The Official A P Economics Study Group Thread

Test Preparation AP Test Preparation
1

<p>Hey guys, i thought i'd start one of these this year.</p>

<p>Myself, I'm taking both macro and micro.
I passed micro (as a junior) last year and got a 3, but my colleges require 4 and 5's so I'm taking both this year!</p>

<p>Anyone have any good study ideas? I'm thinking we can just do like a question/ answer / question type of thread where I start with a question, then someone answers it and asks another question. </p>

<p>I guess ill start (oh, and label whether you're asking for macro or micro please ^^)</p>

<p>[Micro]
Which is true of monopolistic competition?</p>

<p>A. Firms can earn long-run economic profits.
B. P = MR = MC = ATC
C. Firms spend money to differentiate and advertise their products
D. In the long run the market is allocatively efficient
E. Excess capacity is eliminated in the long run</p>

2

<p>lol I do not know the answer to the question yet, as I have yet to read the chapter on monopoly XD.</p>

<p>Here’s my question:</p>

<p>[MICRO]
A tax imposed on a supplier will more likely be passed on to the consumer in the form of price increase if</p>

<p>A. price elasticity of demand is highly elastic.
B. price elasticity of demand is highly inelastic.
C. price elasticity of demand is unit elastic
D. wage elasticity of demand of demand is highly elastic.
E. wage elasticity of demand is highly inelastic.</p>

<p>[MACRO]
According to Classical economic theory, a decrease in the money supply would</p>

<p>A. raise the price level and output in economy.
B. lower the price level and output in economy.
C. raise the price level in the economy.
D. lower the price level in economy
E. raise the price level and lower output in the economy.</p>

3

<p>Hey let’s form an AIM study group, we can chat every night at a certain time period and one of us can start the economic group chat and we just ask questions.</p>

<p>How does that sound? I think it would be great because we can clarify concepts we do not understand as well as help ourselves by elaborating on what we do know and share it.</p>

<p>My AIM is under my name so just IM me when you want to!</p>

<p>For all other people who wants to do this, post in this thread!</p>

4

<p>Hey,</p>

<p>I dunno about the first Micro question but I can answer the other two as practice :)</p>

<p>(btw, I’m going to number them as we go along so as to avoid confusion, so the first Micro question is #1M, then the first Macro question is #1Ma)</p>

<h1>2M. I’ll guess B because if you draw it out, then the upward shift of S caused by the tax increase will more directly affect the price. Then again, I’m guessing so any correction would be appreciated~</h1>

<h1>1Ma. Classical economists base their beliefs off of Say’s Theory, which basically just states that supply creates its own demand. Thus, the biggest characteristic to their graphs is that supply is ALWAYS upward sloping–they believe that prices will adjust themselves to whatever quantity given. Thus, a decrease in money supply would simply shift the demand curve down because less money means higher interest rates, which then translates into lower investment. Because investment is a key part of aggregate demand, a decrease in that will decrease AD. So, yeah the answer is D because only price is affected in Classical terms, and here the AD curve shifts downward bringing down price levels as well.</h1>

<p>Sorry for the longwinded answer, I just want to make sure my train of thought is thorough for the AP test! lol</p>

<h1>3M. In the perfectly competitive market, firms must have which of the following abilities/characteristics?</h1>

<p>I. The ability to enter and exit freely
II. The ability to change the socially optimal price level according to production
III. Asymmetrical knowledge of the good at hand
IV. Production of fundamentally identical goods</p>

<p>A. I only
B. I and III
C. II and IV
D. I and IV
E. I, II, and IV</p>

<h1>2Ma. Which of the following best/most directly explains the decrease in bond prices?</h1>

<p>A. An increase in the consumer price index
B. An increase in interest rates
C. A decrease in aggregate spending
D. A recessionary output level
E. An increase in money supply</p>

<p>Good luck! =P</p>

5

<p>I believe the first one is D? Correct me if I’m wrong!</p>

<p>EDIT: I think 3M is D and 2Ma is B? Bleh. I think I’m wrong, though. I don’t have any questions of my own… Uh… explain the Nash equilibrium?</p>

6

<p>I’m taking Micro in school and self-studying for Macro (though I haven’t started… ha) since my school does not offer the class. I’m gonna be the only one taking Macro this year. Additional $50 fee FTL. :|</p>

<p>1M: D. As a monopoly, the firm is a price maker, so they will set the price at which profits are maximized. Why would they be in the game if they don’t earn anything?
B applies to perfectly competitive firms, not monopolies.
C is wrong because monopolies do not have to differentiate themselves; they already control the market of their goods seeing as they are the only ones who produce them.
D is incorrect because monopolies are interested in maximizing their profits and thus will sell at the profit-maximizing point, not the socially optimal point. They are not concerned about social efficiency.
E - same explanation along the lines of D.</p>

<p>2M: B. An inelastic demand curve means the good is probably a necessary item, so a change in price will not significantly change the number of buyers. Consumers are going to be hurt more because very few will give up the good.

  • I need to review this… I’m sure this can be explained through graphs, but I forgot how tax wedges and all that work, so here’s my improvisation.</p>

<p>1MA: B. Haven’t learned this yet, so it’s a guess. Lower money supply equals lower demand, so D shifts to the left. This leads to a drop in P and Q.</p>

<p>3M: E. I and IV are characteristic of perfect competition for sure. Not so sure about II, but it sounds about right since the market always manages to shift back to the socially optimal point in PC.</p>

<p>2MA: B/C/D. Ugh… trying to reach back to what I learned in regular Econ class. Not A since that would correspond to higher prices in general. Same for E. Higher interest rates mean people are more inclined to save. Dunno what C and D are. oof.
If this were the exam, I’d eliminate D and choose either B or C. :x</p>

<p>Nash equilibrium: NO IDEA. Didn’t learn. :[ Is this micro or macro?</p>

<p>Are you guys making these questions up yourselves or pulling them out of a textbook/prep book?</p>

7

<p>agh, correction! 1M is C. I just realized the question was asking about monopolistic competition, not monopolies. In this case, A is false because there is no long-run profit for monopolistic competition since there are few barriers to entry, so more firms can enter the market and drive prices down. C is right because firms have to differentiate their product in order to maintain market power.</p>

8

<p>3M is actually just D–II isn’t a requirement because the firms don’t choose the socially optimal price level, the demand and supply market does. This means that each firm is making just enough to keep in the business (i.e. economic profit, not same thing as accounting profit) and can’t set the price level higher. There’s the whole exit/enter situation, but firms aren’t choosing to lower or raise the price level–this happens automatically because of the profits/losses incurred.</p>

<p>2MA is actually just B. I struggled a bit with this one, but basically just know that bond prices will increase when interest rates decrease (and the other way around) because, well, let’s do this through example. </p>

<p>You buy a government bond for $50, which basically just means that the gov’t will pay you back $50 in the future adjusted for inflation etc. etc. etc. Then, the Fed comes out, increases the money supply, and effectively decreases the interest rate. So, now, you will get to jack up the price of your bond in order to sell it since it’s making less on its interest rate than it used to. So, mathematically let’s say it was a $50 bond, 10% interest rate. Then, after the money supply change, it’s still worth $50, but now interest rates are 5%. You get to jack the price of your bond price up in order to make up for the decrease in interest rate. So, to make the same amount that you put in ($500), you will bring the bond price up to $100.</p>

<p>Does that make sense? =P</p>

<p>Here’s a link to the website that explained it to me:</p>

<p>[Bonds</a> and Interest Rates - Bond Prices Move Inversely to Interest Rates](<a href=“http://stocks.about.com/od/understandingstocks/a/Bondint111004.htm]Bonds”>http://stocks.about.com/od/understandingstocks/a/Bondint111004.htm)</p>

<p>Once you get ahold of that, you’re golden!</p>

<p>P.S. If you present questions, then please do MC questions. You can make your own up or get them out of a study book. I suggest making them up–it’ll help you make sure your Econ. skills are thorough :D</p>

9

<p>i want in.
aim is
ostonzi</p>

10

<p>Hello everyone,</p>

<p>I have a question regarding both macro and micro for which i plan to take the ap exams, but it isn’t a study question (i’m sorry). i’m taking macro at my school right now and it’s the only one offered. however, my teacher isn’t that great. for example, she chose to skip the chapters regarding aggregate demand and supply, and she has been skipping too many important concepts. that’s why i chose to study for both of them on my own. the only problem is…after looking through the earliest princeton review study book i could find over macro/micro (2007), i noticed that it covers everything really briefly and simplistically as if it’s targeted for those who have a thorough background knowledge concerning most of the concepts. i don’t think i fall under that category, even though i’ve been reading chapters from my textbook on my own ahead of my class. please let me know if there is any other independent study book i could get (such as cliffnotes, barrons, REA, etc.), and which one might be a good fit for someone like me! thank you so much.</p>

11

<p>The AP test doesn’t really have lots of indepth information. The test is Economics 101, so it is fairly basic economic knowledge. That said if you need more info I would suggest looking at the McConnell & Brue book on economics. It is really well done.</p>

12

<p>5 Steps to a 5 is much, much more in-depth. I would also suggest Economics for Dummies because it teaches you economic thought really well. Be warned though, it doesn’t have all of the review for Macro but for Micro it covers around 70% of it. Anything else you can just study from PR or Barron’s :)</p>

<p>Okay, I’ll start the chain of questions again.</p>

<p>I’ll post a Macro so the two subjects are finally balanced.</p>

<h1>3Ma. If unexpected deflation occurs, which of the following groups are hurt?</h1>

<p>I. Banks lending on a fixed interest rate
II. Families with flexible savings deposits
III. Borrowers on loans with expected inflation rates</p>

<p>A. I only
B. II only
C. III only
D. I and II
E. I and III</p>

13

<p>Thank you so much for making this forum! I’m really alone in my economics class (much of the class goofs off), and I’m too afraid to ask questions to test if I comprehend the material fully (the teacher barks at anyone who asks questions). </p>

<p>I would join the AIM thing, but I don’t have AIM. I can do Yahoo No-Download Messenger, though =)</p>

<p>And Nash Equilibrium is Micro. I don’t know if this is on the AP or not, but we learned it in class. It’s basically the theory for oligopolies to follow. The Game Theory presents a dilemma between choosing a decision and having one possibility happen and choosing another decision and having another possibility happen. This is due to the dependence of oligopolies on each other.
[Nash</a> Equilibrium](<a href=“http://william-king.www.drexel.edu/top/eco/game/nash.html]Nash”>http://william-king.www.drexel.edu/top/eco/game/nash.html)</p>

<p>I would say A for 3Ma, but that’s assuming that III’s expected inflation rates only applies to inflation =P</p>

<p>Here’s one for all:</p>

<p>Models of consumer behavior explain the downward slope of a demand curve with each of the following EXCEPT:
A. Substitution effect
B. Complement effect
C. Income effect
D. Diminishing marginal utility
E. All of the above are used to explain consumer behavior</p>

14

<p>ARGH… I’m so screwed for the Macro test! I don’t know anything (I just looked at a practice test). </p>

<p>Do you think I can self-study Macro in one month? Bleh… Can I get a decent score purely by studying from a review book?</p>

15

<p>I’m sure that you can–the amount of info you need to know isn’t that much, trust me. I truly suggest reading through Economics for Dummies, then picking up the review guide and just studying anything that isn’t included in EfD. 5 Steps to a 5 is pretty thorough, though they say Barron’s or PR is better. And if you looked at a practice test from Barron’s, don’t feel bad if you didn’t get a lot of it right–Barron’s MC are HORRIBLE.</p>

<p>I suggest looking through this video series (</p>

<p>And #3Ma is actually C-- I dorked up the wording though. I meant to put “Banks lending on a fixed inflation rate,” sorry. Anyway, III is the answer because let’s say I borrow $100 from you and we expect the inflation rate to be 10%, meaning that I’d have to pay you back $110 next year. Then if deflation occurs, which basically means less money is worth more, then I’ll be paying you back more because we expected the inflation rate to be higher. So, from our example, if 5% deflation occurs, then I should only be paying you back $105 but since I’m locked into the 10% inflation rate, I pay you back $110. I hope that makes sense =P</p>

<h1>3Mi (which is canned_dice’s question) is E, I’m sure, because A is true (if the price goes up, I’ll resort to buying more of a different good), B is true (if the price of hot dogs goes up, then I’ll buy less hot dogs and subsequently less buns), C is true (if we only have a certain amount of income, we’re going to buy less and less of more expensive goods), and D is true definitely (people get sick of buying too much of one good–Economic for Dummies’s example is the marginal utility of pizza and how as you eat each slice of pizza you become more and more sick of it. Thus, you should only buy a small amount). So yeah :)</h1>

<p>Let’s see… I’ll do a Macro one then.</p>

<h1>4Ma. Built-in stabilizers work primarily to</h1>

<p>A. manage price ceilings and create excess demand
B. provide employment during times of inflation
C. adjust income levels according to the business cycle
D. shorten the effects or length of a recessionary or inflationary period
E. keep a country indefinitely out recessionary or inflationary periods</p>

16

<p>I’m going to say D for #4Ma. Ex may include unemployment benefits, or progressive taxes.</p>

<h1>4Mi: In general, minimum wage laws cause</h1>

<p>A) Labor shortages
B) Labor surpluses
C) the maximum possible economic efficiency
D) An increase in demand for lesser-skilled workers
E) People to quit their jobs</p>

17

<p>Ah, I see. Thanks =) I guess I mixed up the “Borrowers like inflation” saying with “Lenders like inflation”. Oops xP</p>

<p>The source I got my question from says the answer is B. I think that’s just due to the weird wording of the “complement effect,” where in reality there is no such effect. That’s my only explanation.</p>

<p>4Mi: I think the answer is B. It creates a price floor (just like farmers with their crops and subsidies…). Hah, I always thought it was weird that the price floor was above equilibrium. </p>

<p>Here’s an easy-peasy.</p>

<h1>5Ma:</h1>

<p>Okun’s law states a relationship between the GDP gap and the _____________.
A. trade deficit
B. government budget deficit
C. actual and expected inflation rate
D. actual unemployment rate and the natural rate of unemployment
E. rate of growth in real GDP and the rate of growth in labor productivity</p>

18

<p>For #4Mi (one about min wage), I say it’s B. </p>

<p>I only know micro. </p>

<p>I would like to join the AIM thing. PM me for my AIM.</p>

19

<p>canned_dice, I’ve never heard of Okun’s Law before and I don’t think it’ll be on the AP test :S</p>

20

<p>Really? Aw, that sucks because that’s the only thing I remember from the macroeconomics class xD</p>

<p>How about… what is the expression for the CPI?</p>