AP Macroeconomics Full Study Guide

Key Goals in Macroeconomics

1. Stabilize economic growth
   • Stabilize the business cycle
2. Economic growth
   • Increase in goods and services produced by an economy over time
3. Minimize unemployment (not 0%)
   • Negative consequences of 0% unemployment include inefficiency and inflation
4. Minimize inflation (not 0%)

Business Cycle

• Contraction: GDP decrease over time
• Recession: 3 consecutive quarters of GDP decrease
• Trough: Temporary minimum of GDP
• Expansion: GDP increase over time
• Peak: Temporary max of GDP

Economic Measures

GDP (Gross Domestic Product)

• Market value of all final goods and services produced within a country
• Expenditure Approach:
  • Formula: Y = C + I + G + NX
  • Components:
    • C: Private consumption
    • I: Investment (business spending on new capital)
    • G: Government spending (excluding transfers)
    • NX: Net exports (exports - imports)
• Income Approach:
  • GDP = wages + rent + interest + profit
• Real vs. Nominal GDP
  • Real GDP: Adjusted for inflation
  • Nominal GDP: Based on current year prices

Unemployment

• Unemployment Rate Formula:
  • (Number of unemployed / (Number of unemployed + Number of employed)) * 100
• Types of Unemployment:
  • Frictional: Job search, temporary
  • Structural: Skills mismatch
  • Cyclical: Due to business cycle
  • Seasonal: Due to seasonal demand changes*

Aggregate Demand and Supply Model

• Aggregate Demand (AD):

  • Relationship between price levels and quantity of output demanded
  • Components: Consumption, Investment, Government Spending, Net Exports
  • Downward sloping due to:
    • Wealth effect
    • Interest rate effect
    • Net export effect

• Short-Run Aggregate Supply (SRAS):

  • Upward sloping because costs are fixed in short term
  • Determinants include changes in commodity prices, nominal wages, technology

• Long-Run Aggregate Supply (LRAS):

  • Vertical because wages adjust over time
  • Determinants include technology, resources

Fiscal Policy

• Expansionary Policy:
  • Increases government spending and decreases taxes
  • Aims to shift AD to the right
• Contractionary Policy:
  • Decreases government spending and increases taxes
  • Aims to shift AD to the left

Phillips Curve

• Short-Run Phillips Curve (SRPC):
  • Downward sloping; inverse relationship between inflation and unemployment
  • Shifts opposite to SRAS shifts
• Long-Run Phillips Curve (LRPC):
  • Vertical, represents natural rate of unemployment

Monetary Policy

• Reserve Requirement Ratio (RRR):
  • Higher RRR leads to less money creation (contractionary)
  • Lower RRR leads to more money creation (expansionary)
• Discount Rate:
  • Interest rate charged by FED to banks
  • Higher rate is contractionary, lower rate is expansionary
• Open Market Operations:
  • Buying bonds increases money supply (expansionary)
  • Selling bonds decreases money supply (contractionary)

Money Supply

• M1: Liquid assets like currency and checkable deposits
• M2: Includes M1 and near money like savings accounts

Quantity Theory of Money

• Money impacts price level and real output through monetary equation of exchange: MV = PQ

These notes provide a comprehensive overview of key concepts in AP Macroeconomics, focusing on fundamental economic indicators, policy tools, and their impact on the economy.