Economics Lecture: Crash Course in Macroeconomics by Jacob Clifford

Introduction

Purpose: Review and summary for introductory and AP Macroeconomics
Ultimate Review Pack: Practice questions and hidden videos available for deeper learning and preparation
Focus: Prepares you for the big AP test or final exam; helps identify knowledge gaps

Basic Concepts

Scarcity

Definition: Unlimited wants, limited resources

Opportunity Cost

Definition: Cost of next best alternative
Production Possibilities Curve (PPC): Shows combinations of producing two goods
- Points on the curve: Efficient use of resources
- Points inside the curve: Inefficient
- Points outside the curve: Impossible
- Shapes:
  - Straight line: Constant opportunity costs
  - Bowed-out: Increasing opportunity costs

Shifts in PPC

Causes: More/less resources, better technology, trade
Trade allows consumption beyond PPC without changing production capacity

Comparative Advantage

Specialization: Based on lower opportunity costs
Absolute Advantage: Producing more of a good
Terms of Trade: Units of products traded that benefit both countries

Economic Systems

Types: Free market, command, mixed economy
Focus: Capitalism
Circular Flow Model: Interaction between businesses, individuals, and government
- Markets: Product market (sell products), resource market (buy resources)
- Government: Transfer payments (welfare), subsidies (business funding)

Supply and Demand

Demand: Downward sloping; higher price -> lower quantity demanded
Supply: Upward sloping; higher price -> higher quantity supplied
Equilibrium: Intersection of supply and demand
- Shifts: Demand/supply increase/decrease
- Price Movements: Move along the curve, not shift it
- Outcomes: Shortage (price too low), surplus (price too high)

Macro Measures (Unit 2)

Economic Goals

Growth: Increase over time
Unemployment: Keep low
Inflation: Keep stable

Gross Domestic Product (GDP)

Definition: Dollar value of all final goods/services within a country in a year
GDP per capita: GDP/population
Exclusions:
- Intermediate goods
- Non-production transactions (stocks, bonds)
- Non-market transactions (illegal goods)
Calculation Methods:
- Expenditures approach: C + I + G + (X-M)
- Income approach: Sum of rent, wages, interest, profits
Nominal vs. Real GDP: Adjusting for inflation; real GDP reflects actual production
Business Cycle: Peak -> Recession -> Trough -> Expansion; states of economy

Unemployment

Calculation: (Unemployed/Labor force) * 100
Types:
- Frictional: Between jobs
- Structural: Skills not in demand
- Cyclical: Due to economic downturn
Natural Rate: Frictional + structural (around 5%)
Criticisms: Discouraged workers, part-time workers*

Inflation

Definition: Money loses purchasing power
- Deflation: Prices falling
- Disinflation: Slower increase in prices
Nominal vs. Real Wages/Interest Rates: Adjusting for inflation
Consumer Price Index (CPI): Measure how prices change over time
- Formula: (Current year market basket/Base year market basket) * 100
GDP Deflator: (Nominal GDP/Real GDP) * 100; includes all goods
Causes of Inflation:
- Government printing money (Quantity Theory of Money: MV = PY)
- Demand-pull inflation: Increased demand
- Cost-push inflation: Rising production costs

Aggregate Demand and Supply (Unit 3)

Aggregate Demand (AD)

Definition: Total demand for goods/services at different price levels
Reasons for Downward Slope:
- Wealth effect
- Interest rate effect
- Foreign trade effect
Shifts: Changes in consumer spending, investment, government spending, net exports

Aggregate Supply (AS)

Short-Run AS (SRAS): Upward sloping; higher price level encourages more production
Long-Run AS (LRAS): Vertical; economy's potential output
Shifts: Resource prices, technology, regulations
Stagflation: SRAS left shift -> higher prices, lower output

Long-Run Adjustments

Inflationary Gap: Wages/costs rise, SRAS left shift back to equilibrium
Recessionary Gap: Wages/costs fall, SRAS right shift back to equilibrium
Economic Growth: LRAS shifts right; similar to outward shift in PPC

Phillips Curve

SRPC: Short-run trade-off between inflation and unemployment
LRPC: No trade-off; vertical

Fiscal Policy

Expansionary: Increase spending, decrease taxes to stimulate economy
Contractionary: Decrease spending, increase taxes to cool down economy
Multiplier Effect: Initial spending gets multiplied in the economy
- Spending Multiplier: 1/MPS
- Tax Multiplier: 1 less than spending multiplier
Debt and Deficit:
- Deficit: Annual overspending
- Debt: Accumulation of deficits
- Crowding Out: Government borrowing raises interest rates, reduces private investment

Money and Banking (Unit 4)

Money

Functions: Medium of exchange, unit of account, store of value
Money Supply: M1 (currency + demand deposits)
Fractional Reserve Banking: Banks hold part of deposits, lend out rest

Bank Balance Sheets

Assets and Liabilities: Track bank's financial health
Required Reserves: Portion banks must hold by law
Excess Reserves: Portion banks can lend out

Money Multiplier

Definition: 1/Reserve Requirement
Total Change in Money Supply: Initial change times money multiplier

Money Market Graph

Axes: Interest rate (y-axis), quantity of money (x-axis)
Demand: Downward sloping; transactional and asset demand
Supply: Vertical; set by the Federal Reserve (Fed)
Monetary Policy: Adjusting money supply to influence economy
- Expansionary: Increase money supply, lower interest rates
- Contractionary: Decrease money supply, raise interest rates
Tools of the Fed: Reserve requirement, discount rate, open market operations
- Federal Funds Rate: Rate at which banks lend to each other

Loanable Funds Market

Definition: Market for borrowing/lending
Supply and Demand: Lenders (supply) and borrowers (demand)
Real Interest Rate: Intersection of supply and demand
Crowding Out: Government borrowing increases demand for loans, raising interest rates

International Trade and Finance (Unit 5)

Balance of Payments

Definition: Record of transactions between countries
Current Account: Trade in goods/services, investment income, net transfers
- Surplus: Exports > Imports
- Deficit: Imports > Exports
Financial Account: Financial assets
- Surplus: Inflow > Outflow
- Deficit: Outflow > Inflow

Foreign Exchange Markets

Exchange Rates: Relative value of currencies
- Appreciation: Currency increases in value
- Depreciation: Currency decreases in value
- Impact on exports and imports
Supply and Demand Graphs: For currencies
- Demand by foreigners, supply by domestic
Shifters: Tastes/preferences, income, inflation, interest rates
- Example: Higher interest rates attract foreign investment, appreciating currency
Exchange Rate Systems:
- Floating: Set by supply and demand
- Fixed: Government intervention to maintain value

Conclusion

Overview of macroeconomic principles
Importance of these concepts in preparing for AP tests and exams
Encouragement to keep practicing and support the learning resources available