AP Macroeconomics Exam Review Lecture Notes

Introduction

• Presenter: Job Breed from ReviewEon.com
• Purpose: Quick review of AP Macroeconomics essentials for exam preparation.
• Resources:
  • Macroeconomics summary review videos for detailed study.
  • Total review booklet at ReviewEon.com for practice sets, cheat sheets, and games.

Unit 1: Basic Economic Concepts

Key Concepts

• Scarcity: Limited resources cannot satisfy all wants; leads to positive prices.
• Factors of Production: Land, labor, capital, entrepreneurship.
• Economic Systems:
  • Market-based: Private property rights, price system.
  • Command: Centralized resource allocation by government planners.

Opportunity Cost

• Definition: Value of the next best alternative not chosen.
• Production Possibilities Curve (PPC):
  • Shows output combinations with fixed resources.
  • Linear PPC: Constant opportunity costs.
  • Bowed-Out PPC: Increasing opportunity costs.
  • Efficiency: Points on PPC - efficient; inside - inefficient; outside - impossible.
  • Growth: Outward shift of PPC signifies economic growth.

Absolute vs. Comparative Advantage

• Absolute Advantage: Ability to produce more with same resources.
• Comparative Advantage: Ability to produce at lower opportunity cost.
• Terms of Trade: Must fall between opportunity costs for benefits.

Market Mechanics

• Law of Demand: Inverse relationship between price and quantity demanded.
• Demand Shifters: Tastes, market size, prices of related goods, income, expectations.
• Law of Supply: Direct relationship between price and quantity supplied.
• Supply Shifters: Input prices, government tools, number of sellers, technology, expectations.
• Equilibrium: Intersection of supply and demand; market clearing price.

Unit 2: Macroeconomic Indicators

Circular Flow Model

• Actors: Households, businesses, and government.
• Markets: Factor market (inputs) and product market (outputs).

GDP Measurement

• Methods:
  • Value Added: Sum of added values by firms.
  • Income Approach: Sum of rent, wages, interest, profit.
  • Output Expenditure: C + I + G + NX.
• Per Capita GDP: GDP divided by population.
• Limitations: Underground economy, non-market activities, income distribution.

Unemployment

• Criteria: Not working, actively seeking work.
• Types: Frictional, structural, cyclical.
• Natural Rate of Unemployment: Frictional + structural.

Inflation

• Measurement: CPI or GDP deflator.
• Real vs. Nominal GDP: Adjusted vs. unadjusted for inflation.
• Effects: Unexpected inflation affects borrowers, banks, savers.

Business Cycle

• Phases: Expansion, contraction, recession, peak, trough.
• Gaps:
  • Inflationary Gap: Output > potential output.
  • Recessionary Gap: Output < potential output.

Unit 3: Aggregate Supply and Demand (AS-AD) Model and Fiscal Policy

Income and Spending

• Disposable Income: Income after taxes, used for spending or saving.
• MPC & MPS: Marginal propensity to consume/save.

Multiplier Effects

• Simple Spending Multiplier: 1 / MPS.
• Tax Multiplier: Negative MPC / MPS.

AS-AD Model

• Aggregate Demand Shifters: C, I, G, NX.
• Short-Run Aggregate Supply Shifters: Resource prices, productivity, expectations, taxes, regulations.
• Long-Run Aggregate Supply Shifters: Resources, technology, productivity.

Fiscal Policy

• Expansionary Policy: Increase spending, cut taxes.
• Contractionary Policy: Decrease spending, raise taxes.
• Automatic Stabilizers: Taxes and transfer payments.

Unit 4: Financial Markets

Functions of Money

• Medium of Exchange, Unit of Account, Store of Value.

Money Supply Measures

• Monetary Base, M1, M2.

Interest Rates

• Fisher Formula: Nominal = Real + Inflation.

Bank Balance Sheets

• Components: Assets, liabilities.
• Money Multiplier: 1 / Reserve Requirement.

Unit 5: Long-Run Economic Policy

Monetary and Fiscal Policy Interaction

• Expansionary/Contractionary effects on AD, interest rates.

Long-Run Monetary Policy

• Monetary Equation of Exchange: MV = PY.

Budget Deficit and National Debt

• Crowding Out: Budget deficits raise interest rates, lowering investment.

Economic Growth

• Factors: Resource quantity/quality, productivity.
• Policies: R&D, tax credits, education.

Phillips Curve

• Short-Run: Inverse relationship between inflation and unemployment.
• Long-Run: Vertical at natural rate of unemployment.

Unit 6: Foreign Exchange Markets

Balance of Payments

• Components: Current Account, Financial/Capital Account.

Exchange Rates

• Appreciation vs. Depreciation: Demand and supply factors.

Impact on Net Exports

• Appreciation decreases net exports, depreciation increases net exports.

These notes cover the essential topics and concepts expected on the AP Macroeconomics exam. For further detailed review and practice, additional resources from ReviewEon.com are recommended.