Stuff I always mess up in Econ...

Test Preparation AP Test Preparation
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<p>…and how to quit messing it up.</p>

<p>I’ve made myself a list.
Here’s the macro version, micro coming soon.
Add on! Hopefully we can help each other remember important stuff.</p>

<p>Stuff I always mess up in Macro
And how not to mess it up</p>

<p>1.Things counted in GDP include SERVICES, even financial (don’t get tricked if it says something about stocks…it can still be counted if someone’s providing a service.)</p>

<p>2.To do comparative advantage: find opportunity cost in both nations. Whoever has the lower domestic cost has the comparative advantage in that item.</p>

<p>3.Automatic stabilizers are:
a.Income tax (people pay proportional to income, so as it rises/falls, so does tax revenue.)
b.Antipoverty programs
c.They cause deficit spending in a recession and surplus budget in inflation.</p>

<p>4.Income rises with price level. </p>

<p>5.Fisher’s hypothesis:
a.Nominal IR = real IR + inflation
b.SO…HIGHER PRICES = HIGHER IR!!!</p>

<p>6.You have to be in the work force to be unemployed. A retired person: not unemployed. Someone not looking for work: not unemployed.</p>

<p>7.When prices fall and real GDP rises, aggregate supply has shifted.
a.If your prices/GDP changes are weird, check and see if supply is to blame instead of demand.</p>

<p>8.Shortages drive prices upward.</p>

<p>9.Classical theory says that in a recession, prices and wages fall. This stimulates demand.</p>

<p>10.Only a shift in SRAS causes stagflation.
a.What shifts AS? RESOURCES, TECHNOLOGY</p>

<p>11.GDP measures:
a.Production AND income</p>

<p>12.For potential GDP to fall, fewer resources must have been available in the first place.</p>

<p>Still Macro
International Econ that gets a little iffy </p>

<p>How supply and demand change in foreign exchange markets</p>

<li><p>Interest Rates
If IR rise in India, Americans will want to lend there because they’ll get more returns on their loans. SO, demand for rupees will shift right and the rupee will appreciate. And vice versa.</p></li>
<li><p>Political Stability
-Say India goes into political turmoil. Americans see this as a bad sign and pull out investments in India. Demand for the rupee will decline. The rupee will depreciate in value.
-ALSO, Indians will look abroad to get money out of their country. They will trade their rupees for other currencies to invest abroad. This means the Supply of rupees will increase as well. This means a serious depreciation of the rupee.</p></li>
<li><p>Relative Levels of Income
-If America has higher income than India, Americans can afford more Indian products. The demand for rupees would increase.
-This also means that India can’t afford American products, so the supply of rupees would fall because India isn’t sending rupees out to the U.S.</p></li>
<li><p>Relative Prices
-If prices rise in India, Americans won’t want to buy Indian products because they’re more expensive. This means the demand for rupees will fall.
-Also, Indians will buy more American products because they’re now cheaper than Indian ones. This increases the supply of rupees.</p></li>
</ol>

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<p>Oh, a small question for you econ-takers: When they say in the free response to show on your graph something new, do they want you to draw a whole new graph for that part?</p>

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<p>thanks for that!!</p>

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<p>tlesc01: oftentimes the question even explicitly states "in your graph in part (a), draw this to indicate..." Best bet is to just go by what the question tells you to.</p>

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<p>Wow, that was very helpful.</p>

<p>I screwed up major on LRAS, which is a problem for me. I'm also screwy in a lot of other areas. I'll cram it all eventually and hopefully get that 5.</p>

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<p>I have a question: when we draw graphs on FR, are we allowed to use ruler, or we have to draw them freehand?</p>

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<p>and oh, I wanna add a memory trick I found really helpful from PR:
- TRIBE for AD shift:
Tastes of consumers
price of Related goods
Income
number of Buyers
Expectation - inflation or recession in the future
- ROTTEN for AS shift
Resource cost
Other goods' prices
Taxes and subsidies
Technology
Expectation of supplier
Number of suppliers</p>

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<p>Freehand, although I'm sure you could use the edge of your green booklet or something if you absolutely have to have a straight line.</p>

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<p>I've gotten pretty good at freehanding graphs from Econ lol.</p>

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<p>Wait, NVP, aren't TRIBE and ROTTEN for individual demand, not aggregate demand?</p>

<p>Specifically, for aggregate demand, how can prices of related goods be relevant? It's AGGREGATE demand. It counts up demand for all goods.</p>

<p>And, again, for aggregate supply, how can other goods' prices be relevant? We're already talking about all goods.</p>

<p>Don't forget international effects. Aggregate demand can shift because of price changes in other countries.</p>

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<p>Here's a summary of common mistakes in Micro from this AMAZING site:
AP</a> Economics Home Page</p>

<p>They also have 2 practice exams on there for free...I'm not sure if they're official or not but they seem good enough. Any practice is practice.</p>

<p>Formulas:
MR = MC Profit maximization
P > ATC Firm is earning ECONOMIC PROFITS
P = ATC Firm is earning normal profit (econ profit = 0)
P < ATCP > AVC Loss minimization
P = AVC SHUT DOWN point
P < AVC Firm will not produce
P = MC Socially Optimum price
P = ATC Fair-return price (natural monopoly)</p>

<p>Perfectly competitive firm’s supply curve: the MC curve above AVC</p>

<p>Profit is between profit-max price, and where the line down to quantity hits the ATC curve
Loss minimization: pretty much the same thing, except the ATC portion is on top this time, and it’s the distance down to the Demand curve.
(See graphs if that makes no sense to you)</p>

<p>Natural monopoly: Want to product at higher price, socially optimum price is much lower and they’ll incur losses, fair-return price is in the middle.</p>

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<p>Can someone help me with this problem (it's suppose to be very easy)</p>

<p>Given the table below what is the opportunity cost of wheat in France?
Country---------Wheat-----------Cloth------------<br>
France-------------5 --------------10--------------
England-----------20--------------60--------------</p>

<p>Barrons says the answer is 1/2 cloth. Shouldn't it be 2 cloth? Because 5 Wheat = 10 Cloth, so 1 Wheat = 2 Cloth. </p>

<p>Can someone explain this to me, thanks.</p>

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<p>yes, it should be 2 cloth. For every 1 wheat you produce, you sacrifice 2 cloths (definition of opportunity cost).</p>

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<p>Yes, it's 2. You have to be careful in that Barron's book...it's the one I used and I found a lot of errors.</p>

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<p>If the 5 and 10 represent labor hours for one unit, the answer should be 1/2 cloth, because in order to create another unit of wheat, you must sacrifice another 5 hours, which is 1/2 unit of cloth.</p>

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<p>Oh jeez, you're right. I was taking the wheat one. </p>

<p>For opportunity cost of good X, you take (units good Y)/(units good X). Here that would be (units wheat)/(units cloth) = 5/10 = 1/2</p>

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<p>Wait that formula doesnt make sense.
So for opportunity cost of wheat (good x) it should be:
Units of Cloth (good y)/ Units of wheat (good X).
= 10/5 = 2 ??</p>

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<p>It depends on whether the chart specified labor hours for one unit, or if it was just # of units. For # of units, you use the above formula. For hours, I guess you'd use the opposite.</p>

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<p>I was just looking at that same problem. It's 1/2 cloth because the numbers are "Labor hours needed to produce a unit of...", not how much can be produced. Is that how comparative/absolute advantage problems are usually set up or is Barron's just messing with us? I don't remember my textbook using labor hours.</p>

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<p>The problemis in units of labor hours. So i'm guessing when labor hours is used the formula switches?</p>