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Comprehensive Guide to AP Macroeconomics
May 8, 2025
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
Land
: Natural resources (land, water, air).
Labor
: Human effort.
Capital
: Goods used to produce other goods (factories, machines).
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.
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