AC/DC Econ: Introductory Macroeconomics Overview

Lecture Introduction

• Presenter: Jacob Clifford
• Focus on review for AP Macroeconomics test
• Offers an Ultimate Review Packet with practice questions and videos

Key Concepts in Introductory Macroeconomics

Scarcity and Opportunity Costs

• Scarcity: Unlimited wants vs. limited resources
• Opportunity Cost: Every choice has a cost

Production Possibilities Curve (PPC)

• Shows combinations of two goods using resources
• Points on curve = efficient; inside = inefficient; outside = impossible
• Shapes of PPC:
  • Straight line: Constant opportunity costs (similar resources)
  • Bowed out: Increasing opportunity costs (different resources)
• PPC Shifters: Resources, technology, trade

Comparative Advantage

• Specialize in goods with lower opportunity cost
• Absolute Advantage: Who can produce more
• Terms of Trade: Beneficial exchange ratios between countries

Economic Systems

• Free-market (capitalism), command, mixed economies
• Circular Flow Model: Interaction between businesses, individuals, government
• Vocabulary:
  • Transfer Payments: Government payments not for goods/services
  • Subsidies: Government payments to businesses
  • Factor Payments: Payments for resources

Demand and Supply

• Demand Curve: Downward sloping; price increase = demand decrease
• Supply Curve: Upward sloping; price increase = supply increase
• Equilibrium: Intersection of supply and demand
• Shifts: Demand/Supply increase or decrease

Macro Measures: Economic Goals

Three Economic Goals

1. Growth: Produce more over time
2. Unemployment: Keep low
3. Inflation: Keep prices stable

Gross Domestic Product (GDP)

• GDP: Dollar value of final goods within a country’s borders
• GDP Per Capita: GDP divided by population
• Not Included in GDP:
  • Intermediate goods
  • Non-production transactions
  • Non-market transactions
• GDP Calculation Methods: Expenditure (C + I + G + Xn) and income approach
• Nominal vs Real GDP: Real adjusts for inflation

Business Cycle

• Phases: Peak, recession, trough, expansion
• Economic states: Full employment, recessionary gap, inflationary gap

Unemployment

• Types: Frictional, structural, cyclical
• Natural Rate: Only frictional and structural
• Discouraged Workers: Not in labor force

Inflation

• Inflation: Increase in prices, decrease in money's purchasing power
• CPI: Measures price changes over time
• GDP Deflator: Measures price changes for all goods
• Causes of Inflation:
  • Quantity Theory of Money: MV=PY
  • Demand-Pull: Increased demand
  • Cost-Push: Increased production costs

Aggregate Demand and Supply

Aggregate Demand (AD)

• Downward sloping; wealth effect, interest rate effect, foreign trade effect
• Shifts due to changes in spending

Aggregate Supply (AS)

• Short Run: Upward sloping; supply shifts with resource prices/technology
• Long Run: Vertical; full employment GDP

Economic Gaps

• Stagflation: High inflation and low output
• Long-Run Adjustments: Shift back to long-run equilibrium

Economic Growth

• Occurs with investment, shifts in AD and AS, PPC shifts

Phillips Curve

• Relationship between inflation and unemployment
• Short-run: Downward slope
• Long-run: Vertical

Fiscal Policy

• Government spending and tax changes
• Expansionary: Increase spending/cut taxes
• Contractionary: Increase taxes/reduce spending
• Multipliers: Spending and tax multipliers affect GDP

Monetary Policy and Money Supply

Money

• Types: Commodity, fiat
• Functions: Medium of exchange, unit of account, store of value
• Money Supply: M1 includes cash and checking accounts
• Fractional Reserve Banking: Banks hold reserves, loan out rest

Money Market

• Demand and supply of money; impacts nominal interest rates
• Monetary Policy: Controlled by the Fed; affects money supply
• Tools: Reserve requirement, discount rate, open market operations

Loanable Funds Market

• Shows demand and supply for loans, real interest rates
• Crowding Out: Government borrowing increases interest rates

International Trade and Exchange Rates

Balance of Payments

• Current Account: Exports/imports, investment income, net transfers
• Financial Account: Inflows and outflows of financial assets
• Surplus in one = deficit in the other

Foreign Exchange

• Appreciation/Depreciation: Currency value changes
• Effects on Exports: Appreciation decreases exports; depreciation increases
• Supply and demand model for currencies

Exchange Rate Systems

• Floating: Market-determined rates
• Fixed: Government-managed rates

Conclusion

• Emphasized the importance of understanding concepts for the final exam