AP Macroeconomics Ultimate Guide

Unit 1: Basic Economic Concepts

Overview of Economics

• Economics: The study of how people, firms, and societies use scarce resources to satisfy unlimited wants. It involves systematic choice and considers all resources as limited.

1.1 Scarcity

• Factors of production are scarce, leading to scarcity in goods and services.
• Macroeconomics: Focuses on the nation's economy.
• Microeconomics: Focuses on individuals within the economy.

Resources or Factors of Production

• Labor: Human effort (physical and mental).
• Land: Natural resources.
• Physical Capital: Human-made equipment.
• Entrepreneurial Ability: Combines resources productively.

Organizations of Society

• Tradition, Command, Market, Mixed: Different economic systems.

Opportunity Costs and Trade-offs

• Opportunity Cost: Value of the next best alternative.
• Trade-offs: Choices due to scarce resources.

1.2 Production Possibilities Curve (PPC)

• PPC: Model to examine production and opportunity cost.
• Curves are typically concave due to resource compatibility with specific goods.

Efficiency

• Productive Efficiency: Maximum output for given resources.
• Allocative Efficiency: Optimal mix of goods for societal benefit.

Growth

• Economic Growth: Increase in output due to resource increase, quality improvement, or technological advancements.
• Economic Contraction: Economy shrinking due to reduced spending.

1.3 Comparative Advantage and Trade

• Absolute Advantage: Efficient production using fewer inputs.
• Comparative Advantage: Production at lower opportunity cost.

1.4 Demand

• Law of Demand: Price increase leads to decreased quantity demanded.
• Determinants of Demand (INSECT): Income, Number of Buyers, Substitutes, Expectations, Complements, Tastes.

1.5 Supply

• Law of Supply: Price increase leads to increased quantity supplied.
• Determinants of Supply (ROTTEN): Resources, Other goods, Taxes, Technology, Expectations, Number of competitors.

1.6 Market Equilibrium

• Equilibrium: Price where buyers' demand equals sellers' supply.
• Disequilibrium: Shortage or surplus in the market.

Unit 2: Economic Indicators and the Business Cycle

2.1 Circular Flow and GDP

• Circular Flow Model: Shows interaction of households, firms, government, and foreign sector.
• GDP Components: Consumer spending, Investment, Government spending, Net exports.

2.2 Limitations of GDP

• Uses of GDP: Measure growth, compare living standards, assess business cycles, formulate policies, attract investment.
• Limitations: Population differences, inequality, environmental factors, shadow economy.

2.3 Unemployment

• Types of Unemployment: Frictional, Seasonal, Structural, Cyclical.
• Full Employment: No cyclical unemployment.

2.4 Prices Indices and Inflation

• Consumer Price Index (CPI): Measures average price level.
• Inflation Types: Inflation, Deflation, Disinflation.

2.5 Costs of Inflation

• Expected Inflation: Predictable, allows planning.
• Unexpected Inflation: Can hurt or benefit different economic actors.

2.6 Real vs. Nominal GDP

• Nominal GDP: Current production at current prices.
• Real GDP: Current production at base year prices.

2.7 Business Cycles

• Phases: Expansion, Peak, Contraction, Trough.
• Recession: Two consecutive quarters of falling real GDP.

Unit 3: National Income and Price Determination

3.1 Aggregate Demand

• Components of AD: Consumption, Investment, Government spending, Net exports.

3.2 Spending and Tax Multipliers

• Multipliers: Change in spending impacts GDP.
• MPC & MPS: Marginal Propensity to Consume/Save.

3.3 Short-Run Aggregate Supply

• SRAS: Relationship between output and price level in short term.

3.4 Long-Run Aggregate Supply

• LRAS: Economy's capacity at full employment.

3.5 Equilibrium in AD-AS Model

• Macroeconomic Equilibrium: Intersection of AD and SRAS.

3.6 Changes in AD-AS Model

• Supply Shocks: Affect the SRAS curve.

3.7 Long-Run Self-Adjustment

• Adjustment: Economy self-corrects to full employment over time.

3.8 Fiscal Policy

• Expansionary vs. Contractionary: Adjust government spending and taxes to influence economy.

3.9 Automatic Stabilizers

• Automatic Stabilizers: Built-in fiscal policies to stabilize economy.

Unit 4: Financial Sector

4.1 Financial Assets

• Types: Stocks, Bonds, Loans, Bank Deposits.

4.2 Nominal vs. Real Interest Rates

• Interest Rates: Nominal includes inflation, real is adjusted.

4.3 Functions of Money

• Fiat vs. Commodity Money: Medium of exchange, unit of account, store of value.

4.4 Banking and Money Supply

• Fractional Reserve Banking: Banks hold a fraction of deposits.

4.5 The Money Market

• Demand and Supply: Interaction determines interest rates.

4.6 Monetary Policy

• Tools: Open market operations, discount rate, reserve ratio.

4.7 Loanable Funds Market

• Loanable Funds: Interaction between borrowers and lenders.

Unit 5: Long-Run Consequences of Stabilization Policies

5.1 Fiscal and Monetary Policy Actions

• Short-Run to Long-Run: Adjustment mechanisms for gaps.

5.2 Phillips Curve

• Phillips Curve: Relationship between inflation and unemployment.

5.3 Money Growth and Inflation

• Inflation: Rising money supply impacts prices.

5.4 Deficits and National Debt

• Deficits vs. Surplus: Government's financial state.

5.5 Crowding Out

• Effect: Public sector spending impacts private sector.

5.6 Economic Growth

• Growth Measurement: Real GDP per capita.

5.7 Public Policy and Economic Growth

• Policies: Education, infrastructure, innovation, employment.

Unit 6: Open Economy (International Trade and Finance)

6.1 Balance of Payment Accounts

• Current Account vs. Capital Account: Transactions with foreign entities.

6.2 Exchange Rates

• Exchange Rate Determinants: Consumer tastes, incomes, speculation.

6.3 Foreign Exchange Market

• Supply and Demand: Determines currency value.

6.4 Impact of Policies on Exchange Rates

• Fiscal and Monetary Policies: Influence currency value.

6.5 Changes in Net Exports

• Impact: Affects aggregate demand and economic output.

6.6 Interest Rates and Capital Flows

• Real Interest Rates: Influence currency value and trade.