AP Macroeconomics Full Review Notes

Background Information

• This resource is a review guide for AP Macroeconomics, not a replacement for learning economics in class.
• Pay special attention to bolded sections; less common material is indicated but may rarely appear on the AP test.
• Graphs and diagrams are essential for understanding.

About the AP Exams

• Aim for a score of 80%-85% on multiple choice (MC) and free response (FR) sections to achieve a score of 5.
• Exam structure:
  • 60 MC questions in 70 minutes (66% of score).
  • 3 FR questions in 60 minutes with a 10-minute reading/planning period (33% of score).
  • A long FR question and two short ones.

Resources

• AP Central for course descriptions and past questions.
• ACDCecon and Crash Course Economics for cumulative video reviews.

Exam Tips

• Use process of elimination for MC questions.
• Draw graphs for FR questions even if not explicitly asked.
• Provide thorough explanations and avoid unnecessary information.

Key Abbreviations

• MC: Multiple Choice
• FR: Free Response
• PL: Price Level
• Fed: Federal Reserve

Macro Unit 1: Measurement of Economic Performance

Circular Flow Diagram

• Shows goods flowing from firms to households and inputs flowing in the opposite direction.
• Extended version includes leakages (savings, taxes) and injections (exports, foreign investment).

Gross Domestic Product (GDP)

• Total value of all final goods/services produced in a year.
• Calculated via expenditure approach: GDP = C (consumption) + I (investment) + G (government purchases) + Xn (net exports).
• Income approach adds National Income, depreciation, subsidies, and net income of foreigners.

Inflation

• Sustained increase in overall price level.
• Winners: Borrowers (pay back less valuable money).
• Losers: Fixed income earners, savers, lenders.
• Types: Creeping, galloping, hyperinflation.

Real vs. Nominal Values

• Real values adjust for inflation, nominal do not.

Price Indices

• CPI and PPI measure inflation effects.
• GDP Deflator calculates overall price level changes.

Unemployment

• Labor force includes willing and able participants seeking work in the last 4 weeks.
• Types: Frictional, structural, cyclical, seasonal.

Macro Unit 2: National Income and Price Determination

AS-AD Model

• Aggregate Supply and Demand interaction determines overall price level and output.
• Short Run Aggregate Supply (SRAS) can be shifted by changes in labor, wages, input prices, etc.
• Long Run Aggregate Supply (LRAS) is vertical at full employment.

Inflation Types

• Cost-push: Increased resource costs shift SRAS left.
• Demand-pull: AD shifters cause higher output and inflation.

Economic Theories

• Classical Analysis: Markets self-correct without government intervention.
• Keynesian Analysis: Government intervention is necessary to manage economic fluctuations.

Macro Unit 3: Fiscal Policy

Gaps and Equilibrium

• Recessionary Gap: Y_e < Y_FE; Keynesian intervention involves increasing money supply, government spending, lowering taxes.
• Inflationary Gap: Y_e > Y_FE; contractionary policies are applied.

Multipliers

• Government Spending Multiplier: Total GDP change from spending changes.
• Tax Multiplier: Smaller effect as some tax savings are saved, not spent.

Supply Side Economics

• Lowering taxes affects both AD and AS.

Macro Unit 4: Monetary Policy

Money Basics

• Medium of exchange, store of value, unit of account.
• Types: M1 (most liquid), M2, M3 (least liquid).

Fractional Reserve Banking

• Banks hold a fraction of deposits and loan out the rest, creating money through the multiplier effect.

Federal Reserve Tools

• Reserve ratio, discount rate, open market operations (buying/selling bonds).

Crowding Out Effect

• Increased government borrowing raises interest rates, reducing private investment.

Macro Unit 5: Open Economy: International Trade and Finance

Balance of Payments

• Tracks international money flows; must net to zero.

Foreign Exchange Market

• Currency appreciation and depreciation affect exports and imports.

Managing Exchange Rates

• Fixed vs. flexible exchange rates.

Important Graphs and Diagrams

• Circular Flow, AS-AD, SRAS, Phillips Curve, Money Market, Loanable Funds Market, Forex Market.

This guide includes detailed explanations, graphs, and diagrams essential for understanding the key concepts in AP Macroeconomics.