Princeton Review_ AP Macro&Micro, 2013

Robert Franek, Senior VP, Publisher Laura Braswell, Senior Editor Selena Coppock, Senior Editor Calvin Cato, Editor Meave Shelton, Editor Production Michael Pavese, Publishing Director K

Robert Franek, Senior VP, Publisher Laura Braswell, Senior Editor Selena Coppock, Senior Editor Calvin Cato, Editor Meave Shelton, Editor

Production

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The Princeton Review is not affiliated with Princeton University eISBN: 978-0-307-94581-5

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2013 Edition

v3.1

I would like to thank The Princeton Reviewteam for their wonderful support during thecreation of this book Centre Collegegenerously provided computer resources.Peggy Pride, Clark Ross, and Claire Melicanprovided invaluable comments I thank mychildren Austin and Ally for making melaugh even when deadlines loomed, and fornot pushing that one button on the plasticbox while I worked None of this would havebeen possible without the kind support of

my wife, Donna, who graciously tolerates

my idealistic goal of showering the worldwith the joy of economics

The Princeton Review would like to thank

Holly Jones for her work updating thisedition.

INTRODUCTION

WHAT IS THE PRINCETON REVIEW?

The Princeton Review is an internationaltest-preparation company with branches inall major U.S cities and several abroad In

1981, John Katzman started teaching anSAT prep course in his parents’ living room.Within five years, The Princeton Review hadbecome the largest SAT prep program in thecountry

Our phenomenal success in improvingstudents’ scores on standardized tests is due

to a simple, innovative, and radicallyeffective philosophy: Study the test, not justwhat the test claims to test This approachhas led to the development of techniques fortaking standardized tests based on theprinciples the test writers themselves use towrite the tests

The Princeton Review has found that itsmethods work not just for cracking the SAT,but for any standardized test We’ve already

successfully applied our system to theGMAT, LSAT, MCAT, and GRE, to name just

a few Obviously, you need to be wellversed in economics to do well on the APEconomics Exams, but you should rememberthat any standardized test is partly ameasure of your ability to think like thepeople who write standardized tests Thisbook will help you brush up on your APEconomics and prepare for the exam usingour time-tested principle: Crack the systembased on how the test is created

We also offer books and online servicesthat cover an enormous variety of educationand career-related topics If you’reinterested, check out our website atPrincetonReview.com

I

How to Crack the

System

About the AP Economics

Exams

WHO SHOULD TAKE AP COURSES AND EXAMS?

C OSTS AND B ENEFITS

You might want to take an AP Economicscourse for the following reasons: to receivecollege credit and/or advanced placement,

to reap the benefits of a faster-pacedcurriculum and better teachers, or simply(and quite understandably!) because youlike economics The combined benefits of an

AP Economics experience can be great, but

as any good economist would say, you mustweigh the benefits against the costs If APEconomics requires a lot of serious studyand challenges your intellect, that isnormal, and continued study with the help

of this book is likely to be worthwhile Ifstudy at the AP level leads you on a pathtoward great misery, the failure of yourother classes, or a dislike of economics, you

should consider taking a lower-level course

in high school and taking college-leveleconomics in college

If you are already about to complete an

AP Economics course, the decision to takethe test should not be difficult The

“marginal”) cost in terms of time andmoney is small relative to the potentialbenefits of obtaining some college creditsahead of the game

L IKELIHOOD OF S UCCESS

Each AP exam receives a numerical score of

1 to 5 with each score meaning thefollowing:

5 = Extremely Well Qualified

4 = Well Qualified

3 = Qualified

2 = Possibly Qualified

1 = No Recommendation

Colleges decide for themselves theminimum score they will accept for collegecredit and/or advanced placement TheAmerican Council on Education recommendsthe acceptance of grades of 3 or above, andmany colleges adhere to these standards.About 60 percent of students who take themicroeconomics or macroeconomics APexam receive a score of 3 or above Write tothe Director of Admissions at the college(s)

of your choice to learn the school’s policy ongranting credit or advanced placement

Scoring Your Exam

The macro and micro exams have 60 pointseach available on the multiple-choicesection and around 30 points available onthe free-response section These raw scoresare converted to grades on a scale from 1 to

5 before they are reported to you or yourchosen colleges The AP Test DevelopmentCommittee works with experts at ETS(Educational Testing Service) and theCollege Board to create the formula thatconverts raw scores to composite scores.Additionally, the scores are weighted so thatthe multiple-choice section accounts fortwice as much of the maximum compositescore as the free-response section The ChiefReader then sets the grading scale thattranslates the composite scores into scores

of 1 through 5 The formulas, grading scale,and outcomes for a representative AP examappear below Although the gradecalculations may differ to a small degreeeach year, you can apply these formulas toyour scores on the practice exams in thisbook to get a rough idea of your standing

Our exams are designed so that the firstfree-response question is worth nine points,

and the second and third are worth fivepoints each.

Multiple-Choice Score +

Free-Response Score = Composite

Percent of Students

Composite Micro

Percent Students

REGISTRATION AND FEES

The macro and micro exams have a fee of

$87 each Your state or school district mightpay the exam fee for you—check with yourhigh school’s AP coordinator A feereduction of $22 per exam is also availablefor qualified students with acute financialneed See your AP coordinator to register forthe exam He or she will collect the fees and

inform you when and where to take theexam(s).

Students affected by extreme hardship(family tragedy, school closing, conflict withother exams, and so on) may take analternate exam within one week after theregularly scheduled date There may be anadditional fee, depending on thecircumstances

STUDENTS WITH DISABILITIES

The College Board offers a variety of

disabilities: Tests are available in Braille,enlarged text, and audiocassette Studentsmust submit an eligibility form to requestthese services or for more time to take theexam Contact your AP coordinator well inadvance of the actual test to make anynecessary arrangements

WHAT TO TAKE TO THE EXAM

Do not take books, food/drink, computers,anything that makes noise, scratch paper,rulers, clothes with economics-relatedinformation on them, or any kind ofphotographic or recording device.Calculators are not allowed for use onany part of the exam Since the goal is totest economic and not mathematical skills,any required calculations are designed to be

as easy as possible You should take thefollowing:

Your secondary school code number

A watch to pace yourself On each examthere are 70 minutes of multiple-choicequestions, 10 minutes of reading andplanning for the free-response section,and 50 minutes of free-response

questions

Several black or dark blue ballpoint

pens for the free-response questionsSeveral number 2 pencils with erasersfor the multiple-choice questions

Optional: Your social security number ifyou want it used for identification andprinted on your AP grade reports

CHEATERS NEVER PROSPER

This book describes a number of desirablestrategies for test taking; cheating is not one

of them Years of experience have led to aseries of effective policies against cheating

on the exam Don’t bother trying anythingthat’s against the rules You’ll always lose

HOW TO GET MORE INFORMATION

Additional information on AP policies, theexam schedule, and the AP Economics exam

is available on the College Board’s website

at http://APcentral.collegeboard.com or by

apexams@info.collegeboard.com

Preparing for the AP Economics Exams

EFFECTIVE STUDY HABITS

L OCATION

They say the three most important decisionsfor starting a business are location, location,and location The same is true for studying.The key is to avoid serious distractionswithout going somewhere so boring that allyou can think about is leaving Summon thecourage to get away from the phone, thestereo, and the computer Some people areproductive in a remote corner of their home

or in a public library For others, a foodcourt or cafe provides nourishment, justenough background noise so that noparticular sounds are distracting, and thepossibility of running into an occasionalfriend to make things more interesting

T IMING

Choosing a good time to study can be just as

important as choosing a good location Thebest times are when you won’t be distracted

by other duties or by the overwhelmingdesire to snooze Weekend mornings andevenings after dinner might be times whenyou can develop study momentum.Experiment and establish a routine thatworks well given your own circumstances.Pacing yourself and setting daily goals canmean the difference between facing animpossible crunch right before the exam andenjoying a fruitful immersion in economicthought Economics can be a lot of fun tolearn, but you’re going to hate it if you’retrying to learn six months’ worth of material

as you organize the pieces After takinggood notes from the subject review in thisbook, in class, and from your textbook,summarize the information about importantconcepts in a central place Having asummary sheet that pulls together all thatyou have learned about a particular marketstructure or school of economic thoughtmakes it easier for you to reference andreview material than if you have to juggle

18 different pieces of paper and books

R EWARDS

Economic research indicates that incentivesmatter and that we tend to discount thefuture rewards that will follow from ourlabors Encourage your work ethic by givingyourself some immediate gratification.Reward your progress with study breaks, afavorite television show, or a snack Somestudents study with a stack of chocolates—

or some other little treat—on their desk,allowing themselves to indulge after everyhour of learning.

to study the definitions It is best to makeyour own cards, not just to save money, butbecause you will learn a lot in the process ofwriting them out Write the economics term

on the front of a 3 × 5 index card and thedefinition on the back Quiz yourself on oneterm at a time: Look at the word and thentry to explain its meaning to yourself (or afriend) without looking at the back You can

also play the game in reverse—read thedefinition and see if you can identify theterm Stick your pack of cards in your backpocket and study them on the bus, standing

in line, and whenever you’re bored

STUDY TIP: Flashcards are not

an adequate way to studygraphs You can look at andidentify a graph 100 times, but ifyou don’t practice drawing thegraph over and over withoutlooking at the card, you’reasking for trouble on the test

You can save yourself some time bylearning root words of economic terms Ifthe meanings of terms like “marginal,”

“average,” and “total” are clear to you, thisknowledge will assist you with all of the

definitions and formulas for all the termsthat include these words For example,marginal means “of/from one more,” somarginal cost means the cost of making onemore unit of output, marginal utility meansthe utility from one more unit of a good,marginal revenue means the revenue fromone more unit of output, and so forth.Similarly, “average” always involves takingthe total and dividing it by the numberinvolved Thus, average cost is the total costdivided by the number of units of output,average variable cost is the total variable costdivided by the number of units of output,average revenue is the total revenue divided

by the number of units sold, and so on Asyou can see, often the term itself describeswhat the formula or graph will look like

10 S TEPS TO S UCCESS

Your success on the AP exam will depend on

your ability to use this book, your economicsclass, and your textbook to your bestadvantage The steps below outline astrategy that works for using theseresources.

1 Take notes from the book

Active reading is the key to effectivestudying Mere highlighting is less effectivethan taking notes because it is too passiveand therefore the material does notnecessarily get “processed” through yourbrain If you read about a concept and thenwrite down a description in your ownwords, you create a self-containedexplanation that speaks your language andwill be easy to remember while studying forthe exam If you cannot explain the concept

to yourself on paper, this is a clearindication that you need to study thematerial further Try reading thecorresponding section in this book to see if

that explanation makes more sense to youthan the one in your textbook.

2 Use colored pens and rulers forclarity

Graphs drawn freehand in one colorquickly become an unreadable mess as moreand more curves are added and shifted.Graphs are essential to solving economicproblems: Take pride in your draftsmanshipand draw graphs that are so clear that theyscream the answers out at you Drawingyour graphs too small can also make themunnecessarily hard for you (and testgraders, come exam time) to understand.Remember the wise words of economist ErikWeissman: “If you can’t solve the problem,draw a larger graph!”

3 Summarize what you’ve learned.For example, you will learn about thesupply curve in this book, during classroomlectures, from textbooks, and perhaps from

active learning exercises and computerizedtutorials Summarize what you learnedabout each concept and curve in a centralplace Summary sheets will serve you wellduring your final preparations for the exam.

4 Draw all of the graphs, completewith proper labels, until you know them

by heart

As we will note throughout this book,graphs can be your best friend or your worstenemy You need them on your side, sostudy them and draw them until you candraw them without looking at the book Onyour summary sheets, explain the slopes,intercepts, and intersections to yourself inyour own words Be sure to learn the axislabels as well

5 Work all the problems you can find.One of the most common mistakesstudents make when studying is to look atgraphs and solutions to problems and think

something like, “That’s familiar to me; I can

do that.” Riding a bike may also look easyuntil you try it the first time Then youdiscover that it takes a lot of practice.Economics is very much the same Evenafter you feel comfortable with the material,

it takes a lot of practice before you knowhow to correctly approach and conquer theproblems So get on that bike and practice!

6 Work together in study groups toattack difficult problems

Explaining concepts to your classmatescan be one of the best ways to solidifyinformation in your own memory bank andlearn what you don’t understand Be surethat your participation in the study group isbalanced between giving and receivinghelp If you are spending a lot of time onthe receiving end, you need to spend moretime studying independently before joiningthe group session Watching others solve

problems is no substitute for solving themyourself.

7 Read the textbook before class

By coming to class prepared, you willhave a better understanding of the lecture,and you will be able to ask questions aboutthe reading while that material is beingcovered in class It is more awkward to raisequestions on textbook material that wascovered during a previous class

8 Take good notes in class

You probably won’t remember what youdon’t write down A good teacher has gems

of wisdom that you won’t want to forget.This is also a chance to practice drawinggraphs and rehearsing definitions

9 Ask questions in class about thetextbook, homework, and lecture

Don’t let the lecture or the reading getahead of you New concepts will build onold concepts and a little shyness early on

can lead to a lot of confusion later Mostteachers would agree with the followingprinciples:

Don’t worry that asking questions willsignal a lack of intelligence to yourteachers; it typically has the oppositeeffect Those who ask questions aregenerally the best students

If one person has a question, it’s likelythat many people in the class have beenwondering the same thing They will besilently relieved that you had the

courage to inquire

There’s no such thing as a stupid

question—you’re taking the courseprecisely because you don’t alreadyknow this stuff

10 Visit your teachers after class foranswers to any remaining questions

The above nine steps will get you far, butsometimes you will still be unclear on a fewthings Do not hesitate to ask your teachersquestions after class that you could not askduring class If they cannot help youdirectly, they can probably help you find theanswer to difficult questions using libraryresources, economists in the area, theInternet, or other sources of information.Remember that economics is a broad fieldand even the Nobel Prize winners can’tanswer every question on the spot Youmight get a more thorough and accurateanswer by not always expecting animmediate response You might asksomething like, “Could you cover this inclass tomorrow?”

Test-Taking Strategies

This section outlines a strategic approach tocracking the AP Economics test We, at ThePrinceton Review, are standardized testexperts, so we can teach you how to bestapproach each question and rack up thepoints Learning our strategies andtechniques and using them when you takethe test will help you do better, especiallywhen you aren’t positive what the correctanswer is We’ll refer back to thesestrategies throughout the book to make sureyou are incorporating them into yourpractice.

CRACKING THE MULTIPLE-CHOICE QUESTIONS

Multiple-choice questions account for thirds of your total examination grade.During the multiple-choice section of eachexam you will have 70 minutes to answer 60questions, or 70 seconds per question You