AP Macro Unit 1 Practice Test

Scarcity in economics refers to the fundamental issue that resources are limited while human wants are unlimited. This concept underpins all economic decision-making and forces choices in allocation.

Opportunity cost is defined as the value of the best alternative that is not chosen. It is a key concept in economics used to understand the trade-offs involved in decision-making.

Positive statements are objective claims that can be tested using data, which sets them apart from normative statements. This characteristic makes them central to empirical economic analysis.

Economic models provide a simplified representation of complex realities, allowing economists to isolate and analyze key relationships. This focused approach aids in understanding broad economic interactions.

Labor is one of the primary factors of production, along with capital, land, and entrepreneurship. It is essential in transforming resources into goods and services.

Comparative advantage is the ability to produce a good at a lower opportunity cost than another producer. This principle underpins the mutual benefits of trade between entities.

A point inside the PPF signifies that the economy is not using all of its available resources efficiently. This inefficiency indicates room for improved production without additional inputs.

The law of demand states that, holding other factors constant, a higher price leads to a lower quantity demanded. This inverse relationship is a fundamental market principle.

Economic agents respond to incentives as these affect the perceived costs and benefits of different choices. This behavior is a cornerstone of economic theory, explaining how decisions are made.

Market equilibrium is achieved when the quantity demanded matches the quantity supplied. This balance means that there is no inherent force pushing the price up or down.

Governments often intervene in markets to correct market failures such as externalities that lead to inefficient outcomes. Such intervention is aimed at promoting a more optimal allocation of resources.

Fiscal policy commonly uses tools such as government spending and taxation to influence economic activity. Government spending is especially important in stimulating or restraining the economy.

GDP measures the total value of all final goods and services produced within an economy, making it a key indicator of economic health. It excludes intermediate goods to avoid double counting.

Inflation is characterized by a sustained rise in the general price level over time. This increase reflects shifts in supply and demand dynamics within the economy.

A price ceiling, when set below the equilibrium price, can lead to shortages because the quantity demanded exceeds the quantity supplied. This is an unintended outcome of interfering with market dynamics.

A leftward shift in the aggregate supply curve indicates a reduction in the quantity of goods and services produced at any given price level. This typically results in higher prices accompanied by a decline in output, a phenomenon known as stagflation.

The presence of close substitutes makes it easier for consumers to switch products when prices rise, thereby increasing price elasticity of demand. This responsiveness is crucial in determining how demand reacts to price changes.

Long-run economic growth is primarily driven by factors that enhance productivity, such as technological innovation. This factor supports sustained improvements in an economy's ability to produce goods and services.

The multiplier effect refers to the process whereby an initial change in spending leads to successive rounds of expenditure, resulting in a greater overall impact on national income. This concept is pivotal in assessing the effectiveness of fiscal policy measures.

Efforts to control inflation, such as raising interest rates, can reduce aggregate demand and inadvertently increase unemployment. Policymakers must therefore balance inflation control with the potential adverse effects on employment and growth.