AP Macroeconomics Modules 1, 2 & 3

Depression

A very deep and prolonged downturn.

This production possibilities curve shows the trade-off between consumer goods and capital goods. Since capital goods are a resource, and increase in the production of capital goods today will increase the economy's production possibilities in the future. Therefore, all other things equal (ceteris paribus), producing at which point today will result in the largest outward shift of the PPC in the future? (Picture in book) A) A B) B C) C D) D E) E

A) A

Resource

Anything that can be used to produce something else.

Macroeconomics

Concerned with the overall ups and downs in the economy.

Which point(s) on the graph represent efficiency in production? (Picture in book) A) B and C B) A and D C) A, B, C, and D D) A, B, C, D, and E E) A, B, C, D, E, and F

C) A, B, C, and D

Which of the following is the most likely result of inflation? A) Falling employment B) A dollar will buy more than it did before C) People are discouraged from holding cash D) Price stability E) Low aggregate output per capita

C) People are discouraged from holding cash

What type of resource is: a bulldozer?

Capital

Output

The quantity of goods and services produced.

An increase in employment could be represented by a movement from point A) D to point C B) B to point A C) C to point F D) B to point E E) E to point B

D) B to point E

The labor force is made up of everyone who is A) Employed B) Old enough to work C) Actively seeking work D) Employed or unemployed E) Employed or capable of working

D) Employed or unemployed

True or false? Explain your answer. An increase in the amount of resources available to Tom for use in producing coconuts and fish does not change his production possibilities curve.

False. An increase in the resources available to Tom for use in producing coconuts and fish changes his production possibilities curve by shifting it outward, because he can now produce more fish and coconuts than before. In the accompanying graph, the line labeled "Tom's original PPC" represents Tom's original production possibilities curve, and the line labeled "Tom's new PPC" represents the new production possibilities curve that results from an increase in resources available to Tom.

True or false? Explain your answer. Points inside a production possibilities curve are efficient and points outside a production possibilities curve are inefficient.

False. Production efficiency is achieved at points along a production possibilities curve, but every point inside a PPC is inefficient because more of either good could be produced without producing less of the other. Points outside the PPC are simply unobtainable.

Trade-off

Giving up something in order to have something else.

Production possibilities curve

Illustrates the trade-offs facing an economy that produces only two goods. It shows the maximum quantity of one good that can be produced for each possible quantity of the other good produced.

Scarce resource

Not available in sufficient quantities to satisfy all the various ways a society wants to use it.

Recessions

Periods of economic downturns when output and employment are falling.

Expansions

Periods of economic downturns when output and employment are rising.

Describe who gets hurt in a recession and how they are hurt.

Recessions cause a great deal of pain across the entire society. They cause large numbers of workers to lose their jobs and make it difficult for workers to find new jobs. Recessions reduce the standard of living of many families and are usually associated with a rise in the number of people living below the poverty line, an increase in the number of people who may lose their houses because they can't afford their mortgage payments, and a fall in the percentage of Americans with health insurance. Recessions also reduce the profits of firms.

Land

Refers to all resources that come from nature, such as minerals, timber, and petroleum.

Capital

Refers to manufactured goods used to make other goods and services.

Incentives

Rewards or punishments that motivate particular choices.

Business cycle

The alternation between economic downturns, known as recessions, and economic upturns, known as expansions.

Positive economics

The branch of economic analysis that describes the way the economy actually works.

Market economy

The decisions of individual producers and consumers largely determine what, how, and for whom to produce, with little government involvement in the decisions.

Aggregate output

The economy's total production of goods and services for a given time period.

Labor

The effort of workers.

Employment

The number of people are currently working for pay in the economy.

Unemployment

The number of people who are actively looking for working but aren't currently employed.

Price stability

The overall price level is changing only slowly if at all.

Unemployment rate

The percentage of the labor force that is unemployed.

Opportunity cost

The real cost of an item; what you must give up in order to get it.

Microeconomics

The study of how individuals, households, and firms make decisions and how those decisions interact.

Economics

The study of scarcity and choice.

Marginal analysis

The study of the costs and benefits of doing a little bit more of an activity versus a little bit less.

Technology

The technical means for producing goods and services.

Efficient economy

There is no way to make anyone better off without making at least one person worse off.

Deflation

A falling overall price level.

Inflation

A rising overall price level.

Model

A simplified representation used to better understand a real-life situation.

Economy

A system for coordinating a society's productive and consumptive activities.

During the recession phase of a business cycle, which of the following is likely to increase? A) The unemployment rate B) The price level C) Economic growth rates D) The labor force E) Wages

A) The unemployment rate

Identify each of the following statements as positive or normative, and explain your answer. A) Society should take measures to prevent people from engaging in dangerous personal behavior. B) People who engage in dangerous personal behavior impose higher costs on society through higher costs on society through higher medical costs.

A) This is a normative statement because it stipulates what should be done. In addition, it may have no "right" answer. That is, should people be prevented from all dangerous personal behavior if they enjoy that behavior—like skydiving? Your answer will depend on your point of view. B) This is a positive statement because it is a description of fact.

You make $45,000 per year at your current job with Whiz Kids Consultants. You are considering a job offer from Brainiacs, Inc., which would pay you $50,000 per year. Which of the following are elements of the opportunity cost of accepting the new job at Brainiacs, Inc.? Answer yes or no, and explain your answer. A) The increased time spent communicating to your new job B) The $45,000 salary from your old job C) The more spacious office at your new job

A) Yes. The increased time spent commuting is a cost you will incur if you accept the new job. That additional time spent commuting—or equivalently, the benefit you would get from spending that time doing something else—is an opportunity cost of the new job. B) Yes. One of the benefits of the new job is that you will be making $50,000. But if you take the new job, you will have to give up your current job; that is, you have to give up your current salary of $45,000, so $45,000 is one of the opportunity costs of taking the new job. C) No. A more spacious office is an additional benefit of your new job and does not involve forgoing something else, so it is not an opportunity cost.

Other things equal assumption

All other relevant factors remain unchanged.

Allocative efficiency

An economy produces a point along its production possibilities curve that makes consumers as well off as possible.

Productive efficiency

An economy produces a point on its production possibilities curve.

Economic growth

An increase in the maximum amount of goods and services an economy can produce.

The other things equal assumption allows economists to A) Avoid making assumptions about reality B) Focus on the effects of only one change at a time C) Oversimplify D) Allow nothing to change in their model E) Reflect all aspects of the real world in their model

B) Focus on the effects of only one change at a time

For this economy, an increase in the quantity of capital goods produced without a corresponding decrease in the quantity of consumer goods produced (Picture in book) A) Cannot happen because there is always an opportunity cost B) Is represented by a movement from point E to point A C) Is represented by a movement form point C to point B D) Is represented by a movement form point E to point B E) Is only possible with an increase in resources or technology

D) Is represented by a movement form point E to point B

Individual choice

Decisions by individuals about what to do, which necessarily involve decisions about what not to do.

Entrepreneurshp

Describes the efforts of entrepreneurs in organizing resources for production, taking risks to create new enterprises, and innovating to develop new products and production processes.

Which of the following might allow this economy to move from point B to point F (picture in book) A) More workers B) Discovery of new resources C) Building new factories D) Technological advances E) All of the above

E) All of the above

A sustained increase in aggregate output over several decades represents A) An expansion B) A recovery C) A recession D) A depression E) Economic growth

E) Economic growth

Economic aggregates

Economic measures that summarize data across many different markets.

Labor force

Equal to the sum of employment and unemployment.

Property rights

Establish ownership and grant individuals the right to trade goods and services with each other.

Command economy

Industry is publicly owned and a central authority makes production and consumption decisions.

What type of resource is: time spent flipping hamburgers at a restaurant?

Labor

What type of resource is: a river?

Land

What are the four categories of resources? Give an example of a resource from each category.

Land, labor, capital, and entrepreneurship are the four categories of resources. Possible examples include fish- eries (land), time spent working on a fishing boat (labor), fishing nets (capital), and the opening of a new seafood market (entrepreneurship)

Normative economincs

Makes prescriptions about the way the economy should work.

True or false? Explain your answer. A technological change that allows Tom to catch more fish relative to any amount of coconuts gathered results in a change in his production possibilities curve.

True. A technological change that allows Tom to catch more fish for any amount of coconuts gathered results in a change in his production possibilities curve. This is illustrated in the accompanying graph. The new production possibilities curve is represented by the line labeled "Tom's new PPC," and the original production possibilities curve is represented by the line labeled "Tom's original PPC." Since the maximum quantity of coconuts that Tom can gather is the same as before, the new production possibilities curve intersects the vertical axis at the same point as the old curve. But since the maximum possible quantity of fish is now greater than before, the new curve intersects the horizontal axis to the right of the old curve.

Who do we talk about business cycles for the economy as a whole, rather than just talking about the ups and downs of particular industries?

We talk about business cycles for the economy as a whole because recessions and expansions are not confined to a few industries—they reflect downturns and upturns for the economy as a whole. The data clearly show that in the steep downturns, almost every sector of the economy reduces output and the number of people employed. Moreover, business cycles are an international phenomenon, sometimes moving in rough synchrony across countries.