Page 853 - Krugmans Economics for AP Text Book_Neat

S-7
SOLUTIONS TO AP REVIEW QUESTIONS

Fare Tackle the Test:
(per ride)
Free-Response Question
$7.00 Deadweight S
loss 2. Fare
(per ride)
S
C
5.50
5.00 E
4.50
D Demand price
Quota E
3.00 D rent
Supply price
0 6 8 9 10 12 14
Quantity of rides (millions per year)
Quota
D

Quantity of rides
2. The accompanying figure shows a decrease in demand by
4 million rides, represented by a leftward shift of the Module 10
demand curve from D to D : at any given price, the
1 2 Check Your Understanding
quantity demanded falls by 4 million rides. (For example,
at a price of $5, the quantity demanded falls from 1. Let’s start by considering the relationship between the total
10 million to 6 million rides per year.) This eliminates value added of all domestically produced final goods and
the effect of a quota limit of 8 million rides. At point E , services, and aggregate spending on domestically produced
2
the new market equilibrium, the equilibrium quantity is final goods and services. These two quantities are equal
equal to the quota limit; as a result, the quota has no because every final good and service produced in the econ-
effect on the market. omy is either purchased by someone or added to invento-
ries, and additions to inventories are counted as spending
by firms. Next, consider the relationship between aggregate
spending on domestically produced final goods and ser -
vices and total factor income. These two quantities are
Fare equal because all spending that is channeled to firms to
(per ride)
pay for purchases of domestically produced final goods and
$7.00 Quota S ser vices is revenue for firms. Those revenues must be paid
out by firms to their factors of production in the form of
6.00
wages, profit, interest, and rent. Taken together, this means
that all three methods of calculating GDP are equivalent.
5.00 E 1
2. Firms make sales to other firms, households, the govern-
4.00 ment, and the rest of the world. Households are linked to
E 2 firms through the sale of factors of production to firms,
3.00
D 1 through purchases from firms of final goods and services,
and through lending funds to firms in the financial mar-
kets. Households are linked to the government through
D 2
0 6 8 10 12 14 their payment of taxes, their receipt of transfers, and
Quantity of rides (millions per year)
their lending of funds to the government to finance gov-
ernment borrowing via the financial markets. Finally,
households are linked to the rest of the world through
their purchases of imports and transactions with foreign-
ers in financial markets.
Tackle the Test: 3. You would be counting the value of the steel twice—once
Multiple-Choice Questions as it was sold by American Steel to American Motors and
1. d once as part of the car sold by American Motors.
2. b Tackle the Test:
3. b Multiple-Choice Questions
4. d 1. c
5. a 2. e