Mr.

Sturguess’ Review 30 Flash Cards for the

AP ECON EXAM
*Remembering these terms and concepts will
help
you pass your AP EXAM
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*Odd pages are questions, Even pages are
answers

A substantial decrease in marginal
income tax rates will encourage
individuals to
Which of the following is a problem
with discretionary fiscal policy as an
economic stabilization tool?
How will an increase in the world price
of crude oil influence the economy of
an oil-importing country such as the
United States?
Which of the following best expresses
the central idea of countercyclical
fiscal policy?
For an oil-importing country such as
the United States, the immediate effect
of a supply shock caused by an
increase in the price of imported oil
would tend to be a(n)
Which of the following would tend to
throw the economy into a recession?
Restrictive fiscal policy may have
some undesirable consequences.
Among these is
During 2000-2004, the price of crude
oil increased substantially on the
world market. Other things constant,
how will an unanticipated increase in
oil prices influence the general level of
prices and real output of oil-importing
nations such as the United States and
Japan?
Which of the following will be most
likely to contribute to the growth of a
less-developed country?
 Deficits are planned during economic higher unemployment
work more hours recessions, and surpluses are utilized
to restrain inflationary booms

It is difficult to properly time decrease in real output and an Real output will decrease, and the
discretionary changes in fiscal policy. increase in the general level of prices. general level of prices will increase

Aggregate supply will decrease, an unanticipated reduction in secure property rights and low
leading to a decrease in real GDP. aggregate demand due to a sharp marginal tax rates
reduction in stock prices
Which of the following would be most
likely to improve the standard of living
of people in less-developed nations?
When an economy is operating at its
full employment rate of output,
Which of the following will most likely
increase the natural rate of
unemployment?
Which of the following would be most
likely to encourage capital formation
in a less-developed country?
For the United States, which statement
best characterizes the labor force
participation rates of men and women
over the past three decades?
Air travel from New York to Los
Angeles costs $600 and takes 5 hours.
A bus ticket between the cities costs
$100 and takes 105 hours. Other
things constant, the minimum value of
one's time that would induce a rational
individual to fly rather than drive
would be
The replacement of older products by
newer improved ones (causing
unemployment in the older product
sector while improving employment
conditions in the newer sector) is
called
Number in the labor force
40 million
Number unemployed
2 million
What is the unemployment rate of the
economy?
Using a production possibilities curve,
a technological advance that
increases the amount of output for the
same amount of inputs would be
illustrated as
 the expectation that property rights creative destruction.
an increase in foreign investment will be highly secure in the years
ahead

the actual rate of unemployment will The participation rate of women has 5 percent
equal the natural rate. increased while the participation rate
of men has decreased.

an increase in unemployment benefits an outward shift of the curve. the potential gains resulting from
specialization and the application of
the law of comparative advantage.

If an economy operates at a point
within its production possibilities
curve,
Gross domestic product is a measure
of both
A fact based on observable
phenomenon that is not influenced by
differences in personal opinion is
called
When adjusting nominal GDP for price
changes, it is preferable to use the
GDP deflator rather than the consumer
price index because
If a local shop buys a used motorcycle
for $1,000, refurbishes it, and resells it
for $2,500, the
New classical conomic theory
suggests that the most effective
strategy during a recession is for
the government to do nothing. The
most likely reason politicians do not
follow this is because
(I) GDP measures the market value of
final goods and services produced in a
country during a time period.
(II) An increase in a nation's GDP
indicates that the nation's net
economic welfare has increased.
In economics, man-made resources
such as tools, equipment, and
structures that are used to produce
other goods and services are referred
to as
If policymakers cut taxes because they
think that recession is a major threat,
a proponent of
the new classical view will be most
likely to argue that the tax cut is
A substantial decrease in marginal If the crowding-out effect is strong, Which of the following makes it more
income tax rates will encourage how powerful will the effect of difficult for monetary policy makers to
individuals to discretionary fiscal policy be? time policy changes correctly?

it is not efficiently using all of its I is true; II is false.

the potential gains resulting from resources.
specialization and the application of
the law of comparative advantage.

the market value of the output shop contributes value added equal to capital.
produced during a period and the cost $1,500, and consequently $1,500 is
of producing that output. added to GDP.
an objective concept. it would lead to their defeat in the next not very important because the
election. "demand stimulus effects" of lower
current taxes will be largely offset by
the expectation of higher taxes in the
future.

If there is a recession, what is the What are some fiscal policies that
nation facing? What would the would be useful in a recession? What are goals of the fiscal policies?
inflation rate have to be?

Explain how each policy action in a Explain how each policy action in a Explain how each policy action in a
recession will fit the goals. There are 3 recession will fit the goals. There are 3 recession will fit the goals. There are 3
possible answers. possible answers. possible answers.
Real GDP is declining and
unemployment is rising. Inflation is
moderate, rising 3 percent inflation in
the last year.
Decreasing personal income taxes will
provide will disposable income
available for consumption and saving.
Higher consumption will increase
aggregate demand and raise the level
of real GDP and employment and
possibly the price level. Because
unemployment is high, the effect on
the price level may be small. Some of
the savings might find its way to
financial markets and become
investment.
Policy recommendations are to
decrease personal income taxes,
decrease corporate income taxes
and/or increase government spending.
Decreasing corporate income taxes
will give businesses more money for
investment, raising aggregate
demand, real GDP and employment. If
businesses undertake purchases of
new capital, this could increase the
aggregate supply and the price level
might fall.
The goal would be to enact
expansionary fiscal policy actions to
raise employment and increase level
of real GDP, but to do so without
cause inflation.
Increasing government
spending is an option.
Government spending is a
direct injection and none is
lost to savings. Additional
disposable income as it
passes through the income
stream will also add to real
GDP and employment.