Introduction to AP Macroeconomics Concepts

Hey, how you doing Econ students? This is Jacob Clifford. Welcome to ACDC Econ. So in this quick video, I'm going to cover everything you need for an introductory macroeconomics class or an AP macroeconomics class. I'm going to go super fast, but keep in mind this is not designed to reteach you all the concepts. It's designed to help you get ready right before you walk into the big AP test or your big final. Also, it's a great way to review what you know and don't know by watching the entire class over again. You can spot the things that you have to go back and study. And if you've been watching my videos, you know I sell something called the Ultimate Review Pack. It has a bunch of practice questions and access to hidden videos that help you learn economics. The summary video... so they cover everything in greater detail than this video I'm doing right now. Now, I was gonna make this video available only to people who buy the packet, but then I thought, you know, I can trust people. Man, if you like my videos, if these videos are helping you learn economics, please go get the packet. I'm gonna make this video available to everyone. but if you like my stuff, please support my channel and help me continue to make great econ videos, okay? Let's start it up. Now, whether or not you're enrolled in a microeconomics class or a macroeconomics class, it all starts the same for a basic introductory econ course. It starts with the idea of scarcity. Scarcity idea is we have unlimited wants and limited resources. Also, you're going to learn the idea of opportunity costs. That's the idea that everything has a cost, right? It doesn't matter what you're producing. You've got to give up something to produce it, or any decision you make has a cost. Now those concepts come together with the production possibilities curve. It's the first graph you learn in economics. It shows the different combinations of producing two different goods using all of your resources. So any point on the curve is efficient, like you're using all of your resources to the fullest. Any point inside the curve is inefficient. Any point out here, outside the curve, is impossible given your current resources. And there's two different shapes you have to remember. If it's a straight line production possibilities curve, that means there's constant opportunity cost, which means the resources to produce the different products, are very similar. So similar resources, if it's a straight line, if it's a boat outline, concave to the origin, that means that resources are not very similar. So when you produce more of one, you have to give up more and more of the other one. That's called the law of increasing opportunity cost. Now this curve can shift if you have more resources like land, labor, and capital, or less resources or better technology. That can shift the curve. Another thing that shifts the curve is trade. If another country trades with another country, that can shift out the production possibilities curve, but it shows how much they can consume, not actually produce. So it doesn't actually change how much you can make, but you can consume beyond your production possibilities curve. And that brings us to the hardest part of this unit, the idea of comparative advantage. Comparative advantage is the idea that countries should specialize in the product where they have a lower opportunity cost. So if you're producing one thing and I'm producing something else, if I can produce a lower opportunity cost than you, I should produce this, you should produce another thing, and then we should trade. Now there's two different things you gotta remember, absolute advantage and comparative advantage. Absolute advantage is a joke, it's easy. You just figure out who produces more, that means they have an absolute advantage. Compared advantage requires you to do some calculations, or the quick and dirty if you saw my unit summary video, and it tells you who should specialize and what. Now another thing you have to learn is the idea of terms of trade, which means how many units of one product should they trade for the other product that would benefit both countries. That's the idea of terms of trade. In this unit you also get a basic overview of different economic systems, like the free market system, capitalism, and the idea of a command economy and a mixed economy. We're going to focus on capitalism in this class. And so you learn the circular flow model. The circular flow model shows you that there's businesses and individuals and the government and how they interact with each other. Just remember, businesses both sell and buy two different things. They sell products and they buy resources. So there's a product market and there's a resource market. And individuals, you and me, we buy. Products and we sell our resources and the government does some stuff as well another thing you're gonna learn here is some vocab like transfer payments This is when the government pays individuals like welfare, but it's not to buy anything It's just to provide some public service and you also learn the idea of subsidies when the government provides Businesses money to produce more and also you're going to talk about the idea of factor payments So individuals sell the resources and businesses pay the factor payments to those individuals You know one sets a foundation for everything you're gonna be doing later on you start with demand and supply remember I demand is a downward sloping curve that shows you the law of demand. When price goes up, people buy less of stuff. When price goes down, people buy more. That's the idea of price and quantity demanded. There's also a law of supply. When the price goes up, people produce more. Price goes down, people produce less. Price goes up, quantity supply goes up. Price goes down, quantity supply goes down. Now, together, they form equilibrium. Please note, if price goes up, there is no shift. Price does not shift the curve. It just moves along the curve, creates either a shortage when the price is low or a surplus when the price is higher. You should also understand, when there's actual individual shifts, so there's only four things that can happen. Demand can go up, demand can go down, supply can go up, or supply can go down. And you just watch the graph, draw the graph, tells you exactly what happens to the price and quantity every single time. Now, in a microeconomics class, you go into a lot more details about the supply and demand graph, and ceilings and floors, and all sorts of crazy other stuff, but you don't need to understand those concepts for most macroeconomics classes. Just understand where equilibrium comes from, what happens when demand shifts right or left, when supply shifts left or right. and understand the idea of shortage and surplus. That's usually enough, and you add on to that. concept when you learn about aggregate demand and aggregate supply later on in Unit 3. Overall, I give Unit 1 5 out of 10 difficulty, not because it's super hard, but because there's a lot of stuff. You got to cover production possibilities curves, supply and demand, understand all these different graphs, and it's going to set the foundation for everything you're going to do in the rest of the course. Here we go. Now we're going to jump into full macroeconomics when we talk about the macro measures. In Unit 2, we're talking about the three goals of every economy. It doesn't matter what kind of economy it is, they have three goals. They want to grow over time. They want to produce more stuff. They want to keep unemployment down, like limit unemployment, and they want to limit inflation, or at least keep prices stable. That's what you do in this unit. You cover each one of these concepts, how do you measure these different things, and what are the issues with those measurements, and then we move on and apply that stuff in later units. So it starts off with the idea of growth. Growth is the idea the economy is expanding over time, and the most important concept probably in the entire course is GDP, gross domestic product. It's the dollar value of all final goods produced in a year in a country's border. So Anything you produce in your own country. Now you should also understand the idea of GDP per capita, which is the GDP divided by population, and get good at doing percent change. So if I say the GDP in one year is this amount and the GDP in another year is different amounts, you should be able to calculate the percent change in the GDP. Now when it comes to GDP, it's important to know what's not included in GDP. And the first one is intermediate goods. These are goods that go into the production of a final good. So we only count the final good, not the things that went into producing it. So we count the final laptop. not the computer chip that the laptop producer bought from another company. So intermediate goods don't count. Also, we don't count non-production transactions. These are situations where nothing new is produced. So stocks and bonds, they don't count in GDP because we have to count things that are goods and services provided in that year. Nothing old, nothing counted in previous years, that doesn't count towards GDP. And the last one is non-market transactions. So illegal goods. or illegal labor, those don't count in GDP either. And there's two ways to calculate GDP, even though the most important one for our purposes is usually the expenditures approach. But there's also the income approach. The expenditure approach adds up all the spending on all goods and services in the economy, and that tells you how much we produce in a given year. The income approach adds up all the income earned from producing those final goods and services. So really, it should just be the same number, two different ways of calculating it. But it does give us the most important equations. Remember. GDP equals C plus I plus G plus XN. It's a super important concept. Remember, business spending is investment. It's not stocks and bonds. Stocks and bonds don't count towards GDP. Government spending, government can buy stuff, and other countries can buy stuff. Now for net exports, remember, exports minus imports is the net exports. And for the United States, it's actually a negative number. And the income approach also has its own equation. It's made up of rent, wages, interest, and profit. So if you add up all those, you add up what's called the factor payments, then that should add up to the GDP of the things we produce in a year. Another concept you're going to see is the idea of nominal and real GDP. Remember, nominal GDP is not adjusted for inflation. So when we talk about the economy, we're usually analyzing real GDP because that's adjusting for inflation and showing us what we're actually producing. And a great way to show that is the business cycle. The business cycle shows you there's four different phases in the business cycle when there's a peak. And then when the economy is up there, eventually over time, the economy moves towards a recession. and then it falls down to a trough, and then it goes into expansion, goes right back up. The economy goes up and down over time, and that tells you there's only three places the economy can be at any given period of time. We can be at full employment. This is the idea that the economy's doing great. GDP is up. Real GDP is moving nice and steady. We can have a recession, right? Or recessionary gap, where the economy's not doing well. We have very high unemployment, and we have something called an inflationary gap, when the economy's kind of overheating, and we're having more and more inflation. You're gonna see those concepts later on as well. And that leads to the second goal of every economy, to limit unemployment. Now, unemployment is the idea of people who are looking for work that can't find it, who are in the labor force. Remember, it's not by population. It's the number of people who are not working, who are actively looking, divided by the labor force, times 100, gives you percentage. That percentage is the number of people who are unemployed in the economy. There's also the labor force participation rate. And understand the idea of labor force is the group of people who can and are able and are willing to work above 16, not institutionalized, not in jail. And at this point, you're going to learn the three types of unemployment. There's frictional when people are between jobs and they're looking for jobs. There's structural when people are replaced by robots or they don't have the skills that people actually want or that employers want. So their skills are obsolete. And there's cyclical unemployment when there's a recession, the economy's gone down, and people have lost their job because no one's buying products. So people don't need resources. They don't need the workers. So at any time in the economy, whether it's good or bad, there's always going to be two types of unemployment, frictional and structural. And that's the goal. Remember, the goal is not to have 0% unemployment. The goal is to have just frictional and structural unemployment. So in the United States, that's about 5% unemployment. That's called the natural rate of unemployment. It's perfectly great to have only frictional and structural unemployment. If the economy is doing poorly, we have a recessionary gap, and we also have cyclical unemployment. And of course, the unemployment rate also has some criticisms. Keep in mind that sometimes people aren't counted when they should be counted. It's called discouraged workers. These are people who stop looking for work, and they're not counted in the labor force. They're not considered unemployed, but in real life, like, they are. They wish they had a job, but they stop looking. When you stop looking, you're not part of the labor force. So that one makes the unemployment rate look lower than it actually should be. And there's also the idea of part-time workers. Part-time workers are counted as fully employed. And so somebody might be all upset and sad that they're not working full time, but according to the numbers, they're still considered fully employed. And again, the unemployment rate number isn't perfect. Doesn't show actually what's happening in all situations in the economy. And there's one more goal of every economy, to keep prices stable, to limit crazy inflation. Remember, inflation is the idea that money loses its purchasing power, right? So it requires more money to buy the same number of goods as before when there's more inflation. We have inflation, there's also deflation when prices are falling. And disinflation when the inflation rate's actually falling. So inflation rate's been going up for a long time, and the inflation rate's going up by less and less. That's called disinflation. You should understand the idea of nominal and real wages. Let's say your boss gave you a 5% raise. You're like, yeah, great, my nominal wage increased. My nominal wage went up by 5%. But if you have 10% inflation, then in real life, your real wage fell by 5%. So you have to understand the idea of that. But nominal is just looking at the regular numbers, and then real adjusts for inflation. It's the same thing with interest rates. If inflation goes up, that's going to decrease the real interest rate. That's the idea of unexpected inflation, which hurts lenders. Unexpected inflation hurts lenders, and it helps borrowers. Another concept you have to understand is the idea of CPI. It's the Consumer Price Index. It's the best way and the most popular way we show to measure price changes over time and inflation. Basically, it's a market basket that we can analyze. And there's an equation you got to know. The market basket of the year you're looking for, the value of the goods that we analyze and track, the market basket divided by that same goods and same stuff in a base year. So what was the value of that price of all that stuff in the base year times 100? And it pops out a number. And that number tells you how the prices have changed since the base year. So if you see a 120, prices went up 20% since the base year. If you see a 200... Prices went up 100% since the base year. You see in 95, that means prices fell 5% since the base year. Probably one of the hardest concepts in this unit is the idea of the deflator. The deflator conceptually is really easy. It's like the CPI except it analyzes everything. So instead of just consumer goods, it's analyzing steel and concrete and other things that consumers don't really buy, but the businesses would buy, the government buys, and it looks at the prices of everything in the economy. So the deflator deflates the nominal GDP. The equations right here, they're... GDP deflator is the nominal GDP divided by the real GDP times 100. Again, it's a number, it's an index number that tells you how prices change relative to some base year. You definitely want to do some calculation and some practice on doing the deflator. And the last concept you're going to learn in this unit is the causes of inflation. Inflation happens for three reasons. The first one is when the government just prints a bunch of money and you learn something called the quantity theory of money. It's an identity that shows you M times V equals P times Y. Now, what does that mean? M is the amount of money in the money supply. V is the velocity of money. It's how much time money is spent or how many times money is spent and re-spent in a given period of time. P is the prices of everything. And Y is the amount of stuff we're actually producing. So P times Y is the nominal GDP. So this says, this Kennedy says, the amount of money that's out there times how many times people spend that money over and over again equals a nominal GDP. Now it's important because it shows you when you increase the money supply and velocity stays the same and Y, the output, stays the same. you're going to have an equivalent change in prices. So if money supply goes up by 10%, prices are going to go up exactly by 10%. And the other two causes of inflation are actually super simple. The first one's called demand pull. This is the idea of demand goes up, people want to buy a lot more stuff in your country and people bid up the price for it, so demand pulls up prices. The other one is called cost push. Cost push is the idea that there's some resource cost or we ran out of some key resource to produce stuff that caused the production. costs arise. So now it costs more to produce stuff. So we produce less stuff causing prices to go up. So either demand goes up, people want more of your stuff, or you can't produce as much stuff. Either one causes prices to go up, causes of inflation. Now, overall, unit two is not that difficult. I give it four out of 10 difficulty, but the concepts you absolutely have to know, you have to understand the types of unemployment, GDP. I mean, huge concepts that if you don't get these, you're not going to get future concepts at all. Now, in unit three, this is where things get hard. It's a bear of a unit. There's so much stuff you gotta learn. It starts off with the idea of aggregate demand. Aggregate demand is all the stuff that people wanna buy in the economy at different price levels. And it's got a downward sloping demand curve, just like a market demand curve, except now, instead of price, it's price level. It's the. price level and the quantity demanded of everything bought by everybody. Now, this is downward sloping for three reasons. You need to understand the three reasons. First is the wealth effect. The idea that when price level goes up, the assets in people's banks are worth less, right? Now I can't buy as much as before. And so when price level goes up, people buy less stuff. And the opposite as well, price level goes down, people buy more stuff. There's also the interest rate effect. When inflation happens, interest rates tend to go up. And so people will take out less loans. Again, these are the reasons why. the aggregate demand curve is down and sloping. The last reason is because the foreign trade effect. This is the idea that when price level goes up, people from other countries don't wanna buy your stuff, and so quantity demand again goes down. Just like a market demand curve, the aggregate demand curve can shift, an increase to the right, a decrease to the left, and the shifters are really simple. Anything that changes what people wanna buy. So if other countries or if there's more investments, or if there's more consumer spending, any of those things can shift the aggregate demand either right or left. There's also an aggregate supply curve, which is upward sloping in the short run. That means that when price level goes up, producers wanna produce more stuff. But there's also a long run graph. This is the idea of, you know, in the long run, we'll produce the same exact quantity. That's the idea of full employment GDP. And the long run aggregate supply shows you there's no relationship between price level and the real GDP we're actually producing. in the long run. In other words, in the long run, eventually prices will go up or down and we'll still produce the same amount of stuff that we did before in the long run. Now, both the short-run aggregate supply and the long-run aggregate supply can shift. The short-run, of course, shifts right if it's an increase, a left if it's a decrease, anything that affects producers here. So price of resources could do this, technology could do this, some sort of government regulations or taxes or subsidies that affects a lot of producers, that could shift the short-run aggregate supply curve. This is by far the most important graph you need to be able to draw showing full employment, showing a recessionary gap, and showing an inflationary gap. This shows the same concept we saw in the last unit on the business cycle. Another key concept to watch out for is the idea of stagflation. When aggregate supply shifts to the left, price level goes up, quantity goes down, and this is like the worst case scenario. We have inflation and low output, which is bad. Now, another thing you have to be able to do here is show what happens in the long run. In other words, when there's an event that occurs, how do you go from the short run? back to the long run. If consumers want more stuff, aggregate demand goes up, right? That leads to an inflationary gap. But in the long run, wages will go up, cost of firms will go up, and the short-term supply will shift back to the left and put us back in the long run. It goes the same way for recessionary gap. Assume the economy's at full employment. If consumption goes down, people buy less stuff, we end up with a recessionary gap. Then what happens? Well, if wages are flexible, which is debatable, if wages are flexible, eventually... prices will fall for resources, wages will fall, and then costs will fall for firms, so firms can produce more. Aggregate supply shifts to the right, boom, right back to the long run. And that's creating the long-run aggregate supply curve. That long-run adjustment is different than economic growth. Economic growth is the idea of GDP going up in the long run. In other words, when there's an increase in investment, there'd be more capital, so aggregate demand would shift to the right. And since we can produce more stuff, short-run aggregate supply would shift to the right. And in the long-run aggregate supply, would also shift to the right. And you've seen this before with the production possibilities curve. The production possibilities curve shifting to the right is like the long run agri-supply curve shifting to the right. We can produce more stuff that we couldn't produce before. That's economic growth. Before you get too excited that you can draw the concepts on one graph, keep in mind there's another graph you have to be able to show recessionary gap, inflationary gap, and full employment. It's called the Phillips curve. The Phillips curve shows the relationship between inflation and unemployment. In the short run, there's a downward sloping relationship. In other words, a negative relationship between these two things. either get high inflation or high unemployment, but usually don't happen at the same time. And in the long run, it's vertical. There's no relationship between inflation and unemployment in the long run. So with these two graphs, you should be able to show when the economy is at full employment, when it has an inflationary gap, when it has a recessionary gap, or when there's a shift in the short-run supply curve and how that shifts the short-run Phillips curve. The next thing you're going to learn in this unit is the idea of fiscal policy, which is the change in government spending and taxes. So when the economy is doing poorly, how do we fix the economy? Expansionary fiscal policy is when we increase government spending or cut taxes. And there's contractionary fiscal policy where you increase taxes or decrease government spending. And one of the last concepts you're going to see is the spending multiplier. Spending multiplier is the idea when people spend, that becomes somebody else's income. And then people save a portion of that and they spend the rest. And that spending becomes somebody else's income, keeps happening over and over again. You need to understand the idea of the marginal propensity to consume, which shows you how much people consume of new income. And then there's marginal propensity to save, which is the opposite side, how much people save of new income. Simple spending multiplier is one over the marginal propensity to save, which means this is if initial change in spending happens, that's going to get multiplied by this amount. And that's the total change in spending after people spend and save, spend and save. It happens over and over and over again. There's also a tax multiplier, which is one less. than the spending multiplier. Again, the math isn't super difficult, it's just something you have to practice to get comfortable with. The last thing in this unit is the idea of the debt, the problems of fiscal policy, right? Increasing government spending and lowering taxes, seems like it's a good idea, but you're gonna have to deficit spend, which is spend more than you bring in in tax revenue. So the government's gonna spend more than they bring in in tax revenue, means they have to go into debt, or they have to have a deficit for that given year. Now the debt is accumulation of all the deficits, the deficit is amount that they're overspending in that. given year. And you should understand this idea of crowding out. When the government does a lot of borrowing, that increases interest rates and kind of crowds out investors and consumers from taking out loans and buying more stuff. Now, this unit, I'm going to give 8 out of 10 difficulty because it has a bunch of key graphs, a bunch of key concepts. Maybe get slowed down when you talk about the multiplier, but none of it's like super impossible hard, but it's a lot of stuff going on and it's the bulk of a macroeconomics class. Okay, here we go. We're talking about money. It starts off by talking about what money is. it's a medium of exchange and why it's better than the barter system. Then you talk about commodity money and fiat money. Commodity money has some sort of intrinsic value, fiat money does not. And the three functions of money, the IR, the medium of exchange, unit of account, and a store of value. The next thing you talk about is M1 money supply. So when we talk about money in this class, we're not just talking about money in currency and cash, we're talking about money in people's checking accounts, so demand deposits as well. Also understand the idea of the fractional reserve banking, the idea that banks hold a portion of reserves. and they loan out the rest of the money. That ends up being spent by somebody and that ends up in another bank. And that other bank holds a portion of that money and loans the rest of it out. You also understand the idea of bank balance sheets. Bank balance sheets shows the assets and liabilities for a given bank. You should be able to use this to calculate the required reserve ratio, the excess reserves. Required reserves is the amount of money that a bank has to hold by law. excess reserves, the amount of money they can loan out if they want to. Now, at this point, you're also going to learn about the money multiplier. We learned about the spending multiplier in Unit 3. Now, it's the same idea, except we're talking about spending and consuming and saving. We're talking about banks lending. So when a bank lends money, someone takes the money, spends it, ends up in another bank. That bank holds a portion and then loans the rest out. That keeps happening over and over and over again. The multiplier for the money multiplier is right here, 1 over the reserve requirement. Remember, the spending multiplier was 1 over the marginal penalty to save. The money multiplier won over the reserve requirement. Same concept though. The initial change in money supply times the multiplier shows you the total change in the money supply. Key graph in this unit is the money market graph. It shows us supply and demand for money. You've got interest rates, you've got the quantity of money, it's got a downward sloping demand. Demand for money happens for two reasons, transaction demand and asset demand. People need money to buy stuff and they need money or they like to have their assets in money. as opposed to have their assets in bonds or stocks or something that's not money. So there's a demand for money. The supply is vertical. It's set by the Fed, and that comes together and sets the nominal interest rate. Now, the Fed can control that money supply. They can increase it, shift to the right, and that would lower the interest rate. Or they can decrease it, shift it to the left, and they can increase the interest rate. That's called monetary policy. Remember, the Fed controls the money supply. If they increase the money supply, it lowers interest rates, which would increase investment and consumer spending. people would take out more loans, buy more stuff, and it would increase aggregate demand. That's called expansionary monetary policy. If the Fed were decreasing the money supply, that would increase interest rates, decrease investment, decrease consumer spending, people would take out less loans because it's more expensive to pay back the loan, and that would decrease aggregate demand. That's called contractionary monetary policy. But understanding that is not enough. You have to understand how they shift the money supply. There's three shifters, reserve requirement, the discount rate and open market operations. The reserve requirement, the Fed can decide to choose whether to increase or decrease the amount that banks have to hold. Discount rate is how much banks are charged by the Fed when they borrow money from the Fed. And then open market operations when the Fed buys or sells bonds. Here's the rules you got to watch out for. It shows you what happens when the reserve requirement goes up or down, discount rate goes up or down, and when the Fed buys or sells bonds to the money supply. So make sure you memorize this. You got to know this, that right there. is monetary policy. Keep in mind, there's a difference between the discount rate is what the Fed charges banks and the federal funds rate is what banks charge each other. So if a bank needs money, they can either go, first they can go to the people they lent the money to and say, hey, I will need the money back. That's one option. Or they can go to another bank or they can go to the Fed. So when they go to the Fed, that's a discount rate. That's what they're charged. When they go to another bank, that's called the federal funds rate. The name's horrible. They should be reversed, right? But just remember, federal funds rate is what banks charge other banks. The next concept you have to understand is the idea of loanable funds. Loanable funds is another key graph that shows the demand and the supply of loans. The demand for loans is by borrowers, the people who want to borrow money. The supply is by lenders, all the people who want to lend out money, and it gives you the real interest rate. Now, this curve, of course, can shift both supply or demand. For example, if the government does a lot of borrowing, that increase in the amount of money that you're borrowing, that increase in the demand for loans because the government say I want to borrow some of that and again interest rates go up. Now the graph shows you the concept of crowding out which I talked about earlier. If the government deficit spends they demand more money that increases the demand for loans higher interest rate higher real interest rate means less investment and less consumption of you know things that people would take out loans for. So overall unit four is pretty hard I give it eight out of ten difficulty because it has some graphs and it has some calculations so it's bringing a lot of different concepts together. But it's all talking about one big concept, monetary policy. If you get that, you're going to be fine. Now for the last unit, we're talking about international trade and foreign exchange. It's going to start off with the balance of payments. This shows all the transactions between different countries. And it has two different accounts, the current account and the financial account. The current account is made up of, first, the balance of trade. That's the first idea I want you to understand. Exports and imports. If you export more than you import, then you have a trade surplus. If you import more than you export, you have a trade deficit. So the first part that you need to understand is the goods and services that are sold are sold and kept track of in the current account. Now, investment income is also counted in the current account, and so is net transfers. So when one country gives aid to another country or remittance, when one person in one country lives there and they send money back to their family, these things all count in the current account. The financial account is basically financial assets. It shows inflow and outflow of money coming in. or out of a country. Now, if the inflow into your country is greater than the outflow, that means you have a surplus in the financial account. If outflow is more than the inflow, then you have a deficit in the financial account. Now, keep in mind, when a country has a deficit in the current account, that means they have to have a surplus in the financial account. That's why it's called the balance of payment. The next concept you're gonna learn is the big concept in this unit, foreign exchange. It talks about the relative value of currencies to each other. Now, the first thing to understand is the idea of appreciation. This is the idea that a country's currency increases in value relative to another country's currency. And the opposite is the idea of depreciation. Now, keep in mind the relationship between appreciation, depreciation, and net exports. When your country's currency appreciates, that's going to cause your net exports of that country to fall. People are going to buy less of your stuff because it's more expensive to buy your stuff. When your currency depreciates, that's going to cause the net exports to go up. So don't get confused, oh depreciation is a bad thing, it's not. It's actually great if you're an exporter, it's bad if you're an importer. Also understand that there's a graph here, it looks like this. This shows you the supply and demand for dollars relative to euros. So be able to draw the demand supply. Keep in mind the demand is by, because we're analyzing dollars here, the demand is by Europeans and the supply is by Americans. Also understand that when there's a change in one market, there's a change in a corresponding other market. In other words... This is demand for dollars and the supply for dollars. There's also the supply and demand for euros and it sets the exchange rate. So for example, Europeans want to go on vacation in the United States. They need more American dollars. So the demand for dollars increases and the dollar is going to appreciate relative to the euro. But at the same time, Europeans are going to supply more of their euros. That causes the euro to depreciate. So keep in mind for any graph, there's also a phantom graph that goes along with it. And the rule is when demand goes up for one. the other country has to supply more of theirs. Also, there are four shifters of foreign exchange. The first one is the one we just did, tastes and preferences. If people prefer more things from one country, then they're gonna demand more of that currency so they can go buy it, so that'll cause that currency to appreciate. So tastes and preferences, really easy. Next one is income. If a country's richer, they buy more things, including things from other countries. Then there's inflation. So if the price level goes up in my country, I don't wanna buy stuff in my country anymore because it's higher priced. I go buy other countries'stuff. And last one is interest rates, which gets tricky. Interest rates are now the opposite of what you normally thought all the way back in Unit 3 and Unit 4. Now we talk about interest rates, we're saying that interest is a good thing, right? In other words, interest rates, higher interest rates will bring in more inflow in your country because other countries want to get the higher rate of return. Keep in mind, two currencies can't appreciate relative to each other at the same time. So the dollar can't appreciate relative to the euro as the euro appreciates relative to the dollar. One goes up. and the other one has to go down. Last thing here is the idea of floating and fixed exchange rates. Floating exchange rates allow supply and demand to set the exchange rate. A fixed exchange rate is when the government of the country tries to manipulate their currency to keep it fixed or pegged to another country's currency. Now, unit five is super short and it doesn't have a lot of graphs, but I give it a six out of 10 difficulty because it's just so darn important. You have to understand how to get exchange rates and don't get it tripped up when you're analyzing two different countries. and whether the currency appreciates or depreciates. Hey, thank you so much for watching this video. I wish you all the best of luck on the AP test or on your big final exam. Hey, you're gonna do awesome, okay? Thanks for watching. Till next time!

It's designed to help you get ready right before you walk into the big AP test or your big final. Also, it's a great way to review what you know and don't know by watching the entire class over again. You can spot the things that you have to go back and study. And if you've been watching my videos, you know I sell something called the Ultimate Review Pack.

It has a bunch of practice questions and access to hidden videos that help you learn economics. The summary video... so they cover everything in greater detail than this video I'm doing right now.

Now, I was gonna make this video available only to people who buy the packet, but then I thought, you know, I can trust people. Man, if you like my videos, if these videos are helping you learn economics, please go get the packet. I'm gonna make this video available to everyone.

but if you like my stuff, please support my channel and help me continue to make great econ videos, okay? Let's start it up. Now, whether or not you're enrolled in a microeconomics class or a macroeconomics class, it all starts the same for a basic introductory econ course.

It starts with the idea of scarcity. Scarcity idea is we have unlimited wants and limited resources. Also, you're going to learn the idea of opportunity costs. That's the idea that everything has a cost, right?

It doesn't matter what you're producing. You've got to give up something to produce it, or any decision you make has a cost. Now those concepts come together with the production possibilities curve.

It's the first graph you learn in economics. It shows the different combinations of producing two different goods using all of your resources. So any point on the curve is efficient, like you're using all of your resources to the fullest. Any point inside the curve is inefficient. Any point out here, outside the curve, is impossible given your current resources.

And there's two different shapes you have to remember. If it's a straight line production possibilities curve, that means there's constant opportunity cost, which means the resources to produce the different products, are very similar. So similar resources, if it's a straight line, if it's a boat outline, concave to the origin, that means that resources are not very similar.

So when you produce more of one, you have to give up more and more of the other one. That's called the law of increasing opportunity cost. Now this curve can shift if you have more resources like land, labor, and capital, or less resources or better technology.

That can shift the curve. Another thing that shifts the curve is trade. If another country trades with another country, that can shift out the production possibilities curve, but it shows how much they can consume, not actually produce.

So it doesn't actually change how much you can make, but you can consume beyond your production possibilities curve. And that brings us to the hardest part of this unit, the idea of comparative advantage. Comparative advantage is the idea that countries should specialize in the product where they have a lower opportunity cost. So if you're producing one thing and I'm producing something else, if I can produce a lower opportunity cost than you, I should produce this, you should produce another thing, and then we should trade. Now there's two different things you gotta remember, absolute advantage and comparative advantage.

Absolute advantage is a joke, it's easy. You just figure out who produces more, that means they have an absolute advantage. Compared advantage requires you to do some calculations, or the quick and dirty if you saw my unit summary video, and it tells you who should specialize and what. Now another thing you have to learn is the idea of terms of trade, which means how many units of one product should they trade for the other product that would benefit both countries. That's the idea of terms of trade.

In this unit you also get a basic overview of different economic systems, like the free market system, capitalism, and the idea of a command economy and a mixed economy. We're going to focus on capitalism in this class. And so you learn the circular flow model. The circular flow model shows you that there's businesses and individuals and the government and how they interact with each other. Just remember, businesses both sell and buy two different things.

They sell products and they buy resources. So there's a product market and there's a resource market. And individuals, you and me, we buy.

Products and we sell our resources and the government does some stuff as well another thing you're gonna learn here is some vocab like transfer payments This is when the government pays individuals like welfare, but it's not to buy anything It's just to provide some public service and you also learn the idea of subsidies when the government provides Businesses money to produce more and also you're going to talk about the idea of factor payments So individuals sell the resources and businesses pay the factor payments to those individuals You know one sets a foundation for everything you're gonna be doing later on you start with demand and supply remember I demand is a downward sloping curve that shows you the law of demand. When price goes up, people buy less of stuff. When price goes down, people buy more. That's the idea of price and quantity demanded.

There's also a law of supply. When the price goes up, people produce more. Price goes down, people produce less. Price goes up, quantity supply goes up. Price goes down, quantity supply goes down.

Now, together, they form equilibrium. Please note, if price goes up, there is no shift. Price does not shift the curve.

It just moves along the curve, creates either a shortage when the price is low or a surplus when the price is higher. You should also understand, when there's actual individual shifts, so there's only four things that can happen. Demand can go up, demand can go down, supply can go up, or supply can go down.

And you just watch the graph, draw the graph, tells you exactly what happens to the price and quantity every single time. Now, in a microeconomics class, you go into a lot more details about the supply and demand graph, and ceilings and floors, and all sorts of crazy other stuff, but you don't need to understand those concepts for most macroeconomics classes. Just understand where equilibrium comes from, what happens when demand shifts right or left, when supply shifts left or right. and understand the idea of shortage and surplus.

That's usually enough, and you add on to that. concept when you learn about aggregate demand and aggregate supply later on in Unit 3. Overall, I give Unit 1 5 out of 10 difficulty, not because it's super hard, but because there's a lot of stuff. You got to cover production possibilities curves, supply and demand, understand all these different graphs, and it's going to set the foundation for everything you're going to do in the rest of the course.

Here we go. Now we're going to jump into full macroeconomics when we talk about the macro measures. In Unit 2, we're talking about the three goals of every economy.

It doesn't matter what kind of economy it is, they have three goals. They want to grow over time. They want to produce more stuff. They want to keep unemployment down, like limit unemployment, and they want to limit inflation, or at least keep prices stable.

That's what you do in this unit. You cover each one of these concepts, how do you measure these different things, and what are the issues with those measurements, and then we move on and apply that stuff in later units. So it starts off with the idea of growth.

Growth is the idea the economy is expanding over time, and the most important concept probably in the entire course is GDP, gross domestic product. It's the dollar value of all final goods produced in a year in a country's border. So Anything you produce in your own country.

Now you should also understand the idea of GDP per capita, which is the GDP divided by population, and get good at doing percent change. So if I say the GDP in one year is this amount and the GDP in another year is different amounts, you should be able to calculate the percent change in the GDP. Now when it comes to GDP, it's important to know what's not included in GDP.

And the first one is intermediate goods. These are goods that go into the production of a final good. So we only count the final good, not the things that went into producing it. So we count the final laptop. not the computer chip that the laptop producer bought from another company.

So intermediate goods don't count. Also, we don't count non-production transactions. These are situations where nothing new is produced. So stocks and bonds, they don't count in GDP because we have to count things that are goods and services provided in that year.

Nothing old, nothing counted in previous years, that doesn't count towards GDP. And the last one is non-market transactions. So illegal goods.

or illegal labor, those don't count in GDP either. And there's two ways to calculate GDP, even though the most important one for our purposes is usually the expenditures approach. But there's also the income approach. The expenditure approach adds up all the spending on all goods and services in the economy, and that tells you how much we produce in a given year.

The income approach adds up all the income earned from producing those final goods and services. So really, it should just be the same number, two different ways of calculating it. But it does give us the most important equations.

Remember. GDP equals C plus I plus G plus XN. It's a super important concept.

Remember, business spending is investment. It's not stocks and bonds. Stocks and bonds don't count towards GDP.

Government spending, government can buy stuff, and other countries can buy stuff. Now for net exports, remember, exports minus imports is the net exports. And for the United States, it's actually a negative number.

And the income approach also has its own equation. It's made up of rent, wages, interest, and profit. So if you add up all those, you add up what's called the factor payments, then that should add up to the GDP of the things we produce in a year. Another concept you're going to see is the idea of nominal and real GDP.

Remember, nominal GDP is not adjusted for inflation. So when we talk about the economy, we're usually analyzing real GDP because that's adjusting for inflation and showing us what we're actually producing. And a great way to show that is the business cycle.

The business cycle shows you there's four different phases in the business cycle when there's a peak. And then when the economy is up there, eventually over time, the economy moves towards a recession. and then it falls down to a trough, and then it goes into expansion, goes right back up.

The economy goes up and down over time, and that tells you there's only three places the economy can be at any given period of time. We can be at full employment. This is the idea that the economy's doing great.

GDP is up. Real GDP is moving nice and steady. We can have a recession, right? Or recessionary gap, where the economy's not doing well. We have very high unemployment, and we have something called an inflationary gap, when the economy's kind of overheating, and we're having more and more inflation.

You're gonna see those concepts later on as well. And that leads to the second goal of every economy, to limit unemployment. Now, unemployment is the idea of people who are looking for work that can't find it, who are in the labor force. Remember, it's not by population. It's the number of people who are not working, who are actively looking, divided by the labor force, times 100, gives you percentage.

That percentage is the number of people who are unemployed in the economy. There's also the labor force participation rate. And understand the idea of labor force is the group of people who can and are able and are willing to work above 16, not institutionalized, not in jail. And at this point, you're going to learn the three types of unemployment.

There's frictional when people are between jobs and they're looking for jobs. There's structural when people are replaced by robots or they don't have the skills that people actually want or that employers want. So their skills are obsolete. And there's cyclical unemployment when there's a recession, the economy's gone down, and people have lost their job because no one's buying products.

So people don't need resources. They don't need the workers. So at any time in the economy, whether it's good or bad, there's always going to be two types of unemployment, frictional and structural.

And that's the goal. Remember, the goal is not to have 0% unemployment. The goal is to have just frictional and structural unemployment. So in the United States, that's about 5% unemployment. That's called the natural rate of unemployment.

It's perfectly great to have only frictional and structural unemployment. If the economy is doing poorly, we have a recessionary gap, and we also have cyclical unemployment. And of course, the unemployment rate also has some criticisms. Keep in mind that sometimes people aren't counted when they should be counted.

It's called discouraged workers. These are people who stop looking for work, and they're not counted in the labor force. They're not considered unemployed, but in real life, like, they are. They wish they had a job, but they stop looking. When you stop looking, you're not part of the labor force.

So that one makes the unemployment rate look lower than it actually should be. And there's also the idea of part-time workers. Part-time workers are counted as fully employed. And so somebody might be all upset and sad that they're not working full time, but according to the numbers, they're still considered fully employed. And again, the unemployment rate number isn't perfect.

Doesn't show actually what's happening in all situations in the economy. And there's one more goal of every economy, to keep prices stable, to limit crazy inflation. Remember, inflation is the idea that money loses its purchasing power, right?

So it requires more money to buy the same number of goods as before when there's more inflation. We have inflation, there's also deflation when prices are falling. And disinflation when the inflation rate's actually falling.

So inflation rate's been going up for a long time, and the inflation rate's going up by less and less. That's called disinflation. You should understand the idea of nominal and real wages.

Let's say your boss gave you a 5% raise. You're like, yeah, great, my nominal wage increased. My nominal wage went up by 5%.

But if you have 10% inflation, then in real life, your real wage fell by 5%. So you have to understand the idea of that. But nominal is just looking at the regular numbers, and then real adjusts for inflation.

It's the same thing with interest rates. If inflation goes up, that's going to decrease the real interest rate. That's the idea of unexpected inflation, which hurts lenders.

Unexpected inflation hurts lenders, and it helps borrowers. Another concept you have to understand is the idea of CPI. It's the Consumer Price Index.

It's the best way and the most popular way we show to measure price changes over time and inflation. Basically, it's a market basket that we can analyze. And there's an equation you got to know.

The market basket of the year you're looking for, the value of the goods that we analyze and track, the market basket divided by that same goods and same stuff in a base year. So what was the value of that price of all that stuff in the base year times 100? And it pops out a number.

And that number tells you how the prices have changed since the base year. So if you see a 120, prices went up 20% since the base year. If you see a 200...

Prices went up 100% since the base year. You see in 95, that means prices fell 5% since the base year. Probably one of the hardest concepts in this unit is the idea of the deflator. The deflator conceptually is really easy.

It's like the CPI except it analyzes everything. So instead of just consumer goods, it's analyzing steel and concrete and other things that consumers don't really buy, but the businesses would buy, the government buys, and it looks at the prices of everything in the economy. So the deflator deflates the nominal GDP.

The equations right here, they're... GDP deflator is the nominal GDP divided by the real GDP times 100. Again, it's a number, it's an index number that tells you how prices change relative to some base year. You definitely want to do some calculation and some practice on doing the deflator. And the last concept you're going to learn in this unit is the causes of inflation. Inflation happens for three reasons.

The first one is when the government just prints a bunch of money and you learn something called the quantity theory of money. It's an identity that shows you M times V equals P times Y. Now, what does that mean?

M is the amount of money in the money supply. V is the velocity of money. It's how much time money is spent or how many times money is spent and re-spent in a given period of time.

P is the prices of everything. And Y is the amount of stuff we're actually producing. So P times Y is the nominal GDP.

So this says, this Kennedy says, the amount of money that's out there times how many times people spend that money over and over again equals a nominal GDP. Now it's important because it shows you when you increase the money supply and velocity stays the same and Y, the output, stays the same. you're going to have an equivalent change in prices.

So if money supply goes up by 10%, prices are going to go up exactly by 10%. And the other two causes of inflation are actually super simple. The first one's called demand pull. This is the idea of demand goes up, people want to buy a lot more stuff in your country and people bid up the price for it, so demand pulls up prices. The other one is called cost push.

Cost push is the idea that there's some resource cost or we ran out of some key resource to produce stuff that caused the production. costs arise. So now it costs more to produce stuff.

So we produce less stuff causing prices to go up. So either demand goes up, people want more of your stuff, or you can't produce as much stuff. Either one causes prices to go up, causes of inflation. Now, overall, unit two is not that difficult. I give it four out of 10 difficulty, but the concepts you absolutely have to know, you have to understand the types of unemployment, GDP.

I mean, huge concepts that if you don't get these, you're not going to get future concepts at all. Now, in unit three, this is where things get hard. It's a bear of a unit. There's so much stuff you gotta learn. It starts off with the idea of aggregate demand.

Aggregate demand is all the stuff that people wanna buy in the economy at different price levels. And it's got a downward sloping demand curve, just like a market demand curve, except now, instead of price, it's price level. It's the. price level and the quantity demanded of everything bought by everybody.

Now, this is downward sloping for three reasons. You need to understand the three reasons. First is the wealth effect. The idea that when price level goes up, the assets in people's banks are worth less, right?

Now I can't buy as much as before. And so when price level goes up, people buy less stuff. And the opposite as well, price level goes down, people buy more stuff.

There's also the interest rate effect. When inflation happens, interest rates tend to go up. And so people will take out less loans.

Again, these are the reasons why. the aggregate demand curve is down and sloping. The last reason is because the foreign trade effect.

This is the idea that when price level goes up, people from other countries don't wanna buy your stuff, and so quantity demand again goes down. Just like a market demand curve, the aggregate demand curve can shift, an increase to the right, a decrease to the left, and the shifters are really simple. Anything that changes what people wanna buy. So if other countries or if there's more investments, or if there's more consumer spending, any of those things can shift the aggregate demand either right or left. There's also an aggregate supply curve, which is upward sloping in the short run.

That means that when price level goes up, producers wanna produce more stuff. But there's also a long run graph. This is the idea of, you know, in the long run, we'll produce the same exact quantity.

That's the idea of full employment GDP. And the long run aggregate supply shows you there's no relationship between price level and the real GDP we're actually producing. in the long run.

In other words, in the long run, eventually prices will go up or down and we'll still produce the same amount of stuff that we did before in the long run. Now, both the short-run aggregate supply and the long-run aggregate supply can shift. The short-run, of course, shifts right if it's an increase, a left if it's a decrease, anything that affects producers here.

So price of resources could do this, technology could do this, some sort of government regulations or taxes or subsidies that affects a lot of producers, that could shift the short-run aggregate supply curve. This is by far the most important graph you need to be able to draw showing full employment, showing a recessionary gap, and showing an inflationary gap. This shows the same concept we saw in the last unit on the business cycle. Another key concept to watch out for is the idea of stagflation.

When aggregate supply shifts to the left, price level goes up, quantity goes down, and this is like the worst case scenario. We have inflation and low output, which is bad. Now, another thing you have to be able to do here is show what happens in the long run.

In other words, when there's an event that occurs, how do you go from the short run? back to the long run. If consumers want more stuff, aggregate demand goes up, right?

That leads to an inflationary gap. But in the long run, wages will go up, cost of firms will go up, and the short-term supply will shift back to the left and put us back in the long run. It goes the same way for recessionary gap.

Assume the economy's at full employment. If consumption goes down, people buy less stuff, we end up with a recessionary gap. Then what happens?

Well, if wages are flexible, which is debatable, if wages are flexible, eventually... prices will fall for resources, wages will fall, and then costs will fall for firms, so firms can produce more. Aggregate supply shifts to the right, boom, right back to the long run. And that's creating the long-run aggregate supply curve.

That long-run adjustment is different than economic growth. Economic growth is the idea of GDP going up in the long run. In other words, when there's an increase in investment, there'd be more capital, so aggregate demand would shift to the right. And since we can produce more stuff, short-run aggregate supply would shift to the right.

And in the long-run aggregate supply, would also shift to the right. And you've seen this before with the production possibilities curve. The production possibilities curve shifting to the right is like the long run agri-supply curve shifting to the right. We can produce more stuff that we couldn't produce before.

That's economic growth. Before you get too excited that you can draw the concepts on one graph, keep in mind there's another graph you have to be able to show recessionary gap, inflationary gap, and full employment. It's called the Phillips curve. The Phillips curve shows the relationship between inflation and unemployment.

In the short run, there's a downward sloping relationship. In other words, a negative relationship between these two things. either get high inflation or high unemployment, but usually don't happen at the same time. And in the long run, it's vertical.

There's no relationship between inflation and unemployment in the long run. So with these two graphs, you should be able to show when the economy is at full employment, when it has an inflationary gap, when it has a recessionary gap, or when there's a shift in the short-run supply curve and how that shifts the short-run Phillips curve. The next thing you're going to learn in this unit is the idea of fiscal policy, which is the change in government spending and taxes.

So when the economy is doing poorly, how do we fix the economy? Expansionary fiscal policy is when we increase government spending or cut taxes. And there's contractionary fiscal policy where you increase taxes or decrease government spending.

And one of the last concepts you're going to see is the spending multiplier. Spending multiplier is the idea when people spend, that becomes somebody else's income. And then people save a portion of that and they spend the rest.

And that spending becomes somebody else's income, keeps happening over and over again. You need to understand the idea of the marginal propensity to consume, which shows you how much people consume of new income. And then there's marginal propensity to save, which is the opposite side, how much people save of new income.

Simple spending multiplier is one over the marginal propensity to save, which means this is if initial change in spending happens, that's going to get multiplied by this amount. And that's the total change in spending after people spend and save, spend and save. It happens over and over and over again.

There's also a tax multiplier, which is one less. than the spending multiplier. Again, the math isn't super difficult, it's just something you have to practice to get comfortable with.

The last thing in this unit is the idea of the debt, the problems of fiscal policy, right? Increasing government spending and lowering taxes, seems like it's a good idea, but you're gonna have to deficit spend, which is spend more than you bring in in tax revenue. So the government's gonna spend more than they bring in in tax revenue, means they have to go into debt, or they have to have a deficit for that given year.

Now the debt is accumulation of all the deficits, the deficit is amount that they're overspending in that. given year. And you should understand this idea of crowding out.

When the government does a lot of borrowing, that increases interest rates and kind of crowds out investors and consumers from taking out loans and buying more stuff. Now, this unit, I'm going to give 8 out of 10 difficulty because it has a bunch of key graphs, a bunch of key concepts. Maybe get slowed down when you talk about the multiplier, but none of it's like super impossible hard, but it's a lot of stuff going on and it's the bulk of a macroeconomics class.

Okay, here we go. We're talking about money. It starts off by talking about what money is. it's a medium of exchange and why it's better than the barter system. Then you talk about commodity money and fiat money. Commodity money has some sort of intrinsic value, fiat money does not.

And the three functions of money, the IR, the medium of exchange, unit of account, and a store of value. The next thing you talk about is M1 money supply. So when we talk about money in this class, we're not just talking about money in currency and cash, we're talking about money in people's checking accounts, so demand deposits as well.

Also understand the idea of the fractional reserve banking, the idea that banks hold a portion of reserves. and they loan out the rest of the money. That ends up being spent by somebody and that ends up in another bank. And that other bank holds a portion of that money and loans the rest of it out. You also understand the idea of bank balance sheets.

Bank balance sheets shows the assets and liabilities for a given bank. You should be able to use this to calculate the required reserve ratio, the excess reserves. Required reserves is the amount of money that a bank has to hold by law. excess reserves, the amount of money they can loan out if they want to.

Now, at this point, you're also going to learn about the money multiplier. We learned about the spending multiplier in Unit 3. Now, it's the same idea, except we're talking about spending and consuming and saving. We're talking about banks lending. So when a bank lends money, someone takes the money, spends it, ends up in another bank.

That bank holds a portion and then loans the rest out. That keeps happening over and over and over again. The multiplier for the money multiplier is right here, 1 over the reserve requirement. Remember, the spending multiplier was 1 over the marginal penalty to save. The money multiplier won over the reserve requirement.

Same concept though. The initial change in money supply times the multiplier shows you the total change in the money supply. Key graph in this unit is the money market graph. It shows us supply and demand for money.

You've got interest rates, you've got the quantity of money, it's got a downward sloping demand. Demand for money happens for two reasons, transaction demand and asset demand. People need money to buy stuff and they need money or they like to have their assets in money. as opposed to have their assets in bonds or stocks or something that's not money. So there's a demand for money.

The supply is vertical. It's set by the Fed, and that comes together and sets the nominal interest rate. Now, the Fed can control that money supply. They can increase it, shift to the right, and that would lower the interest rate. Or they can decrease it, shift it to the left, and they can increase the interest rate.

That's called monetary policy. Remember, the Fed controls the money supply. If they increase the money supply, it lowers interest rates, which would increase investment and consumer spending. people would take out more loans, buy more stuff, and it would increase aggregate demand.

That's called expansionary monetary policy. If the Fed were decreasing the money supply, that would increase interest rates, decrease investment, decrease consumer spending, people would take out less loans because it's more expensive to pay back the loan, and that would decrease aggregate demand. That's called contractionary monetary policy. But understanding that is not enough.

You have to understand how they shift the money supply. There's three shifters, reserve requirement, the discount rate and open market operations. The reserve requirement, the Fed can decide to choose whether to increase or decrease the amount that banks have to hold. Discount rate is how much banks are charged by the Fed when they borrow money from the Fed. And then open market operations when the Fed buys or sells bonds.

Here's the rules you got to watch out for. It shows you what happens when the reserve requirement goes up or down, discount rate goes up or down, and when the Fed buys or sells bonds to the money supply. So make sure you memorize this. You got to know this, that right there. is monetary policy.

Keep in mind, there's a difference between the discount rate is what the Fed charges banks and the federal funds rate is what banks charge each other. So if a bank needs money, they can either go, first they can go to the people they lent the money to and say, hey, I will need the money back. That's one option.

Or they can go to another bank or they can go to the Fed. So when they go to the Fed, that's a discount rate. That's what they're charged. When they go to another bank, that's called the federal funds rate. The name's horrible.

They should be reversed, right? But just remember, federal funds rate is what banks charge other banks. The next concept you have to understand is the idea of loanable funds. Loanable funds is another key graph that shows the demand and the supply of loans.

The demand for loans is by borrowers, the people who want to borrow money. The supply is by lenders, all the people who want to lend out money, and it gives you the real interest rate. Now, this curve, of course, can shift both supply or demand.

For example, if the government does a lot of borrowing, that increase in the amount of money that you're borrowing, that increase in the demand for loans because the government say I want to borrow some of that and again interest rates go up. Now the graph shows you the concept of crowding out which I talked about earlier. If the government deficit spends they demand more money that increases the demand for loans higher interest rate higher real interest rate means less investment and less consumption of you know things that people would take out loans for.

So overall unit four is pretty hard I give it eight out of ten difficulty because it has some graphs and it has some calculations so it's bringing a lot of different concepts together. But it's all talking about one big concept, monetary policy. If you get that, you're going to be fine.

Now for the last unit, we're talking about international trade and foreign exchange. It's going to start off with the balance of payments. This shows all the transactions between different countries. And it has two different accounts, the current account and the financial account.

The current account is made up of, first, the balance of trade. That's the first idea I want you to understand. Exports and imports. If you export more than you import, then you have a trade surplus.

If you import more than you export, you have a trade deficit. So the first part that you need to understand is the goods and services that are sold are sold and kept track of in the current account. Now, investment income is also counted in the current account, and so is net transfers.

So when one country gives aid to another country or remittance, when one person in one country lives there and they send money back to their family, these things all count in the current account. The financial account is basically financial assets. It shows inflow and outflow of money coming in. or out of a country. Now, if the inflow into your country is greater than the outflow, that means you have a surplus in the financial account.

If outflow is more than the inflow, then you have a deficit in the financial account. Now, keep in mind, when a country has a deficit in the current account, that means they have to have a surplus in the financial account. That's why it's called the balance of payment. The next concept you're gonna learn is the big concept in this unit, foreign exchange. It talks about the relative value of currencies to each other.

Now, the first thing to understand is the idea of appreciation. This is the idea that a country's currency increases in value relative to another country's currency. And the opposite is the idea of depreciation.

Now, keep in mind the relationship between appreciation, depreciation, and net exports. When your country's currency appreciates, that's going to cause your net exports of that country to fall. People are going to buy less of your stuff because it's more expensive to buy your stuff. When your currency depreciates, that's going to cause the net exports to go up.

So don't get confused, oh depreciation is a bad thing, it's not. It's actually great if you're an exporter, it's bad if you're an importer. Also understand that there's a graph here, it looks like this. This shows you the supply and demand for dollars relative to euros.

So be able to draw the demand supply. Keep in mind the demand is by, because we're analyzing dollars here, the demand is by Europeans and the supply is by Americans. Also understand that when there's a change in one market, there's a change in a corresponding other market.

In other words... This is demand for dollars and the supply for dollars. There's also the supply and demand for euros and it sets the exchange rate.

So for example, Europeans want to go on vacation in the United States. They need more American dollars. So the demand for dollars increases and the dollar is going to appreciate relative to the euro.

But at the same time, Europeans are going to supply more of their euros. That causes the euro to depreciate. So keep in mind for any graph, there's also a phantom graph that goes along with it. And the rule is when demand goes up for one. the other country has to supply more of theirs.

Also, there are four shifters of foreign exchange. The first one is the one we just did, tastes and preferences. If people prefer more things from one country, then they're gonna demand more of that currency so they can go buy it, so that'll cause that currency to appreciate. So tastes and preferences, really easy. Next one is income.

If a country's richer, they buy more things, including things from other countries. Then there's inflation. So if the price level goes up in my country, I don't wanna buy stuff in my country anymore because it's higher priced.

I go buy other countries'stuff. And last one is interest rates, which gets tricky. Interest rates are now the opposite of what you normally thought all the way back in Unit 3 and Unit 4. Now we talk about interest rates, we're saying that interest is a good thing, right?

In other words, interest rates, higher interest rates will bring in more inflow in your country because other countries want to get the higher rate of return. Keep in mind, two currencies can't appreciate relative to each other at the same time. So the dollar can't appreciate relative to the euro as the euro appreciates relative to the dollar.

One goes up. and the other one has to go down. Last thing here is the idea of floating and fixed exchange rates. Floating exchange rates allow supply and demand to set the exchange rate.

A fixed exchange rate is when the government of the country tries to manipulate their currency to keep it fixed or pegged to another country's currency. Now, unit five is super short and it doesn't have a lot of graphs, but I give it a six out of 10 difficulty because it's just so darn important. You have to understand how to get exchange rates and don't get it tripped up when you're analyzing two different countries.

and whether the currency appreciates or depreciates. Hey, thank you so much for watching this video. I wish you all the best of luck on the AP test or on your big final exam. Hey, you're gonna do awesome, okay?

Thanks for watching. Till next time!

Transcript for:Introduction to AP Macroeconomics Concepts

Transcript for:
Introduction to AP Macroeconomics Concepts