AP Macroeconomics Lecture Notes

Introduction

• The video covers all content for AP Macroeconomics.
• Organized in the order of course units.
• Each unit includes topics and summaries.

Unit 1: Basic Economic Concepts

Economics and Scarcity

• Economics: Study of production, distribution, and consumption.
• Scarcity: Limited resources vs. unlimited wants.
• Examples: Workers, machines.

Factors of Production

1. Land: Natural resources (land, water, air).
2. Labor: Human effort.
3. Capital: Goods used to produce other goods (factories, machines).
4. Entrepreneurship: Decision-makers combining other factors.

Opportunity Cost

• Value of best forgone alternative.
• Example: Choosing a kiwi—opportunity cost is a banana.

Production Possibilities Curve (PPC)

• Displays possible combinations of two goods' production.
• Points on curve: Efficient. Inside: Underallocation. Outside: Unattainable (short-term possible).
• Shape implications:
  • Outward curve: Increasing opportunity costs.
  • Straight line: Constant opportunity costs.
  • Inward curve: Decreasing opportunity costs.
• Shifts due to economic growth (outward) or decline (inward).

Comparative Advantage and Trade

• Trade enables economies to surpass PPC limits.
• Absolute advantage: More production capability.
• Comparative advantage: Lower opportunity cost.
• Example: Country A vs. Country B with apples and oranges.

Demand and Supply

Demand

• Law of Demand: Higher price → Lower demand.
• Determinants (INSECT): Income, Number of buyers, Substitute goods, Expectation, Complementary goods, Taste.

Supply

• Law of Supply: Higher price → Higher supply.
• Determinants (PETTING): Prices of other goods, Expectations, Technology, Taxes/Subsidies, Input costs, Number of sellers, Government regulations.

Market Equilibrium

• Intersection of supply and demand curves.
• Price adjusts to reach equilibrium.

Unit 2: Economic Indicators and the Business Cycle

GDP

• Market value of all final goods/services within a country.
• Calculated using:
  • Expenditure Approach: GDP = C + I + G + (X - M)
  • Income Approach: GDP = Wages + Interest + Rents + Profits + Adjustments
  • Value Added Approach: Sum of value added at each production stage.

Limitations of GDP

• Excludes non-market transactions, underground economy.
• Doesn't capture well-being, depreciation, income inequality.

Unemployment

• Unemployment Rate: Unemployed people divided by labor force.
• Types: Frictional, Structural, Cyclical.
• Natural Unemployment: Frictional + Structural.

Inflation

• General rise in price levels.
• Measured by Consumer Price Index (CPI).
• Inflation Rate: Change in CPI.
• Nominal vs. Real Variables.
• Business Cycle: Expansion, recession, peaks, troughs.

Unit 3: National Income and Price Determination

Aggregate Demand and Supply

• Aggregate Demand (AD): Downward sloping due to wealth, interest rate, and exchange rate effects.
• Short-Run Aggregate Supply (SRAS): Upward sloping due to sticky wages/prices.
• Long-Run Aggregate Supply (LRAS): Vertical, potential output.

Shocks

• Demand-pull vs. cost-push inflation.
• Long-run self-adjustment without government intervention.

Multiplier Effect

• Marginal Propensity to Consume/Save.
• Spending and Tax Multipliers.

Fiscal Policy

• Government spending and taxation.
• Expansionary vs. contractionary policies.
• Automatic stabilizers vs. discretionary policy.

Unit 4: The Financial Sector

Financial Assets

• Cash, Demand deposits, Bonds, Stocks.
• Liquidity: Ease of converting to cash.

Money Supply

• M0: Currency + Reserves.
• M1: Liquid money (currency, deposits).
• M2: Includes M1 + less liquid money (savings, CDs).

Banking

• Fractional Reserve Banking.
• Required reserve ratio.
• Banks expand money supply through loans.

Monetary Policy

• Influences nominal interest rates and money quantity.
• Tools: Open market operations, Discount rate, Required reserve ratio.
• Ample Reserves: Interest on reserves.

Loanable Funds Market

• Real interest rate, supply of savings, demand from borrowers.
• Closed vs. Open Economy: National savings and capital inflow.

Unit 5: Long-Run Consequences of Stabilization Policies

Fiscal and Monetary Policy

• Work in parallel; can offset each other.

Phillips Curve

• Trade-off between unemployment and inflation.
• Short-run vs. Long-run Phillips Curves.

Quantity Theory of Money

• MV = PQ; increase in money supply without real output increase leads to inflation.

Deficit vs. Debt

• Deficit: Yearly spending minus revenue.
• Debt: Accumulated deficits.
• Crowding Out: Government borrowing raises interest rates, reducing private investment.

Economic Growth

• Increase in real GDP per capita.
• Caused by capital stock, human capital, technology.

Unit 6: Open Economy: International Trade and Finance

Balance of Payments

• Current Account: Non-liability transactions.
• Capital/Financial Account: Liability transactions.
• Theoretically, both accounts should balance.

Exchange Rates

• Currency value comparison; appreciation vs. depreciation.
• Foreign Exchange Market: Supply and demand for currency.

Impact of Exchange Rates

• Appreciation can decrease exports, increase imports.
• Real interest rate effects on capital accounts.

Conclusion

• Reviewed all units and major concepts.
• Recommend reviewing summaries and practicing problems for exam preparation.