to illustrate and reinforce the principles involved.
The importance of property rights, the role of incentives in the functioning of free
markets, and the principle of marginal analysis should be highlighted.
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Microeconomics
The third area covers production and cost analysis both in the short run and in
the long run. This section begins with an introduction of the short-run production
function, describing the relationship between the quantity of inputs and the quantity
of output. Within the context of the production function, students should understand
average and marginal products as well as the law of diminishing marginal returns.
Students learn the link between productivity and costs, and examine the relationships
among the short-run costs: total, average, and marginal. With an introduction of
the concept of cost minimization, this section also includes a discussion of long-run
costs and an examination of economies and diseconomies of scale, as well as returns
to scale.
The fourth area covers the behavior of firms in different types of market structures.
This section begins with the definition of profits and making the distinction between
accounting and economic profits, and establishing the profit-maximizing rule, using
marginal analysis. In covering perfect competition, the course focuses on determining
short-run and long-run equilibrium, both for the profit-maximizing individual firm
and for the industry, and on the equilibrium relationships among price, marginal
and average revenues, marginal and average costs, and profits. Students should
understand the adjustment process to long-run equilibrium.
In considering the market behavior of a monopolist, students identify and examine
the sources of monopoly power and understand the relationship between a monopolists
demand curve and its marginal revenue curve. Students learn how a monopolys total
revenue changes along its demand curve as price varies. Having learned the behavior
of monopolies and perfect competition, students should compare a monopolists price,
level of output, and profit with those of a firm operating in a perfectly competitive
market. By paying particular attention to the concept of allocative efficiency, students
learn how and why competitive markets achieve an efficient allocation of resources,
whereas monopolists do not. The concept of deadweight loss is a good device to show
the efficiency loss due to monopoly. The model of price discrimination provides
another dimension of monopoly behavior that students need to learn and understand.
In covering oligopoly, the course stresses the interdependency of firms and
their tendency to collude or to form a cartel. With a simple payoff matrix, the basic
game-theory model should be used to enhance a students understanding of the
interdependent behavior of firms in an oligopolistic market and identification of
dominant strategies.
Finally, the course considers the market structure of monopolistic competition and
highlights the importance of product differentiation and the role of advertising in
the behavior of firms. The course then proceeds to examine firm behavior in the
short run and in the long run, and the existence of excess capacity and its implication
for efficiency.
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Microeconomics
in the allocation of scarce resources. When the markets for different factors are
considered separately, most attention should be given to the labor market,
particularly labor supply and wage and employment determination. Although the
course may emphasize perfectly competitive labor markets, the effect of deviations
from perfect competition, such as minimum wages, unions, monopsonies, and
product market monopolies, can also be considered. The principles studied in the
analysis of the labor market should be applied to the markets for land and capital to
explain the determination of economic rent and the price of capital. By studying the
determination of factor prices, students gain an understanding of how the market
determines the distribution of income and the sources of income inequality in a
market economy.
Topic Outline
On the next page is an outline of the major content areas covered by the
AP Microeconomics Exam. The percentages indicated reflect the approximate
percentage in the multiple-choice section of the exam devoted to each content area.
The outline is a guide and is not intended as an exhaustive list of topics.
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Microeconomics
Content Area
10
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Microeconomics
Content Area
4. Oligopoly
a. Interdependence, collusion, and cartels
b. Game theory and strategic behavior
5. Monopolistic competition
a. Product differentiation and role of advertising
b. Profit maximization
c. Short-run and long-run equilibrium
d. Excess capacity and inefficiency
III. Factor Markets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (10 18%)
A. Derived factor demand
B. Marginal revenue product
C. Labor market and firms hiring of labor
D. Market distribution of income
IV. Market Failure and the Role of Government . . . . . . . . . . . . . . . . . . . . . . (1218%)
A. Externalities
1. Marginal social benefit and marginal social cost
2. Positive externalities
3. Negative externalities
4. Remedies
B. Public goods
1. Public versus private goods
2. Provision of public goods
C. Public policy to promote competition
1. Antitrust policy
2. Regulation
D. Income distribution
1. Equity
2. Sources of income inequality
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11
I only
II only
III only
I and II only
I, II, and III
12
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3. The diagram above shows the demand and supply curves for a normal good.
The equilibrium price could rise from P1 to P2 if
(a)
(b)
(c)
(d)
(e)
I only
II only
III only
II and III only
I, II, and III
5. Assume a consumer finds that his total expenditure on compact disks stays the
same after the price of compact disks declines, other things being equal. Which
of the following is true for this price change?
(a) Compact disks are inferior goods to this consumer.
(b) The consumers demand for compact disks increased in response to the
price change.
(c) The consumers demand for compact disks is perfectly price elastic.
(d) The consumers demand for compact disks is perfectly price inelastic.
(e) The consumers demand for compact disks is unit price elastic.
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13
6. As its output increases, a firms short-run marginal cost will eventually increase
because of
(a)
(b)
(c)
(d)
(e)
diseconomies of scale
a lower product price
inefficient production
the firms need to break even
diminishing returns
7. For a firm hiring labor in a perfectly competitive labor market, the marginal
revenue product curve slopes downward after some point because as more of a
factor is employed, which of the following declines?
(a)
(b)
(c)
(d)
(e)
Marginal product
Marginal factor cost
Marginal cost
Total output
Wage rates
8. Which of the following is always true of the relationship between average and
marginal costs?
(a) Average total costs are increasing when marginal costs are increasing.
(b) Marginal costs are increasing when average variable costs are higher than
marginal costs.
(c) Average variable costs are increasing when marginal costs are increasing.
(d) Average variable costs are increasing when marginal costs are higher than
average variable costs.
(e) Average total costs are constant when marginal costs are constant.
14
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Questions 910 refer to the following diagram and assume a perfectly competitive
market structure.
(b) ABKH
10. In the short run, the firm will stop production when the price falls below
(a) 0A
(b) 0B
(c) 0C
(d) 0D
(e) 0E
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15
11. If the marginal cost curve of a monopolist shifts up, which of the following will
occur to the monopolists price and output?
(a)
(b)
(c)
(d)
(e)
Price
Decrease
Decrease
Increase
Increase
Increase
Output
Increase
Decrease
No change
Increase
Decrease
12. If firms in a perfectly competitive industry have been dumping toxic waste free
of charge into a river, government action to ensure a more efficient use of
resources would have which of the following effects on the industrys output
and product price?
(a)
(b)
(c)
(d)
(e)
Output
Decrease
Decrease
Increase
Increase
Increase
Price
Decrease
Increase
Decrease
Increase
No change
13. A market is clearly NOT perfectly competitive if which of the following is true
in equilibrium?
(a)
(b)
(c)
(d)
(e)
16
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P1 GQ1 0
P1 GIP2
P0 P1 JK
P0 P1GH
P0 P2 IH
P1GHP0
P1GKP0
GHK
GKI
zero
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17
Bright
Strategy 1
Strategy 2
Strategy 1
$3,000, $6,000
$2,000, $4,000
Strategy 2
$500, $3,000
$2,500, $0
19. The payoff matrix above shows the profits associated with the strategic decisions
of two oligopoly firms, Bright Company and Sparkle Company. The first entries in
each cell show the profits to Bright and the second the profits to Sparkle. What are
the dominant strategies for Bright and Sparkle, respectively?
(a)
(b)
(c)
(d)
(e)
18
Bright
Strategy 1
Strategy 1
Strategy 2
Strategy 2
No dominant
strategy
Sparkle
Strategy 1
Strategy 2
Strategy 1
No dominant strategy
Strategy 1
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Questions 2022 are based on the chart below, which gives a firms total cost of
producing different levels of output.
Output
0
1
2
3
4
5
6
Total Cost
$13
20
25
28
32
43
60
$ 4
$11
$19
$32
impossible to determine from the information given
$ 6
$11
$30
$43
impossible to determine from the information given
2
3
4
5
impossible to determine from the information given
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19
23. The graph above shows the market for good X. The letters in the graph denote
the enclosed areas. If the government imposes an excise tax of t dollars on each
unit of good X, which of the following represents the consumer surplus, producer
surplus, and deadweight loss after the imposition of the tax?
Consumer Surplus
(a) A
(b) A
(c) AB
(d) ABH
(e) ABH
Producer Surplus
G
FE
GFE
GF
GFC
Deadweight Loss
DE
DE
CD
DE
E
24. A Lorenz curve can be used to evaluate which of the following economic issues?
(a)
(b)
(c)
(d)
(e)
20
4b
5e
6e
7a
8d
9b
10 d
11 e
12 b
13 a
14 b
15 c
16 d
17 c
18 d
19 e
20 a
21 c
22 e
23 a
24 d
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21
1. J & P Company operates in a perfectly competitive market for smoke alarms. J & P
is currently earning short-run positive economic profits.
(a) Using correctly labeled side-by-side graphs for the smoke alarm market and
J & P Company, indicate each of the following for both the market and the
J & P Company.
(i) Price
(ii) Output
(b) In the graph in part (a) for J & P, indicate the area of economic profits that
J & P Company is earning in the short run.
(c) Using a new set of correctly labeled side-by-side graphs for the smoke alarm
market and J & P Company, show what will happen in the long run to each of
the following.
(i) Long-run equilibrium price and quantity in the market
(ii) Long-run equilibrium price and quantity for J & P Company
(d) Assume that purchases of smoke alarms create positive externalities. Draw a
correctly labeled graph of the smoke alarm market.
(i) Label the market equilibrium quantity as Qm.
(ii) Label the socially optimum equilibrium quantity as Qs.
(e) Identify one government policy that could be implemented to encourage the
industry to produce the socially optimum level of smoke alarms.
2. (a) Draw a correctly labeled graph showing a typical monopoly that is
maximizing profit and indicate each of the following.
(i) Price
(ii) Quantity of output
(iii) Profit
(b) Describe and explain the relationship between the monopolists demand
curve and marginal revenue curve.
(c) Label each of the following on your graph in part (a).
(i) Consumer surplus
(ii) Deadweight loss
3. Assume that Company XYZ is a profit-maximizing firm that hires its labor in a
perfectly competitive labor market and sells its product in a perfectly competitive
output market.
22
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Macroeconomics
A P M acr o ec o n o mics
The purpose of an AP course in macroeconomics is to give students a thorough
understanding of the principles of economics that apply to an economic system as
a whole. Such a course places particular emphasis on the study of national income and
price-level determination, and also develops students familiarity with economic
performance measures, the financial sector, stabilization policies, economic growth,
and international economics. There is no single approach that an AP Macroeconomics
course is expected to follow. Whatever the approach, however, AP teachers are advised
to take into account certain topics generally covered in college courses. The following
is a brief discussion of these topics and some aspects of them that a teacher may
choose to explore.
Topics
I. Basic Economic Concepts
A macroeconomics course introduces students to fundamental economic concepts
such as scarcity and opportunity costs. Students understand the distinction between
absolute and comparative advantage and apply the principle of comparative advantage
to determine the basis on which mutually advantageous trade can take place between
individuals and/or countries and to identify comparative advantage from differences
in opportunity costs. Other basic concepts that are explored include the functions
performed by an economic system and the way the tools of supply and demand are
used to analyze the workings of a free-market economy. The course should also
introduce the concept of the business cycle to give students an overview of economic
fluctuations and to highlight the dynamics of unemployment, inflation, and economic
growth. Coverage of these concepts provides students with the foundation for a
thorough understanding of macroeconomic concepts and issues.
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23
Macroeconomics
price indices, such as the consumer price index (CPI) and the gross domestic
product deflator. Students should learn how these indices are constructed and used
to convert nominal values into real values, as well as to convert dollar values in the
past to dollar values in the present. It is also important to highlight the differences
between the two price indices as a measure of inflation, as well as the problems
associated with each measure.
24
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Macroeconomics
between changes in the interest rate and changes in aggregate demand, and how
changes in aggregate demand affect real output and price level. Students should have
an understanding of financial markets and the working of the loanable funds market
in determining the real interest rate. It is also important that students develop a
clear understanding of the differences between the money market and the loanable
funds market.
Having an understanding of the financial markets, students should identify and
examine the tools of central bank policy and their impact on the money supply and
interest rate. Students should understand the distinction between nominal and real
interest rate. Students should also be introduced to the quantity theory of money,
and examine and understand the effect of monetary policy on real output growth
and inflation.
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25
Macroeconomics
Topic Outline
Below is an outline of the major content areas covered by the AP Macroeconomics
Exam. The percentages indicated reflect the approximate percentage devoted to each
content area in the multiple-choice section of the exam. The outline is a guide and is
not intended as an exhaustive list of topics.
Content Area
26
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Macroeconomics
Content Area
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27
Macroeconomics
Content Area
28
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Country A
Country B
Fish
10 labor-hours
20 labor-hours
Wheat
20 labor-hours
60 labor-hours
1. The table above indicates labor-hours needed to produce a single unit of each
of two commodities in each of two countries. If labor is the only factor used to
produce the commodities, which of the following statements must be correct?
I. Country A has an absolute advantage in the production of both commodities,
but a comparative advantage in the production of wheat.
II. Country B has an absolute advantage in the production of both commodities,
but a comparative advantage in the production of fish.
III. Mutually advantageous trade can occur between the two countries when
2.5 units of fish are exchanged for 1 unit of wheat.
(a)
(b)
(c)
(d)
(e)
I only
II only
III only
I and III only
II and III only
2. Suppose that the consumer price index rises from 100 to 200. From this information
we may conclude that
(a)
(b)
(c)
(d)
(e)
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29
3. In the graph above, AD denotes the aggregate demand curve, SRAS the short-run
aggregate supply curve, and LRAS the long-run aggregate supply curve. If no
policy action were taken, which of the following changes would move the
economy to its long-run equilibrium?
(a)
(b)
(c)
(d)
(e)
30
8. Based on the diagram above, what effect will an increase in the world supply of
oil have on real gross domestic product and the aggregate price level?
Real Gross
Domestic Product
Price Level
(a) Decrease
Increase
(b) Decrease
Decrease
(c) Increase
Increase
(d) Increase
No change
(e) Increase
Decrease
9. If the government simultaneously engages in expansionary monetary and fiscal
policies, which of the following is the likely effect on interest rates and
unemployment?
Interest Rates
(a)
(b)
(c)
(d)
(e)
Unemployment
Increase Indeterminate
Increase
Decrease
Decrease
Decrease
Indeterminate
Decrease
Indeterminate
Increase
10. If the Federal Reserve sells a significant amount of government securities in the
open market, which of the following will occur?
(a)
(b)
(c)
(d)
(e)
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31
11. The purchase of bonds by the Federal Reserve will have the greatest effect
on real gross domestic product if which of the following situations exists in
the economy?
(a) The required reserve ratio is high, and the interest rate has a large effect on
investment spending.
(b) The required reserve ratio is high, and the interest rate has a small effect on
investment spending.
(c) The required reserve ratio is low, and the interest rate has a large effect on
investment spending.
(d) The required reserve ratio is low, and the marginal propensity to consume
is low.
(e) The marginal propensity to consume is high, and the interest rate has a small
effect on investment spending.
12. Which of the following will most likely occur as a result of an increase in labor
productivity in an economy?
(a)
(b)
(c)
(d)
(e)
13. Which of the following is most likely to cause an increase in the international
value of the United States dollar?
(a)
(b)
(c)
(d)
(e)
15. If the reserve requirement is 25 percent and banks hold no excess reserves,
an open market sale of $400,000 of government securities by the Federal
Reserve will
(a)
(b)
(c)
(d)
(e)
32
16. An increase in which of the following would cause an increase in aggregate supply?
(a)
(b)
(c)
(d)
(e)
Labor productivity
The wage rate
Prices of imports
Consumer spending
Interest rates
17. Which of the following is true when the velocity of money falls?
(a) An increase in the money supply will have less effect on nominal gross
national product.
(b) A change in the money supply will affect output only.
(c) The Federal Reserve will decrease the money supply.
(d) Output will be greater for a given money supply.
(e) The public will increase its holdings of assets other than money.
18. A stimulative fiscal policy combined with a restrictive monetary policy will
necessarily cause
(a)
(b)
(c)
(d)
(e)
19. Assume that Canadian consumers increase their demand for Mexican financial
assets. How would the international supply of Canadian dollars, the value of the
Mexican peso relative to the Canadian dollar, and Canadian net exports to
Mexico change?
(a)
(b)
(c)
(d)
(e)
Supply of
Canadian Dollars
Increase
Increase
Decrease
Decrease
No change
Value of
the Peso
Increase
Increase
Increase
Decrease
Increase
Canadian Net
Exports
Increase
Decrease
Decrease
Increase
Decrease
20. If nominal gross domestic product fell while real gross domestic product rose,
which of the following must be true?
(a)
(b)
(c)
(d)
(e)
Unemployment increased.
The inflation rate was negative.
Net exports were negative.
The average of stock prices rose while bond prices fell.
Nominal interest rates rose by less than the rate of inflation.
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33
21. An increase in which of the following would reduce the United States
balance-of-trade deficit?
(a)
(b)
(c)
(d)
(e)
34
4c
5c
6b
7e
8e
9d
10 a
11 c
12 a
13 a
14 d
15 b
16 a
17 a
18 d
19 a
20 b
21 c
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35
1. Assume that the United States economy is in a severe recession with no inflation.
(a) Using a correctly labeled aggregate demand and aggregate supply graph,
show each of the following for the economy.
(i) Full-employment output
(ii) Current output level
(iii) Current price level
(b) The federal government announces a major decrease in spending. Using
your graph in part (a), show how the decrease in spending will affect each of
the following.
(i) Level of output
(ii) Price level
(c) Explain the mechanism by which the decrease in government spending will
affect the unemployment rate.
(d) The Federal Reserve purchases bonds through its open-market operations.
(i)Using a correctly labeled graph, show the effect of this purchase on the
interest rate.
(ii)Explain how the change in the interest rate will affect output and the
price level.
(e) Explain how the change in the interest rate you identified in part (d) will
affect each of the following.
(i) International value of the dollar relative to other currencies
(ii) United States exports
(iii) United States imports
2. Country Y is experiencing severe and unanticipated inflation.
(a)
(b)
(c)
36
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3. Assume that two countries, Atlantis and Xanadu, have equal amounts of
resources. Atlantis can produce 30 cars or 10 tractors or any combination, as
shown by the line MN in the figure above. Xanadu can produce 20 cars or
40 tractors or any combination, as shown by the line PQ in the figure above.
(a) Which country has an absolute advantage in the production of tractors?
Explain how you determined your answer.
(b) Which country has a comparative advantage in the production of cars? Using
the concept of opportunity cost, explain how you determined your answer.
(c) If the two countries specialize and trade with each other, which country will
import cars? Explain why.
(d) If the terms of trade are such that one car can be exchanged for one tractor,
explain how Atlantis will benefit from such trade.
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37
Teacher Support
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You can find the following Web resources at AP Central (free registration required):
AP Course Descriptions, AP Exam questions and scoring guidelines, sample
syllabi, and feature articles.
A searchable Institutes and Workshops database, providing information about
professional development events.
The Course Home Pages (apcentral.collegeboard.com/coursehomepages),
which contain insightful articles, teaching tips, activities, lab ideas, and other
course-specific content contributed by colleagues in the AP community.
Moderated electronic discussion groups (EDGs) for each AP course, provided to
facilitate the exchange of ideas and practices.
Teachers Guides
For those about to teach an AP course for the first time, or for experienced AP
teachers who would like to get some fresh ideas for the classroom, the Teachers
Guide is an excellent resource. Each Teachers Guide contains syllabi developed by
high school teachers currently teaching the AP course and college faculty who
teach the equivalent course at colleges and universities. Along with detailed course
outlines and innovative teaching tips, youll also find extensive lists of suggested
teaching resources.
Course Descriptions
Course Descriptions are available for each AP subject. They provide an outline of
each AP courses content, explain the kinds of skills students are expected to
demonstrate in the corresponding introductory college-level course, and describe
the AP Exam. Sample multiple-choice questions with an answer key and sample
free-response questions are included. (The Course Description for AP Computer
Science is available in PDF format only.)
Released Exams
Periodically the AP Program releases a complete copy of each exam. In addition to
providing the multiple-choice questions and answers, the publication describes the
process of scoring the free-response questions and includes examples of students
actual responses, the scoring standards, and commentary that explains why the
responses received the scores they did.
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39
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