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AP Microeconomics/Macroeconomics FIVE STEPS TO A 5 AP Microeconomics/Macroeconomics Other books in McGraw-Hill’s 5 STEPS TO A 5 series include: AP Biology AP Calculus AB/BC AP Chemistry AP Computer Science AP English Language AP English Literature AP Physics B and C AP Psychology AP Spanish Language AP Statistics AP U.S. Government and Politics AP U.S. History AP World History Writing the AP English Essay FIVE STEPS TO A5 AP Microeconomics/ Macroeconomics 2008-2009 Eric R. Dodge MCGRAW-HILL New York Chicago San Francisco Lisbon London Madrid Mexico City Milan New Delhi San Juan Seoul Singapore Sydney Toronto Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved. Manufactured in the United States of America. Except as permitted under the United States Copyright Act of 1976, no part of this publication may be reproduced or distributed in any form or by any means, or stored in a data- base or retrieval system, without the prior written permission of the publisher. 0-07-159598-8 The material in this eBook also appears in the print version of this title: 0-07-149795-1. All trademarks are trademarks of their respective owners. Rather than put a trademark symbol after every occurrence of a trademarked name, we use names in an editorial fashion only, and to the benefit of the trademark owner, with no intention of infringement of the trademark. Where such designations appear in this book, they have been printed with initial caps. McGraw-Hill eBooks are available at special quantity discounts to use as premiums and sales promotions, or for use in corporate training programs. For more information, please contact George Hoare, Special Sales, at [email protected] or (212) 904-4069. TERMS OF USE This is a copyrighted work and The McGraw-Hill Companies, Inc. (“McGraw-Hill”) and its licensors reserve all rights in and to the work. Use of this work is subject to these terms. Except as permitted under the Copyright Act of 1976 and the right to store and retrieve one copy of the work, you may not decompile, disassemble, reverse engineer, reproduce, modify, create derivative works based upon, transmit, distribute, disseminate, sell, publish or sublicense the work or any part of it without McGraw-Hill’s prior consent. You may use the work for your own noncommercial and personal use; any other use of the work is strictly prohibited. Your right to use the work may be terminated if you fail to comply with these terms. THE WORK IS PROVIDED “AS IS.” McGRAW-HILL AND ITS LICENSORS MAKE NO GUARANTEES OR WARRANTIES AS TO THE ACCURACY, ADEQUACY OR COMPLETENESS OF OR RESULTS TO BE OBTAINED FROM USING THE WORK, INCLUDING ANY INFORMATION THAT CAN BE ACCESSED THROUGH THE WORK VIA HYPERLINK OR OTHERWISE, AND EXPRESSLY DISCLAIM ANY WARRANTY, EXPRESS OR IMPLIED, INCLUDING BUT NOT LIMITED TO IMPLIED WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE. McGraw-Hill and its licensors do not warrant or guarantee that the functions contained in the work will meet your requirements or that its operation will be uninterrupted or error free. Neither McGraw-Hill nor its licensors shall be liable to you or anyone else for any inaccuracy, error or omission, regardless of cause, in the work or for any damages resulting therefrom. McGraw-Hill has no responsibility for the content of any information accessed through the work. Under no circumstances shall McGraw-Hill and/or its licensors be liable for any indirect, incidental, special, punitive, consequential or similar damages that result from the use of or inability to use the work, even if any of them has been advised of the possibility of such damages. This limitation of liability shall apply to any claim or cause whatsoever whether such claim or cause arises in contract, tort or otherwise. DOI: 10.1036/0071497951 Professional Want to learn more? We hope you enjoy this McGraw-Hill eBook! If you’d like more information about this book, its author, or related books and websites, please click here. ABOUT THE AUTHOR Eric R. Dodge was born in Portland, Oregon and attended high school in Tigard, Oregon. He received a bachelor’s degree in Business Administration from the University of Puget Sound in Tacoma, Washington before attending the University of Oregon for his master’s and doctoral degrees in Economics. While at the University of Oregon he received two graduate student awards for teaching and became a die-hard fan of the Ducks. Since 1995 he has been teaching economics at Hanover College in Hanover, Indiana, the oldest private college in the state. The author teaches principles of microeconomics and macroecon- omics, intermediate microeconomic theory, labor economics, environmental economics, industrial organization, statistics, and econometrics. Since 2000 he has served as a faculty consultant for the Educational Testing Service reading AP free-response exams. He lives in Madison, Indiana with his wife, Molly and son Eli. Copyright © 2008 by The McGraw-Hill Companies, Inc. Click here for terms of use. This page intentionally left blank For more information about this title, click here CONTENTS Preface, ix Acknowledgments, xi Introduction: The Five-Step Program, xiii STEP 1 Set Up Your Study Program, 1 1 What You Need to Know About the AP Economics Exams, 3 2 How to Plan Your Time, 12 STEP 2 Determine Your Test Readiness, 17 3 Take Diagnostic Exams, 19 Diagnostic Exam: AP Microeconomics, 23 Diagnostic Exam: AP Macroeconomics, 28 STEP 3 Develop Strategies for Success, 39 4 How to Approach Each Question Type, 41 Multiple-Choice Questions, 41 Free-Response Questions, 44 STEP 4 Review the Knowledge You Need to Score High, 47 5 Fundamentals of Economic Analysis, 49 Scarce Resources, 50 Production Possibilities, 53 Functions of Economic Systems, 59 6 Demand, Supply, Market Equilibrium, and Welfare Analysis, 63 Demand, 63 Supply, 69 Market Equilibrium, 72 Welfare Analysis, 77 7 Elasticity, Microeconomic Policy, and Consumer Theory, 82 Elasticity, 83 Microeconomic Policy and Applications of Elasticity, 91 Consumer Choice, 98 8 The Firm, Profit, and the Costs of Production, 107 Firms, Opportunity Costs, and Profits, 108 Production and Cost, 109 9 Market Structures, Perfect Competition, Monopoly, and Things Between, 121 Perfect Competition, 122 Monopoly, 132 Monopolistic Competition, 137 Oligopoly, 139 viii ❯ Contents 10 Factor Markets, 145 Factor Demand, 146 Least-Cost Hiring of Multiple Inputs, 150 Factor Supply and Market Equilibrium, 152 Imperfect Competition in Product and Factor Markets, 153 11 Public Goods, Externalities, and the Role of Government, 157 Public Goods and Spillover Benefits, 158 Pollution and Spillover Costs, 160 Income Distribution and Tax Structures, 162 12 Macroeconomic Measures of Performance, 169 The Circular Flow Model, 170 Accounting for Output and Income, 171 Inflation and the Consumer Price Index, 177 Unemployment, 181 13 Consumption, Saving, Investment, and the Multiplier, 187 Consumption and Saving, 188 Investment, 191 The Multiplier Effect, 194 14 Aggregate Demand and Aggregate Supply, 201 Aggregate Demand, 201 Aggregate Supply, 204 Macroeconomic Equilibrium, 207 The Trade-off Between Inflation and Unemployment, 212 15 Fiscal Policy, Economic Growth, and Productivity, 219 Expansionary and Contractionary Fiscal Policy, 219 Difficulties of Fiscal Policy, 223 Economic Growth and Productivity, 225 16 Money, Banking, and Monetary Policy, 232 Money and Financial Assets, 232 Fractional Reserve Banking and Money Creation, 239 Monetary Policy, 241 17 International Trade, 249 Comparative Advantage and Gains from Trade, 249 Balance of Payments, 253 Foreign Exchange Rates, 255 Trade Barriers, 258 STEP 5 Build Your Test-Taking Confidence, 263 AP Microeconomics Practice Exam 1, 267 AP Macroeconomics Practice Exam 1, 287 AP Microeconomics Practice Exam 2, 309 AP Macroeconomics Practice Exam 2, 329 Appendixes, 347 Bibliography, 348 Web Sites, 349 Glossary, 350 Important Formulas and Conditions, 358 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, both for 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, but a memorizer of formulas is in deep trouble when asked to ana- lyze the relative success of several possible economic policies or to draw fine distinctions between competing economic theories. 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 exams. 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 the first four chapters 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.
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