Comprehensive Guide to AP Macroeconomics

Macro Unit 1: Measurement of Economic Performance

Gross Domestic Product (GDP)

• Total value of final goods/services produced within a country annually.
• Expenditure Approach: GDP = C + I + G + Xn
  • C = Personal consumption
  • I = Investment
  • G = Government purchases
  • Xn = Net exports

Inflation

• Sustained rise in the overall price level.
• Winners: Borrowers (pay back with money worth less).
• Losers: Fixed income earners, lenders, savers.

Real vs. Nominal

• Real: Adjusted for inflation (e.g., real GDP)
• Nominal: Not adjusted for inflation.

Unemployment

• Unemployed include those willing and able to work and seeking employment.
• Types of Unemployment:
  • Frictional
  • Structural
  • Cyclical

Macro Unit 2: National Income and Price Determination

AS-AD Model

• AS (Aggregate Supply): Total supply of goods/services.
• AD (Aggregate Demand): Total demand for goods/services.

Keynesian vs. Classical Economics

• Classical: Markets adjust quickly on their own.
• Keynesian: Government intervention is necessary for economic stability.

Macro Unit 3: Fiscal Policy

• Government adjusts spending and taxes to influence the economy.
• Recessionary Gap: Increase spending, decrease taxes.
• Inflationary Gap: Decrease spending, increase taxes.

Multipliers

• Government Spending Multiplier
• Tax Multiplier

Macro Unit 4: Monetary Policy

Money

• Types: Commodity money, fiat money.
• Functions: Medium of exchange, store of value, unit of account.

Tools of the Fed

• Reserve Ratio: Minimum reserves banks must hold.
• Discount Rate: Interest rate for banks borrowing from the Fed.
• Open Market Operations: Buying/selling government securities.

Macro Unit 5: Open Economy: International Trade and Finance

Balance of Payments

• Current Account: Trade balance + services + transfers
• Financial Account: Foreign purchases of home assets - home purchases of foreign assets

Exchange Rates

• Fixed Exchange Rate: Controlled by government interventions.
• Flexible Exchange Rate: Determined by market forces.

Important Graphs

• Circular Flow
• AS-AD Model
• Phillips Curve
• Money Market
• Loanable Funds Market
• Forex Market for Dollars and Yen