Ap Macroeconomics-Microeconomics

5 Steps to a 5

AP Microeconomics/

Macroeconomics

McGRAW-HILL

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5 Steps to a 5

AP Microeconomics/

Macroeconomics

Eric R. Dodge

McGRAW-HILL

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DOI: 10.1036/0071465170

0-07-146517-0

v

Contents

Acknowledgments / ix

Preface / xi

PART I HOW TO USE THIS BOOK / 1

The Basics / 3

Organization of the Book / 3

Introduction to the Five-Step Program / 3

Three Approaches to Preparing for the AP Economics Exams / 4

Calendars for Preparing for Each of the Plans / 6

Introduction to the Graphics Used in This Book / 9

PART II WHAT YOU NEED TO KNOW ABOUT

THE AP ECONOMICS EXAMS / 11

Background Information / 13

Some Frequently Asked Questions About the AP Economics Exams / 13

Why take the AP Economics Exam? / 13

Who writes the AP Economics Exam? / 13

What is going to appear on the exam? / 14

Who grades my AP Economics Exam? / 17

Will my exam remain anonymous? / 18

What about that permission box on the back? / 18

How is my multiple-choice exam scored? / 18

How is my free-response exam scored? / 18

So how is my final grade determined and what does it mean? / 18

How do I register and how much does it cost? / 19

What if my school only offered AP Macroeconomics and not AP Microeconomics,

or vice versa? / 20

What should I bring to the exam? / 20

What should I NOT bring to the exam? / 20

Tips for Taking the AP Economics Exams / 21

Section I: Multiple-Choice Questions / 21

Section II: Free-Response Questions / 21

Getting Started: The Diagnostic Exams / 23

Diagnostic Exams: Answer Sheet / 23

Diagnostic Exam: AP Microeconomics / 24

Diagnostic Exam: AP Macroeconomics / 28

Microeconomics Answers and Explanations, Section I / 31

Macroeconomics Answers and Explanations, Section I / 33

Scoring and Interpretation / 35

PART III COMPREHENSIVE REVIEW / 37

Chapter 1 Fundamentals of Economic Analysis / 39

Introduction / 39

1.1 Scarce Resources / 39

v

For more information about this title, click here

1.2 Production Possibilities / 42

1.3 Functions of Economic Systems / 48

Review Questions / 49

Answers and Explanations / 50

Rapid Review / 50

Chapter 2 Demand, Supply, Market Equilibrium,

and Welfare Analysis / 52

Introduction / 52

2.1 Demand / 52

2.2 Supply / 57

2.3 Market Equilibrium / 61

2.4 Welfare Analysis / 66

Review Questions / 68

Answers and Explanations / 68

Rapid Review / 69

Chapter 3 Elasticity, Microeconomic Policy,

and Consumer Theory / 71

Introduction / 71

3.1 Elasticity / 71

3.2 Microeconomic Policy and Applications of Elasticity / 80

3.3 Consumer Choice / 85

Review Questions / 90

Answers and Explanations / 91

Rapid Review / 92

Chapter 4 The Firm, Profit, and the Costs of Production / 94

Introduction / 94

4.1 Firms, Opportunity Costs, and Profits / 94

4.2 Production and Cost / 96

Review Questions / 105

Answers and Explanations / 105

Rapid Review / 106

Chapter 5 Market Structures, Perfect Competition,

Monopoly, and Things Between / 108

Introduction / 108

5.1 Perfect Competition / 108

5.2 Monopoly / 118

5.3 Monopolistic Competition / 123

5.4 Oligopoly / 125

Review Questions / 127

Answers and Explanations / 128

Rapid Review / 129

Chapter 6 Factor Markets / 130

Introduction / 130

6.1 Factor Demand / 130

6.2 Least-Cost Hiring of Multiple Inputs / 135

6.3 Factor Supply and Market Equilibrium / 136

6.4 Imperfect Competition in Product and Factor Markets / 137

vi • Contents

Review Questions / 139

Answers and Explanations / 140

Rapid Review / 141

Chapter 7 Public Goods, Externalities,

and the Role of Government / 142

Introduction / 142

7.1 Public Goods and Spillover Benefits / 142

7.2 Pollution and Spillover Costs / 145

7.3 Income Distribution and Tax Structures / 147

Review Questions / 150

Answers and Explanations / 151

Rapid Review / 152

Chapter 8 Macroeconomic Measures of Performance / 153

Introduction / 153

8.1 The Circular Flow Model / 154

8.2 Accounting for Output and Income / 155

8.3 Inflation and the Consumer Price Index / 161

8.4 Unemployment / 165

Review Questions / 167

Answers and Explanations / 167

Rapid Review / 168

Chapter 9 Consumption, Saving, Investment,

and the Multiplier / 170

Introduction / 170

9.1 Consumption and Saving / 170

9.2 Investment / 174

9.3 The Multiplier Effect / 177

Review Questions / 180

Answers and Explanations / 181

Rapid Review / 181

Chapter 10 Aggregate Demand and Aggregate Supply / 183

Introduction / 183

10.1 Aggregate Demand (AD) / 183

10.2 Aggregate Supply (AS) / 186

10.3 Macroeconomic Equilibrium / 188

10.4 The Trade-off Between Inflation and Unemployment / 194

Review Questions / 197

Answers and Explanations / 198

Rapid Review / 198

Chapter 11 Fiscal Policy, Economic Growth,

and Productivity / 200

Introduction / 200

11.1 Expansionary and Contractionary Fiscal Policy / 200

11.2 Difficulties of Fiscal Policy / 203

11.3 Economic Growth and Productivity / 206

Review Questions / 209

Answers and Explanations / 210

Rapid Review / 211

Contents • vii

Chapter 12 Money, Banking, and Monetary Policy / 212

Introduction / 212

12.1 Money and Financial Assets / 212

12.2 Fractional Reserve Banking and Money Creation / 218

12.3 Monetary Policy / 220

Review Questions / 225

Answers and Explanations / 226

Rapid Review / 226

Chapter 13 International Trade / 228

Introduction / 228

13.1 Comparative Advantage and Gains from Trade / 228

13.2 Balance of Payments / 232

13.3 Foreign Exchange Rates / 234

13.4 Trade Barriers / 237

Review Questions / 239

Answers and Explanations / 240

Rapid Review / 240

PART IV PRACTICE MAKES PERFECT! / 241

AP Microeconomics Practice Exam 1 / 243

AP Macroeconomics Practice Exam 1 / 260

AP Microeconomics Practice Exam 2 / 277

AP Macroeconomics Practice Exam 2 / 293

APPENDIX / 309

Bibliography / 311

Web sites / 312

Glossary / 313

Important Formulas and Conditions / 320

About the Author / 323

viii • Contents

Acknowledgments

This book would not have been possible without the sabbatical leave program at

Hanover College and the support of the Faculty Development Committee. Thanks to

the editorial suggestions of Don Reis and several anonymous reviewers, the readabil￾ity of this text has been greatly improved. To Michael Brody and his AP Economics stu￾dents at the Menlo School in Atherton, California, I offer my thanks for helping to refine

and improve upon the diagnostic exams. Thanks again go out to the students at the

Menlo School and also to Matthew Pedlow and his AP Economics students at Jackson

High School in Jackson, Michigan for contributing their input on what are important

topics for the exam. I wish to thank Janel Lockwood and Ashley Long at Hanover

College for their assistance in the construction of review questions for several chap￾ters. Thanks to my parents, Ray and Dorothy, for all of the encouragement over the

years. To my wife, Molly, who was at times a proofreader, a sounding board, and a

source of inspiration, I offer my heartfelt thanks and best wishes for the long-run suc￾cess of the lemonade stand. You have helped me to finally define equilibrium.

ix

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Preface

So, you’ve decided to bite the bullet and invest in a book designed to help you earn a

“5” on your AP Microeconomics and Macroeconomics exams. Congratulations! You

have taken the first of many small steps toward this goal. An important question

remains: “Why this book?”

Priority number one, for both your AP course and for this book, is to prepare you to

do well enough on the AP Microeconomics and Macroeconomics Exams to earn college

credit. I firmly believe that this book has a comparative advantage over your other

options. First, I have written this text with a certain conversational approach, rather than

a flurry of formulas and diagrams that you must remember. Sure, some memorization is

required for any standardized test; it’s the nature of the beast. But a memorizer of for￾mulas is in deep trouble when questions ask her to analyze the relative success of several

possible economic policies or to draw more fine distinctions between competing eco￾nomic theories. The AP Economics exams are not designed for a memorizer. Using this

book to supplement and reinforce your understanding of the theories and relationships

in economics will allow you to apply your analytical skills to the exam, and this gives you

a significant advantage over the formula-memorizing exam taker. If you spend less

time memorizing formulas and take the extra time to understand the basics, you will get

along just fine with this book, and you will do extremely well on the AP Economics

exam.

Second, as a college professor who has taught economics to thousands of students,

I have a strong understanding of where the learning happens and where the mistakes are

made.

Third, as a reader of AP exams, I can tell you where points are lost and where a “5”

is made on the free-response questions. Most importantly, I am a realist. You want to

know what it takes to earn a “5” and not necessarily the finer points of the Federal

Reserve System, the Sherman Antitrust Act, or the NAFTA.

Take the time to read Parts I and II of this book, which are designed to help you

understand the challenge that lies ahead and to provide you with tips for success on the

exam. At the end of Part II, take each diagnostic exam to see where you stand before

beginning your review. Part III is a comprehensive review of each chapter of material

with practice questions at the end of each chapter. These questions are designed to

quickly test your understanding of the material presented in each chapter, not neces￾sarily to mirror the AP exams. For exam questions that are more typical of what you

will experience in May, Part IV provides you with two practice exams in both micro￾economics and macroeconomics. These are practice exams complete with essay ques￾tions, sample responses, and scoring guidelines.

I don’t see any reason to continue prefacing the book when we could just dive in. I

hope that you enjoy the book and that you find it a useful resource. Good luck!!!

xi

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HOW TO USE THIS BOOK

PART I

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