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>> Solutions to

AP Review Questions

This section offers suggested answers to the AP Review Questions that appear at
the end of each module.

Module 1 Module 2

Check Your Understanding Check Your Understanding
1. Land, labor, capital, and entrepreneurship are the four 1. We talk about business cycles for the economy as a
categories of resources. Possible examples include fish- whole because recessions and expansions are not con-
eries (land), time spent working on a fishing boat fined to a few industries—they reflect downturns and
(labor), fishing nets (capital), and the opening of a new upturns for the economy as a whole. The data clearly
seafood market (entrepreneurship). show that in the steep downturns, almost every sector of
2. a. time spent flipping burgers at a restaurant: labor the economy reduces output and the number of people
b. a bulldozer: capital employed. Moreover, business cycles are an international
c. a river: land phenomenon, sometimes moving in rough synchrony
across countries.
3. a. Yes. The increased time spent commuting is a cost you 2.
will incur if you accept the new job. That additional time Recessions cause a great deal of pain across the entire
spent commuting—or equivalently, the benefit you would society. They cause large numbers of workers to lose their
get from spending that time doing something else—is an jobs and make it difficult for workers to find new jobs.
opportunity cost of the new job. Recessions reduce the standard of living of many families
b. Yes. One of the benefits of the new job is that you will be and are usually associated with a rise in the number of
making $50,000. But if you take the new job, you will people living below the poverty line, an increase in the
have to give up your current job; that is, you have to give number of people who may lose their houses because
up your current salary of $45,000, so $45,000 is one of they can’t afford their mortgage payments, and a fall in
the opportunity costs of taking the new job. the percentage of Americans with health insurance.
c. No. A more spacious office is an additional benefit of Recessions also reduce the profits of firms.
your new job and does not involve forgoing something Tackle the Test:
else, so it is not an opportunity cost.
Multiple-Choice Questions
4. a. This is a normative statement because it stipulates what 1.
should be done. In addition, it may have no “right” a
answer. That is, should people be prevented from all dan- 2. d
gerous personal behavior if they enjoy that behavior—like 3. e
skydiving? Your answer will depend on your point of view.
b. This is a positive statement because it is a description of fact. 4. c
Tackle the Test: 5. b
Multiple-Choice Questions Tackle the Test:
1. d Free-Response Question
2. d 2. Inflation is an overall increase in the price of goods and
3. b services throughout an economy. If inflation occurs, the
4. b price of donuts will most likely increase, but an increase
in the price of this one good does not indicate inflation.
5. a For example, the price of donuts might have increased
due to an increase in the price of sugar, while the prices
Tackle the Test: of most other goods in the economy have remained
Free-Response Question unchanged.
2. In positive economics there is a “right” or “wrong”
answer. In normative economics there is not necessarily a Module 3
“right” or “wrong” answer. There is more disagreement in Check Your Understanding
normative economics because there is no “right” or
“wrong” answer. Economists disagree because of (1) dif- 1. a. False. An increase in the resources available to Tom for
ferences in values and (2) disagreements about models use in producing coconuts and fish changes his produc-
and about which simplifications are appropriate. tion possibilities curve by shifting it outward, because he
S-1