Module 2
Check Your Understanding- We talk about business cycles for the economy as a
whole because recessions and expansions are not con-
fined 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. - 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.
Tackle the Test:
Multiple-Choice Questions - a
- d
- e
- c
- b
Tackle the Test:
Free-Response Question - Inflation is an overall increase in the price of goods and
services throughout an economy. If inflation occurs, the
price of donuts will most likely increase, but an increase
in the price of this one good does not indicate inflation.
For example, the price of donuts might have increased
due to an increase in the price of sugar, while the prices
of most other goods in the economy have remained
unchanged.
Module 3
Check Your Understanding- a.False. An increase in the resources available to Tom for
use in producing coconuts and fish changes his produc-
tion possibilities curve by shifting it outward, because he
Solutions to
AP Review Questions
Module 1
Check Your Understanding- 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). - a.time spent flipping burgers at a restaurant: labor
b.a bulldozer: capital
c.a river: land - 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. - 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 dan-
gerous 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.
Tackle the Test:
Multiple-Choice Questions - d
- d
- b
- b
- a
Tackle the Test:
Free-Response Question - In positive economics there is a “right” or “wrong”
answer. In normative economics there is not necessarily a
“right” or “wrong” answer. There is more disagreement in
normative economics because there is no “right” or
“wrong” answer. Economists disagree because of (1) dif-
ferences in values and (2) disagreements about models
and about which simplifications are appropriate.
S-1
This section offers suggested answers to the AP Review Questions that appear at
the end of each module.