AP Macroeconomics Exam Review

Jul 23, 2024

AP Macroeconomics Exam Review

Introduction

  • Presenter: Jacob Reed from ReviewEcon.com
  • Purpose: Quick review for AP Macroeconomics exam.
  • Resources: Total review booklet at ReviewEcon.com.

Unit 1: Basic Economic Concepts

Scarcity

  • Definition: Limited resources cannot satisfy all wants.
  • Implications: Positive price, opportunity cost.

Factors of Production

  • Components: Land, labor, capital, entrepreneurship.

Economic Systems

  • Market-Based Economies: Private property rights, price allocation.
  • Command Economies: Government bureaucrats allocate resources.

Opportunity Cost

  • Definition: Value of the next best alternative not chosen.

Production Possibilities Curve (PPC)

  • Linear PPC: Constant opportunity costs.
  • Bowed Out PPC: Increasing opportunity costs.
  • Efficiency: On the curve means efficient, inside means inefficient.
  • Economic Growth: Outward shift. Recession: Inward shift.

Comparative and Absolute Advantage

  • Absolute Advantage: Produce more with same resources.
  • Comparative Advantage: Produce at a lower opportunity cost.
  • Terms of Trade: Mutually beneficial terms fall between opportunity costs.

Demand and Supply Laws

  • Law of Demand: Inverse relationship between price and quantity demanded.
  • Demand Shifters: Tastes, market size, prices of related goods, income, expectations.
  • Law of Supply: Direct relationship between price and quantity supplied.
  • Supply Shifters: Input prices, government tools, number of sellers, technology, prices of other goods, expectations.
  • Equilibrium: Where supply and demand curves intersect.
  • Surplus and Shortage: Surplus if price above equilibrium, shortage if below.

Unit 2: Macroeconomic Indicators

Circular Flow Diagram

  • Actors: Households and businesses.
  • Markets: Factor markets and product markets.
  • Government: Public goods and factor market purchases.

Gross Domestic Product (GDP)

  • Definition: Total value of all final goods and services produced.
  • Calculation Methods: Value-added, income approach, output expenditure model.
  • Output Expenditure Model: C (Consumption) + Ig (Gross Investment) + G (Government Purchases) + Xn (Net Exports).
  • Per Capita GDP: GDP divided by population. Doesn’t cover underground economy, non-market activities, clean up for bad things, income distribution.

Unemployment

  • Criteria: Not working and actively looking for work.
  • Unemployment Rate: (Number of unemployed / labor force) * 100.
  • Labor Force Participation Rate: (Labor force / civilian working-age population) * 100.
  • Types: Frictional, structural, cyclical.
  • Natural Rate: When the economy is at long-run equilibrium.

Inflation

  • Definition: General increase in prices.
  • Measurement: CPI, GDP deflator.
  • Nominal vs Real GDP: Nominal uses current prices, real GDP uses base year prices.

Business Cycle

  • Phases: Expansion, contraction, peak, trough, recession.
  • Output Gaps: Inflationary Gap, Recessionary Gap, Economic Growth.

Unit 3: Aggregate Supply and Demand (ASAD) Model and Fiscal Policy

Disposable Income

  • Definition: Income minus taxes.
  • MPC and MPS: Marginal propensity to consume/save.
  • Multipliers: Spending and tax multipliers.

Aggregate Demand

  • Definition: Demand for all goods and services.
  • Shifters: Consumption, gross investment, government purchases, net exports.

Aggregate Supply

  • Short-Run Supply: Relationship between real GDP and price level.
  • Shifters: Resource prices (wages), productivity changes, inflation expectations, business taxes, regulations.

Long-Run Aggregate Supply (LRAS)

  • Definition: Full Employment output.
  • Shifters: Resources, productivity, technology.

Equilibrium

  • Short-Run Equilibrium: Intersection of AD and SRAS.
  • Long-Run Equilibrium: Intersection of AD, SRAS, and LRAS.

Fiscal Policy

  • Expansionary Fiscal Policy: Increase government spending and/or decrease taxes.
  • Contractionary Fiscal Policy: Decrease government spending and/or increase taxes.
  • Automatic Stabilizers: Taxes and transfer payments.

Unit 4: Financial Markets

Functions of Money

  • Functions: Medium of exchange, unit of account, store of value.

Measures of Money Supply

  • Monetary Base: Bank reserves + currency.
  • M1: Currency + checkable deposits + savings accounts.
  • M2: M1 + small time deposits + money market mutual funds.

Fisher Formula

  • Formula: Nominal interest rate - inflation rate = real interest rate.

Bank Balance Sheets

  • Assets and Liabilities: Demand deposits, savings deposits, reserves, loans.
  • Reserve Requirement: Set by the Federal Reserve.

Money Multiplier

  • Formula: 1 / Reserve Requirement.

Money Market

  • Supply and Demand: Quantity of money and nominal interest rates.
  • Monetary Policy Tools (Scarce Reserves): Open market operations, discount rate, reserve requirement.
  • Monetary Policy Tools (Ample Reserves): Administered rates, interest on reserves rate, open market operations.
  • Goals: Expansionary policy to decrease unemployment, contractionary policy to fight inflation.

Loanable Funds Market

  • Demand and Supply: Investment demand and savings supply.

Unit 5: Long-Run Consequences of Economic Policies

Monetary and Fiscal Policy Interaction

  • Expansionary Policies: Shift AD to the right (price level and real output increase).
  • Contractionary Policies: Shift AD to the left.

Budget Deficits and National Debt

  • Deficit: When government spends more than it collects in taxes.
  • National Debt: Accumulation of all deficits and surpluses.
  • Crowding Out: Higher deficits lead to higher interest rates, decreased investment.

Economic Growth

  • Definition: Increase in potential GDP or per capita GDP.
  • Drivers: Quantity and quality of resources, investment in physical capital, technology, education.

Phillips Curve

  • Short-Run Phillips Curve: Inverse relationship between inflation and unemployment.
  • Long-Run Phillips Curve: Vertical at the natural rate of unemployment.

Unit 6: Foreign Exchange Markets

Balance of Payments

  • Components: Current account and capital and financial account.
  • Surplus vs Deficit: When exports > imports (surplus), when imports > exports (deficit).

Exchange Rates

  • Definition: Price of one currency in terms of another.
  • Appreciation vs Depreciation: Increase/decrease in currency value.
  • Impact on Exports and Imports: Appreciated currency makes exports more expensive, imports cheaper; depreciated currency makes exports cheaper, imports more expensive.

Conclusion

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