AC/DC Econ: Introductory Macroeconomics Review

Introduction

• Quick video covering essentials for introductory/AP macroeconomics classes
• Intended for rapid review before exams
• Also useful to identify gaps in knowledge
• Ultimate review pack available with practice questions and videos
• Encourages support for the channel

Basic Concepts

Scarcity and Opportunity Cost

• Unlimited wants vs. limited resources
• Opportunity Cost: Cost of foregone alternatives
• Production Possibilities Curve (PPC): Combinations of two goods using resources
  • Efficient: Points on the curve
  • Inefficient: Points inside the curve
  • Impossible: Points outside the curve
  • Constant Opportunity Cost: Straight line PPC
  • Increasing Opportunity Cost: Bowed out PPC

Shifts in PPC

• More resources or better technology → PPC shifts outward
• Trade can alter consumption possibilities

Comparative Advantage

• Countries should specialize in goods with lower opportunity costs
• Absolute Advantage: Producing more of a good
• Comparative Advantage: Producing at a lower opportunity cost
• Terms of Trade: Units of one good traded for another

Economic Systems and Circular Flow

• Overview of free market, command, and mixed economies
• Circular Flow Model: Interaction of businesses, individuals, and government
  • Businesses: Sell products, buy resources
  • Individuals: Buy products, sell resources
  • Government: Provides services, transfer payments

Demand and Supply

• Demand Curve: Downward sloping; price ↑, quantity demanded ↓
• Supply Curve: Upward sloping; price ↑, quantity supplied ↑
• Equilibrium: Intersection of supply and demand
  • Price Changes: Movement along the curve, not shifts
  • Shifts in demand/supply affect equilibrium

Unit 2: Macroeconomic Measures

Economic Goals

1. Economic growth (↑ GDP)
2. Low unemployment
3. Price stability

Gross Domestic Product (GDP)

• Total value of final goods/services produced within a country
• GDP per Capita: GDP divided by population
• Exclusions: Intermediate goods, non-production transactions, non-market activities
• Expenditure Approach: GDP = C + I + G + (X - M)
• Income Approach: Sum of income (rent, wages, interest, profits)
• Nominal vs. Real GDP: Nominal not adjusted for inflation, real is adjusted
• Business Cycle: Peak, recession, trough, recovery

Unemployment

• Unemployed: Actively seeking work
• Types:
  1. Frictional: Between jobs
  2. Structural: Skills obsolete
  3. Cyclical: Due to economic downturns
• Natural Rate of Unemployment: Frictional + structural (≈5%)
• Discouraged Workers: Not counted in labor force
• Part-Time Workers: Counted as fully employed

Inflation

• Inflation: General increase in prices
• Deflation: Decrease in prices
• Disinflation: Decrease in the rate of inflation
• CPI (Consumer Price Index): Measures inflation using a market basket
  • CPI Equation
• GDP Deflator: Measures price changes across the economy
• Types of Inflation:
  1. Quantity theory (too much money printed)
  2. Demand-pull inflation (demand ↑)
  3. Cost-push inflation (resource cost ↑)

Unit 3: Aggregate Supply and Demand

Aggregate Demand (AD)

• Downward sloping: Wealth effect, interest rate effect, foreign trade effect
• Shifts: Changes in consumer spending, investment, government spending, net exports

Aggregate Supply (AS)

• Short Run: Upward sloping
• Long Run: Vertical at full employment
• Shifts: Resource prices, technology, government policy
• Recessionary Gap: Output < full employment
• Inflationary Gap: Output > full employment
• Stagflation: AS decreases, price level ↑, output ↓
• Long-Run Adjustment: Economy returns to full employment
• Economic Growth: Long-run AS shifts right

Phillips Curve

• Short-Run: Downward sloping (inflation ↔ unemployment)
• Long-Run: Vertical (no trade-off between unemployment and inflation)

Fiscal Policy

• Government adjusts spending/taxes to influence the economy
• Expansionary Policy: ↑ Government spending, ↓ taxes
• Contractionary Policy: ↓ Government spending, ↑ taxes
• Multipliers: Spending multiplier, tax multiplier
• Debt and Deficit: Deficit (yearly), debt (cumulative)
• Crowding Out: Government borrowing ↑ interest rates, ↓ private investment

Unit 4: Money and Banking

Nature of Money

• Commodity Money: Intrinsic value
• Fiat Money: No intrinsic value but accepted as money
• Functions: Medium of exchange, unit of account, store of value
• Money Supply (M1): Currency and demand deposits

Fractional Reserve Banking

• Banks hold fraction of deposits as reserves
• Bank Balance Sheets: Assets, liabilities
• Money Multiplier: 1/reserve requirement

Money Market

• Demand: Transaction and asset demand
• Supply: Set by the Federal Reserve (vertical)
• Monetary Policy: Fed controls money supply
  • Expansionary: Increase supply, ↓ interest rates
  • Contractionary: Decrease supply, ↑ interest rates

Monetary Policy Tools

1. Reserve requirement
2. Discount rate
3. Open market operations

Loanable Funds Market

• Demand: Borrowers
• Supply: Lenders
• Shifts: Government borrowing, savings rates

Unit 5: International Trade and Finance

Balance of Payments

• Current Account: Trade balance, investment income, net transfers
• Financial Account: Financial assets (inflows/outflows)
• Deficit in current account → surplus in financial account

Foreign Exchange

• Appreciation: Currency increases in value
• Depreciation: Currency decreases in value
• Impact on Net Exports: Appreciated currency reduces exports, depreciated currency increases exports
• Supply and Demand Graphs: Shifts in demand and supply for currencies

Exchange Rate Regimes

• Floating: Determined by supply and demand
• Fixed: Government maintains currency value relative to another currency

Conclusion

• Wishing success for AP tests and final exams
• Encouragement to support the channel