Advanced Placement Economics: Teacher Resource Manual


Table of Contents

  • Front Material
    This is the front material from the publication including the table of contents, introduction, etc.
  • Microeconomics Unit 1: Unit Overview
    This gives you a brief overview of Unit 1 along with a lesson planner.
  • Microeconomics Unit 1: Sample Plan
    This is a sample plan for what should taught each day for Unit 1.
  • Microeconomics Unit 1: Lesson 1 - The Economic Way of Thinking
    Advanced Placement Economics has thousands of details that can confuse students. The students need a framework to organize these details. This lesson acquaints the students with basic economic concepts and methodology. It begins with some key economic ideas, which represent a new set of lenses through which the students may view the world. The lesson ends with a test of economic myths that should get the students' attention. This exercise also gives the teacher a way of reinforcing the eco-nomic concepts taught at the beginning of the lesson.
  • Microeconomics Unit 1: Lesson 2 - Scarcity, Opportunity Cost and Production Possibilities Curves
    This lesson deals with opportunity cost, one of the most important concepts in economics. Start with a lecture on scarcity and production possibilities curves. Then reinforce the lecture by using Activity 2, which develops the central economic problem of scarcity. Opportunity costs include not only out-of-pocket expenses (explicit costs) but also the value of resources that could be used elsewhere (implicit costs). Understanding explicit and implicit costs will be essential as the students analyze product markets. Explicit and implicit costs are the focus of Activity 3. In all societies, people must organize to deal with the basic problems raised by scarcity and opportunity cost. A society must decide which goods and services to produce, how to produce them and how to distribute them. Societies use three systems - tradition, command or market - to solve the basic problems. This is the focus of Activity 4. It is easier to analyze campus parking than a complex economic system. Finally, the United States has a mixed market system. The circular flow diagram (Activity 5) describes in a nontechnical way the major flows of goods, services, resources and money in a market economy.
  • Microeconomics Unit 1: Lesson 3 - Absolute Advantage and Comparative Advantage, Specialization and Trade
    Activity 6 introduces absolute advantage and comparative advantage. Although these concepts are covered in more detail in the international-trade unit in Macroeconomics, they explain economic activities intranationally as well. Students who take the AP Microeconomics Exam will be tested on them. People trade because both parties stand to benefit when they engage in voluntary exchanges. Comparative advantage is a powerful concept that helps explain how mutual benefits can occur from exchange. A nation and an individual have a comparative advantage when they can make one or more products at a lower opportunity cost than another nation or individual. When producers specialize in the lower-cost product, they can make additional goods, which they can trade to other producers for goods that would have been more costly to make. To determine a comparative advantage, costs must be measured in terms of what other products must be forgone to make a particular product. This relative measure is a subtle, difficult and very important idea for students to understand. A nation's or an individual's comparative advantage will change as the opportunity costs of products made available by different trading partners change.
  • Microeconomics Unit 1: Lesson 4 - Practice in Applying Economic Reasoning
    This lesson reinforces some of the economic-reasoning ideas that were introduced in Lesson 1. It provides practice in applying economic reasoning to a wide variety of conventional and unconventional situations. Activity 7 emphasizes marginalism, a concept used throughout the course. In this case, marginal or additional benefits are compared with marginal or additional costs. Activity 8 is a problem set that illustrates the idea that economic principles affect all kinds of behavior, not just financial, business or consumer behavior.
  • Microeconomics Unit 1: Answer Key: Sample Multiple-Choice Questions
    Answer key to sample multiple-choice questions for Microeconomics Unit 1.
  • Microeconomics Unit 1: Answer Key: Sample Short Free-Response Questions
    Answer key to sample short free-response questions for Microeconomics Unit 1.
  • Microeconomics Unit 1: Answer Key: Sample Long Free-Response Questions
    Answer key to sample long free-response questions for Microeconomics Unit 1.
  • Microeconomics Unit 1: Visuals
    Visuals for Microeconomics Unit 1.
  • Microeconomics Unit 2: Unit Overview
    Brief overview of Microeconomics Unit 2, as well as a lesson planner.
  • Microeconomics Unit 2: Sample Plan
    Sample lesson plan for Microeconomics Unit 2.
  • Microeconomics Unit 2: Lesson 1 - The Law of Demand
    In this lesson, the students learn about the law of demand. They first learn that a demand curve is downward sloping and then analyze why it is downward sloping. Finally, they find out which factors other than the price of a product can shift the demand curve for that product. Diagrams are essential for analyzing changes in demand and changes in quantity demanded, but manipulating diagrams is not enough. The students must understand the actual behavior that is illustrated by a demand curve.
  • Microeconomics Unit 2: Lesson 2 - Understanding Supply
    Prices are determined by demand and supply. This lesson examines the factors that affect supply; these factors are called the determinants of supply. The students should also understand the difference between changes in supply and changes in quantity supplied. Students may have more trouble understanding supply than demand. Supply describes the behavior of producers, and the students have had little experience as producers. Of course, they have a lot of experience as consumers.
  • Microeconomics Unit 2: Lesson 3 - Equilibrium Price, Equilibrium Quantity and the Interrelation of Markets
    The forces of supply and demand work to establish a price at which the quantity of goods and services people will buy is equal to the quantity suppliers will provide. Activity 14 illustrates this point. If supply or demand changes, equilibrium price and quantity change. Activity 15 drives this point home. Finally, the equilibrium price and quantity of a good or serv-ice established by supply and demand affect the equi-librium price and quantity in other markets. Market prices determine what to produce, how to produce and for whom to produce. This is an important point, which is illustrated by Activities 15 and 16.
  • Microeconomics Unit 2: Lesson 4 - Elasticity of Demand and Supply
    Knowledge of price elasticity of demand and supply helps the students understand how businesses make pricing decisions and how governments make decisions on taxation. These exercises on elasticity become increasingly complex. To answer the elasticity questions on the AP Exam,the students should know the qualities that determine price elasticity of demand and supply, how the total revenue method can be used to determine price elasticity of demand and how to calculate elasticity coefficients. Elasticity lends itself to complex application questions. Knowledge ofthe factors that determine elasticity may be more important than memorizing formulas. The students should also have some knowledge ofother elasticities including income elasticity of demand, cross elasticity of demand and elasticity of supply.
  • Microeconomics Unit 2: Lesson 5 - Price Ceilings and Floors
    Legislators often have been dissatisfied with the outcomes of free markets. The invisible hand is not good enough for them, so they mandate prices that are lower or higher than the equilibrium price. A price ceiling is a legal maximum price that may be charged for a good or service. If a price ceiling is below the equilibrium price, it will cause shortages and illegal, or underground, markets to develop. A price floor is a legal minimum price that may be charged for a good or service. If a price floor is above the equilibrium price, it will cause surpluses. In your presentation of price ceilings and floors, discuss how changing prices are incentives that determine what to produce, how to produce and for whom to produce. Sometimes the students are mechanistic and merely identify shortages and sur-pluses on a graph. They should instead understand why price ceilings cause shortages and price floors cause surpluses. People react to incentives in pre-dictable ways.
  • Microeconomics Unit 2: Lesson 6 - Complex Application Questions in Supply and Demand
    This lesson requires the students to apply price theory to a variety of situations. Learning the laws of economics is not enough. Problem solving concentrates the mind and forces the students to really understand an economic concept. Because many AP test questions will be complex application questions, these problems are good practice for the AP test.
  • Microeconomics Unit 2: Answer Key: Sample Multiple-Choice Questions
    Answer key to sample multiple-choice questions for Microeconomics Unit 2.
  • Microeconomics Unit 2: Answer Key: Sample Short Free-Response Questions
    Answer key to sample short free-response questions for Microeconomics Unit 2.
  • Microeconomics Unit 2: Answer Key: Sample Long Free-Response Questions
    Answer key to sample long free-response questions for Microeconomics Unit 2.
  • Microeconomics Unit 2: Visuals
    Visuals for Microeconomics Unit 2.
  • Microeconomics Unit 3: Unit Overview
    Brief overview of Microeconomics Unit 3, as well as a lesson planner.
  • Microeconomics Unit 3: Sample Plan
    Sample lesson plan for Microeconomics Unit 3.
  • Microeconomics Unit 3: Lesson 1 - An Introduction to Market Structure
    This lesson introduces the students to the kinds of market structures they will be studying during the next several weeks. Because most actual markets do not fit the assumptions of the perfectly competitive market model, it is necessary to examine what happens when these assumptions - such as perfect information and an industry consisting of many small firms - are violated. Economists have developed classifications and market models to explain how other market structures - such as those characterized by monopoly, oligopoly and monopolistic competition - can produce results that differ from those expected under purely competitive conditions. In this lesson, it is a good idea to point out that throughout the unit we will assume that firms want to maximize their profits. However, depending on the market structure of the industry, such behavior has greatly different effects on society and the economy. Stress that in this unit the students will use models and analytical skills to examine the behavior and effects of firms operating under different types of market structure. As social scientists, the students must support their conclusions.
  • Microeconomics Unit 3: Lesson 2 - The Costs of Production
    This lesson helps the students understand the relationship between output and input and ultimately to understand several cost concepts. This lesson is critical if the students are to grasp what follows. Although there are four types of market structure, the costs of the firm remain conceptually the same for each. Unless the students understand these cost concepts, they will be confused during the entire unit. For this reason, these concepts are repeated as part of Lesson 2. First, this lesson includes the application of opportunity costs (including implicit costs) to determine economic profit. Second, the students learn the interrelationships among these costs. Third, they learn how to graph cost curves in order to see more clearly how the costs are related to each other.
  • Microeconomics Unit 3: Lesson 3 - Perfect Competition in the Short Run and the Long Run
    This lesson is designed to help the students under-stand the profit-maximizing output of the perfectly competitive firm. Any firm maximizes profits by producing at the quantity where marginal revenue equals marginal cost. For a perfectly competitive firm, marginal revenue is equal to the price it receives for selling its product. This is because there are so many firms producing a homogeneous prod-uct that no one firm can influence the price. There-fore, a perfectly competitive firm maximizes profits by producing at the quantity where price equals marginal cost. In the short run, a firm has fixed costs. The firm maximizes profits by producing at the quantity where price equals marginal cost. In the short run, the per-fectly competitive firm may make a profit, have a loss or break even. Activity 27 illustrates this point. The long-run situation is much more complicat-ed, and the students must add an industry graph to the firm graph. Students confuse the firm and the industry. One way to explain this is to say there are many firms in an industry. Another is to tell the students that if they see marginal cost and price curves, they have a firm graph. If they see supply and demand curves, they have an industry graph. Activities 28 and 29 compare short-run equilib-rium with long-run equilibrium and analyze why long-run equilibrium occurs where P = MC = ATC. In the long run, a perfectly competitive firm will earn a normal profit, or break even. The perfectly competitive firm will produce at the quantity where price equals marginal cost equals average total cost; this is also the point where the firm is producing at its minimum average total cost. In long-run equilibrium, a perfectly competitive firm is allocatively and productively efficient. This is ter-rific for the economy and explains why competitive markets work to the consumer's advantage. Activity long-run equilibrium produces at the quantity where P = MC = ATC. If a firm makes an economic profit in the short run, more firms enter the indus-try and the price decreases. If a firm has short-run economic losses, it will exit the industry, and the price increases. This process has been covered in the AP free-response questions several times, each time with a different twist. Activity 30 differentiates a long-run cost curve from a short-run cost curve. It is important for the students to understand the difference and to grasp the concepts of economies and diseconomies of scale. Finally, Activity 31 summarizes both short-run and long-run equilibria. Students can never have enough practice with these graphs.
  • Microeconomics Unit 3: Lesson 4 - The Monopoly Firm
    In Lesson 3, the students learned why perfect competition leads to an optimum allocation of resources in the long run. They found that even though the perfect competitor's goal is to maximize profits, in the long run the perfect competitor makes no economic profits-only normal profits. The perfect competitor also is productively (technically) and allocatively efficient. All rejoice when the perfectly competitive firm seeks to maxi-mize profits. When a monopolist attempts to maximize profits, the result is a misallocation of resources. In long-run equilibrium, the monopoly may make an economic profit and is not allocatively or productively efficient. All (except the monopolist) can complain when a monopoly attempts to maximize profits. Activity 32 is a key to understanding monopoly behavior. The cost concepts for all types of market structures are conceptually the same. But a monopo-list is a price seeker (price searcher). The monopo-list's demand curve is downward sloping, and mar-ginal revenue is less than price. Therefore, marginal revenue and price are different for a monopoly. Activity 33 illustrates long-run equilibrium for a monopolist. Students should see that a monopoly will charge a higher price, produce less, and be less productively and allocatively efficient than a per-fect competitor. Activity 34 reinforces how monopolies deter-mine price and output and how this affects society by changing consumer and producer surplus.
  • Microeconomics Unit 3: Lesson 5 - Regulating Monopoly: Antitrust Policy in the Real World
    Because a monopoly produces an inefficient level of output, government often tries to regulate monopoly or break up a monopoly into several firms. Without using graphs, Activity 35 illustrates why unregulated monopolies have undesirable outcomes. Students must go beyond graphs to really understand the behavior of monopolies. In discussing this activity, you might also insert some current case studies on monopoly. We have not included these to keep the workbook from becoming dated. A monopoly or any firm with market power can practice price discrimination. Price discrimination occurs when a producer is able to charge con-sumers with different tastes and preferences differ-ent prices for the same good. Price discrimination works well only if the good-or more likely the serv-ice- cannot be resold. Activity 36 analyzes the effects of price discrimi-nation on consumer surplus. Activity 37 shows how government regulates natural monopolies. Be sure the students can differentiate among the unregulated price, the fair-return price (P = ATC) and the socially optimal price (P = MC). Activity 38 is a brain teaser. If the students can answer these problems, they really understand the interrelationship between revenue and costs for a monopoly firm. Activity 38 would be a good group exercise. Finally, Activity 39 compares monopoly and per-fect competition. It is a review exercise designed to bring closure to the topics of monopoly and perfect competition.
  • Microeconomics Unit 3: Lesson 6 - Monopolistic Competition and Oligopoly
    Perfect competition and monopoly give us some of the basic tools needed to understand how product price and output are determined. Although they simplify reality, perfect competition and monopoly identify conditions that affect consumers' and pro-ducers' behavior. Perfect competition and monop-oly, however, are the exception in the U.S. econo-my. Most market structures are between these two extremes, and they are the focus of this lesson. Today the U.S. economy is dominated by oligop-olies and monopolistically competitive firms. An oli-gopolistic industry is dominated by a few large firms that act interdependently in output and pric-ing decisions. Monopolistic competition is a mar-ket in which a relatively large number of firms of small and moderate size offers similar but not identical products. Most retailing in the United States is conducted under conditions of monopo-listic competition. In contrast, manufacturing typi-cally occurs under conditions of oligopoly. Activity 40 provides an overview of monopolis-tic competition and compares it to perfect compe-tition and monopoly. Game theory is used to explain the behavior of oligopolists. John Nash of A Beautiful Mind fame won the Nobel Prize in economics for his contribu-tions on game theory. Game theory is the study of situations in which the outcome depends jointly on the actions of each of the participants. The optimum strategy or mix of strategies is delivered by the minimax principle: Each participant lists the worst possible results that an opponent could inflict. Then the participants try to realize the best outcome from this list. When both players have found their optimum strategies, the game is solved. Game theory also explains why collusion among oligopolists does not work in the long run. Activity 41 provides an overview of game theory.
  • Microeconomics Unit 3: Lesson 7 - Analyzing Market Structure
    This lesson helps the students apply their knowledge of market structure to conventional and unconventional situations. Activity 42 can be assigned as homework or completed in groups. It is good practice for the complex application questions that are emphasized on the AP test.
  • Microeconomics Unit 3: Answer Key: Sample Multiple-Choice Questions
    Answer key to sample multiple-choice questions for Microeconomics Unit 3.
  • Microeconomics Unit 3: Answer Key: Sample Short Free-Response Questions
    Answer key to sample short free-response questions for Microeconomics Unit 3.
  • Microeconomics Unit 3: Answer Key: Sample Long Free-Response Questions
    Answer key to sample long free-response questions for Microeconomics Unit 3.
  • Microeconomics Unit 3: Visuals
    Visuals for Microeconomics Unit 3.
  • Microeconomics Unit 4: Unit Overview
    Brief overview of Microeconomics Unit 4, as well as a lesson planner.
  • Microeconomics Unit 4: Sample Plan
    Sample lesson plan for Microeconomics Unit 4.
  • Microeconomics Unit 4: Lesson 1 - An Introduction to Factor Markets
    Students can understand factor or resource markets better if they gain an overall perspective before getting into the details of marginal productivity theory. In this lesson, the students learn that a firm is both a seller in product markets and a buyer in factor markets. This lesson also brings out some key ideas to give structure to the lessons that follow.
  • Microeconomics Unit 4: Lesson 2 - How Resource Prices Are Determined: Marginal Productivity Theory
    Marginal productivity theory is the heart of the factor market unit. Students must master the details of marginal productivity and complex terminology such as marginal physical product, marginal revenue product, marginal resource cost and the MRP = MRC rule before they can grasp the main concepts. Furthermore, the students must understand that the demand for a resource is derived from the demand for the goods and services produced by that resource. Finally, the students must understand how a firm hires resources when more than one resource is involved. The material covered in this lesson is the most heavily emphasized among the factor-market questions on the AP test.
  • Microeconomics Unit 4: Lesson 3 - Competition vs. Monopsony: The Effects of Resource Market Structure on Wages and Employment
    Until now, the students have studied only the perfectly competitive resource market. What happens if the resource market is not perfectly competitive? This lesson compares monopsony with perfect competition. To illustrate the differences between these markets, the students study the effects of minimum wages and union activities in competitive and monopsonistic markets.
  • Microeconomics Unit 4: Lesson 4 - Economic Rent and Return for Other Factors of Production
    The factor-market questions on the AP test will place the heaviest emphasis on labor markets because labor accounts for almost 75 percent of payments to factors of production. However, there also may be questions on payments to other factors of production. Although rent is the smallest pay-ment to any factor of production, the concept of economic rent provides insights into any input, such as land, whose supply is fixed. Interest rates, determined by the supply of and demand for borrowed funds, are important influences on the ability of firms to raise money for business invest-ment. Economic profits create the incentive in a capitalist economy and influence both the use and allocation of resources.
  • Microeconomics Unit 4: Lesson 5 - Analyzing Factor-Market Concepts
    This lesson helps the students to apply their knowledge of factor markets to conventional and unconventional situations. Activity 51 can be assigned as homework or completed in groups. It is good practice for the complex application questions that are emphasized on the AP test.
  • Microeconomics Unit 4: Answer Key: Sample Multiple-Choice Questions
    Answer key to sample multiple-choice questions for Microeconomics Unit 4.
  • Microeconomics Unit 4: Answer Key: Sample Short Free-Response Questions
    Answer key to sample short free-response questions for Microeconomics Unit 4.
  • Microeconomics Unit 4: Answer Key: Sample Long Free-Response Questions
    Answer key to sample long free-response questions for Microeconomics Unit 4.
  • Microeconomics Unit 4: Visuals
    Visuals for Microeconomics Unit 4.
  • Microeconomics Unit 5: Unit Overview
    Brief overview of Microeconomics Unit 5, as well as a lesson planner.
  • Microeconomics Unit 5: Sample Plan
    Sample lesson plan for Microeconomics Unit 5.
  • Microeconomics Unit 5: Lesson 1 - Public vs. Private Goods
    In the United States, most economic decisions are made in the marketplace through the interaction of buyers and sellers. Some goods and services, however, can be provided only by government. The students should know the criteria that should be used to judge whether a good or service should be provided by the private sector or by government. They must know the characteristics of public goods and private goods.
  • Microeconomics Unit 5: Lesson 2 - When Markets Fail
    Some government intervention in the economy is designed to remedy problems arising from third-party costs and benefits of private activities or transactions. Students who understand third-party effects, often called externalities, can analyze the need for and effect of such government interventions. Activity 54 provides an overview of the externality problem. When a government tries to correct a negative externality, it can choose to intervene in a number of ways, or the problem may be corrected by private negotiations, which is the basis for the Coase Theorem (Activity 55). When government does intervene, its objective is to use marginal analysis so the marginal social benefit of the last unit pro-duced equals the unit's marginal social cost. Activi-ty 56 provides practice in doing this type of analy-sis. Finally, competitive markets can fail because of information cost, which is the basis of Activity 57.
  • Microeconomics Unit 5: Lesson 3 - When Government Fails
    Lessons 1 and 2 stress the economic functions of government, with particular emphasis on market failures. This lesson deals with government failure and provides balance in evaluating the role of government. Throughout their education, the students have been told that democratic governments try to improve society. They learn that some political leaders may be stupid, incompetent or corrupt; but a responsible electorate can vote them out of office. Furthermore, poor leadership is often blamed on political apathy. Most civics and government classes stress the reasons why citizens should vote and actively participate in the political process. Public-choice economists believe that all this good-government stuff is bunk and that when political activity is studied with the tools of economics, government will be seen to fail more often than markets will. Their analysis shows why there is not much difference between the political parties, why special interests prevail over the public good, why it is rational not to vote and why bureaucrats are inefficient. It is not a matter of getting the right people in government. Rather, government fails because politicians and bureaucrats are trying to maximize their ability to gain votes and power. Their behavior is as self-interested as anyone else's. This lesson should increase the students' skepticism toward government. They may agree with Winston Churchill, who said that democracy is the worst form of government except for the alternatives.
  • Microeconomics Unit 5: Lesson 4 - Efficiency, Equity and the Effects of Government Policies
    Previous lessons have examined the role or size of government. This unit looks at the distribution of income and the effects of government policies to change it. The controversy weighs efficiency against equity. Markets work. In a world of scarce resources, higher productivity is better than lower productivity. Markets create incentives that increase productivity and the size of the pie. It also may be true that the poor are needier than the rich. Markets create inequalities, and governments use taxes and transfer payments to redis-tribute income. These very policies, however, may create serious disincentives that damage efficiency and shrink the size of the pie. What should be the trade-off between efficiency and equity? Are there policies that can improve both? Can government create hard-headed and soft-hearted policies?
  • Microeconomics Unit 5: Answer Key: Sample Multiple-Choice Questions
    Answer key to sample multiple-choice questions for Microeconomics Unit 5.
  • Microeconomics Unit 5: Answer Key: Sample Short Free-Response Questions
    Answer key to sample short free-response questions for Microeconomics Unit 5.
  • Microeconomics Unit 5: Answer Key: Sample Long Free-Response Questions
    Answer key to sample long free-response questions for Microeconomics Unit 5.
  • Microeconomics Unit 5: Visuals
    Visuals for Microeconomics Unit 5.
  • Macroeconomics Unit 1: Unit Overview
    Brief overview of Macroeconomics Unit 1, as well as a lesson planner.
  • Macroeconomics Unit 1: Sample Plan
    Sample lesson plan for Macroeconomics Unit 1.
  • Macroeconomics Unit 1: Lesson 1 - Scarcity, Opportunity Cost, Production Possibilities and Comparative Advantage
    This lesson uses the concept of opportunity cost to develop a production possibilities curve. The production possibilities curve represents the choices that society faces. Opportunity cost is a fundamental concept in economics and includes not only out-of-pocket costs but also the cost to society of not using the resources to produce an alternative product or service. Alternative forms of the production possibilities curves illustrate different trade-offs. Activity 1 reinforces the concept of opportunity cost and investigates the alternative shapes of the production possibilities curve. We use production possibilities curves to illustrate the economic situation that nations face and the advantages that exist if people or nations specialize in the production of specific goods and services and then trade for the goods and services they want. The concept of comparative advantage underlies trade and exchange within an economy and between different economies. Activity 2 pro-vides practice at determining absolute and comparative advantage.
  • Macroeconomics Unit 1: Lesson 2 - Demand
    This lesson introduces the market system. Demand is half of a market and a demand schedule represents the quantities that people are willing and able to buy at alternative prices. The demand curve is a graphical representation of the demand schedule. Understanding a market is essential to success in AP Economics. Activity 3 has the students graph a demand schedule and helps them understand the implications of a shift in the demand curve. The activity then focuses on the factors that shift the demand curve. Activity 4 reinforces the factors that cause a demand curve to shift, the direction of the shift and whether the shift represents an increase or decrease in demand.
  • Macroeconomics Unit 1: Lesson 3 - Supply
    Lesson 2 introduced demand. This lesson introduces supply, the other half of the market system. A supply schedule represents the quantities that firms are willing and able to supply at alternative prices. A supply curve is a graphical representation of the supply schedule. Understanding a market is essential to success in AP Economics. Activity 5 has the students graph a supply schedule and helps them understand the implications of a shift in the supply curve. The activity then focuses on the factors that shift the supply curve. Activity 6 reinforces the factors that cause a supply curve to shift, the direction of the shift and whether the shift represents an increase or decrease in supply.
  • Macroeconomics Unit 1: Lesson 4 - Equilibrium Price and Quantity
    In this lesson we bring the two sides of the market - demand and supply - together to determine the equilibrium price and quantity. The students should understand that unless there are forces operating to change supply or demand, the price and quantity will remain at the equilibrium. Activity 7 brings the supply and demand sides of the market together and helps the students understand equilibrium price and quantity. The factors that shift supply and demand are also used to emphasize the impact of supply or demand on the equilibrium price and quantity. The second part of Activity 7 has the students work through changes in supply and demand and the effects in related markets.
  • Macroeconomics Unit 1: Lesson 5 - Elasticity
    In many economic situations, producers and policy makers want to know more than simply the direction in which price or quantity will move. The law of demand tells producers that if price increases, the quantity demanded will decrease. This law doesn't tell the producers by how much the quantity demanded will decrease. The responsiveness of one variable to changes in another variable is important information. Elasticity is a measurement of how much one variable will change if another variable changes. Activity 8 focuses on the definition of elasticity and the calculation of the coefficient of elasticity. The activity then has the students see the difference between elasticity of a curve and the slope of a curve.
  • Macroeconomics Unit 1: Answer Key: Sample Multiple-Choice Questions
    Answer key to sample multiple-choice questions for Macroeconomics Unit 1.
  • Macroeconomics Unit 1: Answer Key: Sample Short Free-Response Questions
    Answer key to sample short free-response questions for Macroeconomics Unit 1.
  • Macroeconomics Unit 1: Answer Key: Sample Long Free-Response Questions
    Answer key to sample long free-response questions for Macroeconomics Unit 1.
  • Macroeconomics Unit 1: Visuals
    Visuals for Macroeconomics Unit 1.
  • Macroeconomics Unit 2: Unit Overview
    Brief overview of Macroeconomics Unit 2, as well as a lesson planner.
  • Macroeconomics Unit 2: Sample Plan
    Sample lesson plan for Macroeconomics Unit 2.
  • Macroeconomics Unit 2: Lesson 1 - Macroeconomics and the Circular Flow
    This lesson defines macroeconomics, presents the important macroeconomic questions and explains the different sectors of a macroeconomic model of the economy. The circular flow model shows the household sector, the business sector and the government sector with the basic interactions among the sectors. Activity 9 asks the students to think about current economic issues, the ideas frequently expressed and the economic basis for each of these ideas. The activity draws on their understanding of a few basic economic concepts. Activity 10 has the students use the circular flow concepts to gain understanding about the movement of money and goods and services in the economy.
  • Macroeconomics Unit 2: Lesson 2 - Macroeconomic Goals and GDP
    The goals of U.S. macroeconomic policy makers are captured in two laws: the Employment Act of 1946 and the Full Employment and Balanced Growth Act of 1978 (Humphrey-Hawkins Act). The 1946 law committed the federal government to maximize employment and economic growth, and maintain a stable price level. The 1978 law went further and committed the government to reach an unemployment rate of 4 percent, to stabilize the price level with a target inflation rate of zero per-cent and to maintain steady economic growth. In this lesson the students should learn the compo-nents of gross domestic product and how we meas-ure the economy to see if we are meeting macro-economic policy goals. This lesson continues an emphasis on definitions and describes the limita-tions of the measures of macroeconomic activity. In Activity 11, the students practice calculating the unemployment rate, the labor force participa-tion rate, a price index and the short-run change in output. Activity 12 helps the students determine what is included in gross domestic product (GDP) and what is included in government spending, household spending and business spending. It also asks them to explain the basic reasoning for inclu-sion or exclusion of economic activity in GDP.
  • Macroeconomics Unit 2: Lesson 3 - Price Indexes and Inflation
    At various points in the economic history of the United States, inflation has been a major economic problem. The high inflation rates of the late 1960s and 1970s led to the severe recession of the early 1980s. This experience has had a major impact on our economic policy today. Monetary policy under Alan Greenspan's chairmanship of the Federal Reserve System has revolved around controlling inflation. In this lesson, the measurement of prices is reviewed and the impact of unanticipated inflation is explored. Activity 13 provides practice in creating a price index, changing the base year of a price index and examining the results of changing the base year. Activity 14 is a classroom game to help the students understand the effects of inflation on individuals. The students use their knowledge of the effects of unanticipated inflation to evaluate different scenar-ios, and they explain their analysis in Activity 15.
  • Macroeconomics Unit 2: Lesson 4 - Unemployment
    Unemployment is always a major economic issue. Economic history seems to show that there is a short-run trade-off between inflation and unemployment. Understanding the types of unemployment is essential to analyzing unemployment reduction policies. Activity 16 has the students identify the unemployment situation and determine whether it represents frictional, cyclical or structural unemployment.
  • Macroeconomics Unit 2: Lesson 5 - Business Cycles
    The study and control of business cycles are the heart of macroeconomics. The discipline of macroeconomics started as business cycle theory. The business cycle is a problem because of the by-products of output fluctuations: unemployment and inflation. Fluctuations in output and employment created major economic problems during the Great Depression and after World War II. Fluctuations in the economy before World War II led to the Employment Act of 1946; and the business cycles in the post-war period led to discussions of the trade-offs between the goals of economic growth, price stability and unemployment, and to passage of the Humphrey-Hawkins Act.
  • Macroeconomics Unit 2: Answer Key: Sample Multiple-Choice Questions
    Answer key to sample multiple-choice questions for Macroeconomics Unit 2.
  • Macroeconomics Unit 2: Answer Key: Sample Short Free-Response Questions
    Answer key to sample short free-response questions for Macroeconomics Unit 2.
  • Macroeconomics Unit 2: Answer Key: Sample Long Free-Response Questions
    Answer key to sample long free-response questions for Macroeconomics Unit 2.
  • Macroeconomics Unit 2: Visuals
    Visuals for Macroeconomics Unit 2.
  • Macroeconomics Unit 3: Unit Overview
    Brief overview of Macroeconomics Unit 3, as well as a lesson planner.
  • Macroeconomics Unit 3: Sample Plan
    Sample lesson plan for Macroeconomics Unit 3.
  • Macroeconomics Unit 3: Lesson 1 - Keynesian Model
    This lesson establishes fundamental macro concepts. The Keynesian model is the simplest macro model and is the starting point from the national income accounting identity: GDP = C + I + G + NX. The lesson describes the equilibrium between production and planned expenditures, and investigates the way economic agents react when planned expenditures do not equal production. The consumption function is presented and this leads to a discussion of average and marginal propensities to consume. The discussion then turns to the impact on the equilibrium if consumption or government spending changes. Activity 19 gives the students practice using the Keynesian model, finding the equilibrium income and understanding the relationship among the concepts of income, consumption and saving. The students calculate APS, APC, MPS and MPC in Activity 20 and see the relationship among those concepts. The students practice calculating various multipliers and using the multiplier concept in Activity 21.
  • Macroeconomics Unit 3: Lesson 2 - Investment
    In the last lesson, the focus was on a simple Keynesian model of the economy and consumption. In this lesson, the determinants of investment - spending by businesses to replace or increase the capital stock - are described. In contrast to consumption, investment spending in the United States changes greatly from year to year. Keynes referred to the cause of the great variability in investment as the "animal spirits of business." Activity 22 presents an opportunity for students to use knowledge about business investment to determine whether a project should be undertaken and to calculate the effects of changes in interest rates for investment functions with different elasticities.
  • Macroeconomics Unit 3: Lesson 3 - Aggregate Demand
    Aggregate demand represents the sum of consumption (C), investment (I), government expenditures (G) and net exports (NX). The quantity of real GDP demand is the total of all final goods and services that households, businesses, governments and foreigners plan to buy. This lesson explains the factors that determine aggregate demand. Just as in microeconomics, the students should understand the difference between a shift in a curve and movement along a curve. This lesson helps the students differentiate the two situations when applied to the aggregate demand curve. Activity 23 provides practice with the aggregate demand curve and distinguishing between movements along and shifts in the aggregate demand curve.
  • Macroeconomics Unit 3: Lesson 4 - Aggregate Supply
    Aggregate supply is the quantity of output that firms are willing and able to produce for the economy. In the long run, the level of output depends on the capital stock, the labor force and the level of technology. In the short run, the level of output depends on the amount of labor employed with a given level of capital and technology. The students should understand the aggregate supply curve and its determinants because the adjustment process in the economy to changes in aggregate demand or aggregate supply depends on understanding the determinants of aggregate supply. The aggregate supply curve is derived in the Appendix to this lesson. Activity 24 provides practice with the aggregate supply curve and understanding movements along and shifts in the aggregate supply curve.
  • Macroeconomics Unit 3: Lesson 5 - Short-Run Equilibrium
    In this lesson, the focus is on the short-run equilibrium between aggregate supply and demand, on the changes in output and price level if aggregate supply or aggregate demand changes, and on the students' ability to explain correctly why the curve shifted in a specific direction. The relationship between the simple Keynesian model and the aggregate supply-aggregate demand model is explored. Activity 25 provides the students with practice at manipulating the aggregate demand and aggregate supply model and interpreting the effects on the price level and real GDP. Students who perform well on this activity have an excellent foundation for the rest of the course. Activity 26 relates the Keynesian simple model and the AD and AS model.
  • Macroeconomics Unit 3: Lesson 6 - Aggregate Supply and Aggregate Demand Analysis Continued
    Manipulation of the aggregate demand and aggregate supply model continues in this lesson. In particular, the students will practice shifting each curve and explaining why the curve shifted. The lesson then explores how the economy moves from the short run to the long run. In order for the students to explain the move from the short run to the long run, it is essential that they understand the framework of aggregate demand and aggregate supply. Activity 27 provides the students with practice interpreting scenarios and determining the effects on aggregate demand, aggregate supply, the price level and the level of output. The students work through the transition of the economy from the short run to the long run and explain the process in the economy in Activity 28.
  • Macroeconomics Unit 3: Lesson 7 - The Long-Run Economy
    The last lesson explored the movement of the economy from the short run to the long run. Here, we explore the long-run aggregate supply curve and its relationship with the economy's production possibilities curve, introduced in Unit 1. Activity 29 draws together the relationship between the long-run aggregate supply curve and the production possibilities curve studied earlier.
  • Macroeconomics Unit 3: Lesson 8 - Fiscal Policy
    Fiscal policy is one of the two demand management policies available to policy makers. Government expenditures and the level and type of taxes are discretionary fiscal policy tools. This lesson explores the effects of these tools on the economy, the existence of embedded tools and alternative ways to analyze fiscal policy. Activity 30 provides the students with practice at manipulating the tools of fiscal policy and analyzing scenarios to determine appropriate fiscal policy. The students continue with fiscal policy analysis in Activity 31 and distinguish between discretionary fiscal policy tools and automatic stabilizers. The students analyze fiscal policy in the Keynesian and aggregate demand and aggregate supply models in Activity 32. Activity 33 serves as an excellent unit review by having the students analyze economic observations and scenarios.
  • Macroeconomics Unit 3: Answer Key: Sample Multiple-Choice Questions
    Answer key to sample multiple-choice questions for Macroeconomics Unit 3.
  • Macroeconomics Unit 3: Answer Key: Sample Short Free-Response Questions
    Answer key to sample short free-response questions for Macroeconomics Unit 3.
  • Macroeconomics Unit 3: Answer Key: Sample Long Free-Response Questions
    Answer key to sample long free-response questions for Macroeconomics Unit 3.
  • Macroeconomics Unit 3: Visuals
    Visuals for Macroeconomics Unit 3.
  • Macroeconomics Unit 4: Unit Overview
    Brief overview of Macroeconomics Unit 4, as well as a lesson planner.
  • Macroeconomics Unit 4: Sample Plan
    Sample lesson plan for Macroeconomics Unit 4.
  • Macroeconomics Unit 4: Lesson 1 - Money
    The properties of money, the functions of money and the definitions of money are important concepts for the students to understand in the initial study of money. Money has existed for a long time, and a wide range of commodities have served as money in different countries and at different times. Before money, economies used a barter system. The principal problem with a barter system is the double coincidence of wants required for success. Double coincidence of wants means that you must find someone who wants what you want to trade and has what you want! This search could be extremely time-consuming and limiting to the development of an economy.
  • Macroeconomics Unit 4: Lesson 2 - Equation of Exchange
    This lesson describes and explains the relationship between the money supply and gross domestic product. The equation of exchange is an identity and provides an understanding of the relationship between money and economic activity. The students demonstrate an understanding of the equation of exchange and the change in velocity over time in Activity 36.
  • Macroeconomics Unit 4: Lesson 3 - Financial Intermediaries
    Financial intermediaries act as the go-between borrowers and lenders. They take deposits from households and businesses and make loans to other households and businesses. Financial intermediaries include commercial banks, savings and loan associations, savings banks, credit unions and money market mutual fund companies. This lesson focuses on demonstrating how banks create money. The term banks is used to mean any depository institution whose deposits are a part of M1. The concept of money creation is a difficult one for most students. Many students think that money is created only by the U.S. Mint or the Federal Reserve System. Student understanding of the money creation process is essential to understand-ing the economic effects of monetary policy. Thus, this lesson is very important. Activity 37 provides the students with practice in calculating the deposit expansion multiplier and an opportunity to under-stand it and its effect on the money supply.
  • Macroeconomics Unit 4: Lesson 4 - The Federal Reserve System and Its Tools
    The focus of this lesson is the Federal Reserve System: how its actions relate to the money creation process introduced in the last lesson and how its tools affect the money supply. The Federal Reserve System is the central bank for the United States. It has regulatory authority for many financial institutions that hold checkable deposits. It has the responsibility to control the money supply to promote the economic goals of full employment, price stability and stable economic growth. The Fed has three tools it can use to control the money supply: open market operations, the discount rate and the required reserve ration. The primary tool the Fed uses is open market operations, or the buying and selling of Treasury securities. Activity 38 provides the students with practice using T-accounts and the mechanics of implementing monetary policy.
  • Macroeconomics Unit 4: Lesson 5 - The Money Market and Monetary Policy
    In this lesson, the demand for and supply of money are brought together in the money market. The effects of the Federal Reserve System's monetary policy are integrated into the money market and then linked to aggregate demand. The lesson then discusses the resulting impact on equilibrium output and price level. In Activity 39, the students practice manipulating the money market and understanding the impact of the Fed's actions in this market. Activity 40 provides practice in relating monetary policy to changes in the monetary variables such as the federal funds rate, the money supply and velocity.
  • Macroeconomics Unit 4: Lesson 6 - Interest Rates and Monetary Policy in the Short Run and the Long Run
    This lesson explores the relationship between the nominal interest rate and the real interest rate, the implications for monetary policy, and the short-run and long-run effects of monetary policy on real output and the price level. The students need to understand the relationship between real and nominal interest rates because the real interest rate determines the level of investment, whereas the nominal interest rate determines the demand for money. Further, the Fisher Effect demonstrates how changes in the money supply affect the nomi-nal interest rate in the long run. The discussion of the short-run and long-run effects on interest rates leads to the discussion of the effects of monetary policy in the short run and long run. Student understanding of the dynamics of the macro-economic model over time is essential to explain-ing the effects of monetary policy on the economy. Activity 41 helps the students gain an under-standing of the difference between nominal inter-est rates and real interest rates, and the effect of monetary policy on both in the short and long run. Activity 42 is designed to bring the dynamic macroeconomic model together with monetary policy actions and to help the students integrate the effects of monetary policy in the short and long run with their understanding of how the economy works. This will help them to analyze current monetary policy and understand monetary policy discussions.
  • Macroeconomics Unit 4: Answer Key: Sample Multiple-Choice Questions
    This is the answer key for the sample multiple-choice questions in Unit 4.
  • Macroeconomics Unit 4: Answer Key: Sample Short Free-Response Questions
    Answer key to sample short free-response questions for Macroeconomics Unit 4.
  • Macroeconomics Unit 4: Answer Key: Sample Long Free-Response Questions
    Answer key to sample long free-response questions for Macroeconomics Unit 4.
  • Macroeconomics Unit 4: Visuals
    Visuals for Macroeconomics Unit 4.
  • Macroeconomics Unit 5: Unit Overview
    Brief overview of Macroeconomics Unit 5, as well as a lesson planner.
  • Macroeconomics Unit 5: Sample Plan
    Sample lesson plan for Macroeconomics Unit 5.
  • Macroeconomics Unit 5: Lesson 1 - Policy Lags and Crowding-Out Effect
    This lesson discusses the lags associated with monetary and fiscal policy making and analyzes the direct and indirect effects of government budget deficits. The direct effect of these deficits is an increase in interest rates. When the government borrows money to finance its deficit, this results in an increase in the demand for money, or, alternatively, the demand for loanable funds. This in turn results in an increase in the interest rate. A higher interest rate causes decreases in investment and other interest-sensitive components of aggregate demand. Crowding-out is the decrease in private demand for funds that occurs when the government's demand for funds causes the interest rate to rise: The demand by government for loanable funds decreases or crowds-out the private demand for loanable funds. An indirect effect of government budget deficits is the possibility that these deficits will lead to an increase in private savings and a decrease in consumption that offset the predicted expansionary effects of expansionary fiscal policy. This is called the Barro-Ricardo effect. Activity 43 should be used as a review of monetary and fiscal policy instruments and their effects on output and inflation. In Activity 44 the students work through the effects of crowding-out using both the money market and the loanable funds market.
  • Macroeconomics Unit 5: Lesson 2 - Monetary and Fiscal Policy Interact
    This lesson continues an examination of the interaction between monetary and fiscal policy in the short run. It examines the impact of monetary and fiscal policy on output, the price level, unemployment, interest rates and investment. Success on the Advanced Placement Examination depends on a student's ability to explain why economic variables are affected. Activity 45 provides the students with an opportunity to work through the short-run effects of monetary and fiscal policy on important macroeconomic variables. The students continue to use the loanable funds market and the money market in this activity.
  • Macroeconomics Unit 5: Lesson 3 - Phillips Curve and Stabilization Policy
    The Phillips curve is an empirical relationship found by A.W. Phillips that shows the relationship between the unemployment rate and the rate at which wages change. He discovered that changes in wages were inversely related to the unemployment rate. Subsequent research established the same relationship between inflation and unemployment. During the 1960s, many economists and policy makers thought there was a consistent trade-off between price changes and unemployment. How-ever, the trade-off is a short-run phenomenon, and inflationary expectations can shift the short-run Phillips curve. The long-run Phillips curve is a ver-tical line at the long-run aggregate supply curve. In Activity 46, the students practice using the Phillips curve and the aggregate demand and aggregate supply model to investigate the effects of different economic scenarios in the short run and long run.
  • Macroeconomics Unit 5: Lesson 4 - Economic Growth
    In this lesson, the students learn the main sources of long-term economic or real GDP growth and the policies that governments might use to increase economic growth. The students should be aware that there is a difference between the short-term fluctuations in real GDP that result from the busi-ness cycle and the long-run growth in real GDP discussed here. Activity 47 emphasizes the alternative measures of output growth and incorporates long-run eco-nomic growth into the aggregate demand and aggregate supply models. The activity also brings in the production possibilities curve discussed at the beginning of the course.
  • Macroeconomics Unit 5: Lesson 5 - Macroeconomic Theories
    Listening to and reading analysis of the various policy proposals can confuse students who are learning economics for the first time. Here the current issues and sources of disagreement among economists should be presented. The students should recognize that most economists hold views that cannot be cat-egorized into a particular school of thought but are a combination of different schools. Activity 48 pulls many policy concepts together and serves to review and summarize stabilization policy.
  • Macroeconomics Unit 5: Answer Key: Sample Multiple-Choice Questions
    This is the answer key for the sample multiple-choice questions in Unit 5.
  • Macroeconomics Unit 5: Answer Key: Sample Short Free-Response Questions
    This is the answer key for the short free-response questions in Unit 5.
  • Macroeconomics Unit 5: Answer Key: Sample Long Free-Response Questions
    This is the answer key for the long free-response questions in Unit 5.
  • Macroeconomics Unit 5: Visuals
    These are the visuals for Unit 5.
  • Macroeconomics Unit 6: Unit Overview
    This is the unit overview for Unit 6.
  • Macroeconomics Unit 6: Sample Plan
    This is the sample plan for Unit 6. It provides a plan for what should be taught each day.
  • Macroeconomics Unit 6: Lesson 1 - International Trade
    This lesson includes a review of comparative advantage and production possibilities curves. It then expands the concepts of specialization and trade to show the gains from international trade. Activity 49 gives the students practice in deter-mining comparative advantage using either the input or output method of presenting the informa-tion. In Activity 50, the students determine who has comparative advantage, explain the reasons behind their decision and then show the gains from trade when given the terms of trade.
  • Macroeconomics Unit 6: Lesson 2 - Government Intervention in International Trade
    The last lesson demonstrated the benefits of trade among nations, showing that total output increased. Nevertheless, most nations attempt to create barriers to trade using tariffs, quotas or regulations. Trade barriers limit the gains from trade and tend to reduce competition and economic efficiency. Activity 51 presents a simple, single-graph model to analyze barriers to trade. The students work through the graphical analysis to determine the effects on the domestic economy.
  • Macroeconomics Unit 6: Lesson 3 - International Finance
    International trade and the methods of limiting trade are extremely important to understanding much of the current discussions about the World Trade Organization (WTO) and the North American Free Trade Agreement (NAFTA). This lesson explains and uses for analysis the concepts of balance of payments and foreign exchange markets. In Activity 52, the students apply their understanding of the balance of payments concepts. Activity 53 provides the students with practice using exchange rates and understanding the effects that changes in economic variables can have on exchange rates.
  • Macroeconomics Unit 6: Lesson 4 - Monetary and Fiscal Policy in a Global Economy
    This lesson combines the knowledge of monetary and fiscal policy and the economy developed in Units 3 through 5 with the knowledge of international finance. It explains and analyzes the impact of domestic policy on the foreign exchange rate. It is essential that the students understand the interaction between the domestic economy and the international economy to understand the current policy discus-sions and to do well on the Advanced Placement Examination in Macroeconomics. In Activity 54, the students work through the effects on the economy of stabilization policies, domestic or foreign, through the effects on exchange rates. Activity 55 is a review of the important interna-tional economic principles.
  • Macroeconomics Unit 6: Answer Key: Sample Multiple-Choice Questions
    Answer key to sample multiple-choice questions for Macroeconomics Unit 6.
  • Macroeconomics Unit 6: Answer Key: Sample Short Free-Response Questions
    Answer key to sample short free-response questions for Macroeconomics Unit 6.
  • Macroeconomics Unit 6: Answer Key: Sample Long Free-Response Questions
    Answer key to sample long free-response questions for Macroeconomics Unit 6.
  • Macroeconomics Unit 6: Visuals
    These are the visuals for Unit 6.

 


Copyright © 2014 Council for Economic Education. All rights reserved.