AP Macroeconomics Exam Review

Overview

• Presenter: Job Breed from revieweon.com
• Designed for individuals with a good understanding of macroeconomics needing a quick review
• In-depth resources and review booklets available at revieweon.com

Unit 1: Basic Economic Concepts

Scarcity

• Limited resources cannot satisfy unlimited wants
• Scarcity results in positive prices and opportunity costs
• Factors of Production: Land, labor, capital, entrepreneurship

Economic Systems

• Market-based economies: Emphasize private property rights, use prices to distribute resources
• Command economies: Central planners allocate resources

Opportunity Cost

• Value of the next best alternative not chosen

Production Possibilities Curve (PPC)

• Shows combinations of two goods producible with fixed resources
• Linear PPC: Constant opportunity costs
• Bowed-out PPC: Increasing opportunity costs
• Points on the PPC are productively efficient, within curve is inefficient
• Economic growth: Outward shift of PPC
• Reduction in resources: Inward shift of PPC

Absolute and Comparative Advantage

• Absolute Advantage: Ability to produce more using fewer resources
• Comparative Advantage: Ability to produce at a lower opportunity cost
• Terms of trade should fall between opportunity costs for mutual benefits

Law of Demand and Supply

• Law of Demand: Downward sloping demand curve; price affects quantity demanded, not demand
• Law of Supply: Upward sloping supply curve; price affects quantity supplied, not supply

Market Equilibrium

• Equilibrium: Where quantity demanded equals quantity supplied
• Surplus and shortage affect price movements towards equilibrium
• Shifts in demand or supply affect equilibrium price and quantity

Unit 2: Macroeconomic Indicators

Circular Flow Diagram

• Economic actors: Households and businesses
• Government participates in product and factor markets

Gross Domestic Product (GDP)

• Total value of all final goods and services produced within a country
• Value Added Approach: Additional value by each company
• Income Approach: Rent, wages, interest, and profit
• Output Expenditure Model: C + I + G + NX
• Exclusions: Used items, intermediate goods, financial transactions

Unemployment

• Must be not working and actively seeking work
• Unemployment rate: Unemployed/Labor force
• Types: Frictional, Structural, Cyclical
• Natural Rate: Frictional + Structural

Inflation

• General increase in prices
• Measured with CPI or GDP deflator
• Nominal vs Real GDP

Business Cycle

• Phases: Expansion, Contraction, Peak, Trough
• Gaps: Inflationary (above potential), Recessionary (below potential)

Unit 3: AS-AD Model and Fiscal Policy

Disposable Income

• Income after taxes

Marginal Propensities

• MPC: Likelihood of spending new income
• MPS: Likelihood of saving new income

Multiplier Effect

• Spending and Tax Multipliers

Aggregate Demand and Supply

• Aggregate Demand: Downward sloping; shifts due to changes in GDP components
• Short-run Aggregate Supply: Upward sloping; shifts due to resource prices, etc.

Fiscal Policy

• Expansionary: Increase spending, decrease taxes
• Contractionary: Decrease spending, increase taxes

Unit 4: Financial Markets

Functions of Money

• Medium of exchange, unit of account, store of value

Money Supply

• Monetary Base: Bank reserves, currency
• M1 and M2: Definitions of money including deposits and money market funds

Bank Balance Sheets

• Liabilities: Demand deposits, savings
• Assets: Total reserves, loans

Money Multiplier

• Maximum potential for money creation

Money Market

• Curves for supply and demand of money

Monetary Policy

• Tools: Open market operations, discount rate, reserve requirement
• Expansionary: Lower interest rates to fight unemployment
• Contractionary: Raise interest rates to fight inflation

Unit 5: Long Run Consequences of Economic Policies

Interaction of Monetary and Fiscal Policy

• Effects on interest rates and real output

Economic Growth

• Increase in potential GDP
• Influenced by resource quantity/quality, technology

Phillips Curve

• Short-run inverse relationship between unemployment and inflation
• Long-run natural rate of unemployment

Unit 6: Foreign Exchange Markets

Balance of Payments

• Current Account: Goods, services, investment income
• Capital and Financial Account: Assets

Exchange Rates

• Currency appreciation and depreciation

Net Exports and Exchange Rates

• Impact of exchange rate changes on net exports and aggregate demand

This comprehensive review covers the essential topics and concepts that are likely to appear on the AP Macroeconomics exam. For further practice and resources, including practice exams and cheat sheets, visit revieweon.com.