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Welcome to AP Macroeconomics. You are an economist now so start thinking like one.

Economics is the study of how we, as humans, choose to allocate our limited resources in order to deal with our unlimited wants. So let’s start making decisions.

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Choices, choices, choices: Your summer assignment starts with a choice, or an opportunity cost if you will. “Opportunity cost” is the next best alternative that is given up to get something else. When you select one the following options, you will pay an opportunity cost. Whether you realize it or not, you will be weighing the cost and benefits of each option. In economics, and in life, if you only think in the short-term you will find yourself behind in the long-term.

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Choice A: Complete the summer assignment and do a great job. Choice B: Wait until mid-August and fill out real quick. Take a chance that Mr. Kirschner will not be reading the answers very carefully and will give me a good grade. Choice C: Choose not to take this serious, work on it the day I get back to school during homeroom, and turn into Mr. Kirschner hoping he is a nice guy.

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Let’s go over the possible outcomes so that you can make a rational choice to do the assignment (or not). 1. Mr. Kirschner has a great summer, comes back to school in such a great mode, decides that the summer assignment was not worth it, and gives everyone in the class an “A”. (Less than 1%). 2. You will likely do this assignment because your incentive is this will be one of two major assignments in the 1st marking period, meaning it could be up to 15-30% of you first marking period grade. 3. You will complete it because I will explain to your parents that you were a slacker and did not take this serious. Once they hear that they take your phone, threaten to not allow you to attend prom, and make you complete it after the school year begins. You hand it in late, get a bad grade, and are punished for receiving a failing grade.

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The thing is, unlike an economist, you actually know what happens in the future when you make this choice so the question is, “Why would you choose any option other than completing the summer assignment over the summer since you already knowing the future consequence?” Now that you know the incentives and the consequences of your decisions, you have a choice to make. It is my hope that you will select Choice A. If you go with Choice C, good luck and you will have your work cut out for you in the fall.

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Please feel free to email me at [email protected]. I RARELY (once a week at the most), check my email during the summer. Sometimes I am on vacation for a week or two at a time. When I do check my email I will respond immediately.


Answer #1 and 2 worksheets directly on the worksheet. You can answer # 3 through 8 worksheets on a separate sheet of paper or on the sheet provided. Make sure each answer is labeled so I know which question you are answering. One important economic concept. There is no fluff in Economics. Only answer what is being asked. You do not need introductions, conclusions, lead in answers, supporting details, etc. JUST ANSWER THE ANSWER. Nothing more, nothing less.

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1. Basic Economic Concepts:

Define the following resources(fill in the answers to the right of the word): 1. labor : 2. land: 3. capital: 4. entrepreneurship:

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Generate a quick list of words to distinguish needs vs wants: 5. Wants:

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Economic resources are limited/scarce which implies that the goods/services they produce must be limited. (Scarcity requires that choices be made. Choices imply that things are given up.)

! 7. Provide an example that relates to the school or local community (Scarcity and Choice): ! ! 8. Provide an example at the national level (Scarcity and Choice): ! ! Opportunity Cost: The real cost of something is what you must give up to get it List 3 opportunity cost decisions you made this summer: 9..

! 10.. ! 11.. ! 12. What does “There is no such thing as a free lunch” mean? ! 13. Describe the difference between Microeconomics and Macroeconomics: ! 14. Describe the difference between positive and normative economics:


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2. Measurement of Economic Performance

Looking at the picture above describe the five steps of a business cycle (you can start at any point on the business activity line):

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1. 2. 3. 4. 5.

! 6. How do we know our current position in the business cycle? ! Labor Force: LF = E (Employed) + U (Unemployed) !

Unemployment rate: UR (Unemployment Rate) % = 100(#U) / (#LF) The unemployment rate is defined as the percentage of the labor force that is not employed.

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A country has the following labor statistics: Military Personnel (not counted towards employment)……………………………1.5 million Population under 16 years old who are working part time (not counted)………….0.3 million Population over 16 years old who are working part time …………………………. 4 million Population over 16 years old who are working full time ……………………..........14 million Those without jobs and who are actively seeking jobs …………………………......2 million

! Calculate the size of the civilian work force and the unemployment rate: ! 7. LF= 8. UR=

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9. Explain how each of the following relates to efficient outcomes in a market economy: Adverse selection, “perverse incentives”, principal-agent problem, and the prisoner’s dilemma:

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3. Measurement of Economic Performance (Cont.): 1. Explain externality in your own words. 2. What roles does government play in a market economy? 3. What are the reasons why government should take a limited role in a market economy? 4. Why is a nation's GDP a good measure of its economic well-being and progress? 5. Why is a nation’s GDP a poor measure of its economic well-being and progress?

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4. National Income and Price Discrimination:

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1. Why is the aggregate demand curve down-sloping? What role does the multiplier play in shifts of the aggregate demand curve? 2. Distinguish between “real-balances effect” and “wealth effect”. How does each relate to the aggregate demand curve? 3. What assumptions cause the immediate-short-run aggregate supply curve to be horizontal? Why is the long-run aggregate supply curve vertical?

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5. The Financial Sector 1. What are the three basic functions of money? Describe how rapid inflation can undermine money’s ability to perform each of the three functions. 2. What “backs” the money supply in the United States? What determines the value (domestic purchasing power) of money? How does the purchasing power of money relate to the price level? 3. What is meant when economists say that the Federal Reserve Banks are central banks, quasipublic banks, and bankers’ banks?

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6. Stabilization Policies (Inflation, Unemployment, and Policy)

1. How, in general, can a financial crisis lead to a recession? How, in general, can a major new invention lead to an expansion? 2. Why is unemployment an economic problem? What are the noneconomic effects of unemployment? Since the United States has an unemployment compensation program that provides income for those out of work, why should we worry about unemployment?

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7. Economic Growth

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1. How is economic growth measured? Why is economic growth important? Why could the difference between a 2.5 percent and a 3 percent annual growth rate be of great significance over several decades? 2. What are the four supply factors of economic growth? What is the demand factor? What is the efficiency factor? Illustrate these factors in terms of the production possibilities curve.

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8. International Trade and Finance

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1. How important is international trade to the United States relative to the importance of trade to other nations (Show number, such as % of GDP)? What country is the United States’ most important trading partner, quantitatively? With what country does the United States have the largest trade deficit? 2. Identify and state the significance of each of the following trade-related entities: (a) the WTO; (b) the EU; (c) the Euro Zone; and (d) NAFTA. 3. What is offshoring of white-collar service jobs and how does that practice relate to international trade? Why has offshoring increased over the past few decades? Give an example of how offshoring can eliminate some American jobs while creating other American jobs.