Comprehensive AP Macroeconomics Study Guide

Introduction to Macroeconomics

Definition of Economics

• Economics is the study of how individuals, firms, and societies allocate scarce resources to satisfy unlimited wants.

• It involves analyzing choices and trade-offs due to scarcity.

Normative vs. Positive Statements

• Positive statements are objective and fact-based, describing "what is."

• Normative statements are subjective and value-based, describing "what ought to be."

• Example: "Unemployment is 5%" (positive); "The government should reduce unemployment" (normative).

Introductory Economic Models

Production Possibilities Curve (PPC)

• Shows the maximum combinations of goods/services that can be produced with available resources and technology.

• Points inside the curve indicate inefficiency; points on the curve are efficient; points outside are unattainable.

• Opportunity cost is represented by the slope of the PPC.

Determinants of Demand (TRIBE)

• Tastes and preferences

• Related goods' prices (substitutes and complements)

• Income of buyers

• Buyer population (number of buyers)

• Expectations of future prices

Law of Supply

• As price increases, quantity supplied increases, ceteris paribus.

Relationship Between Price and Quantity Demanded

• Inverse relationship: as price rises, quantity demanded falls, and vice versa.

Supply and Demand

Equilibrium

• Occurs where quantity supplied equals quantity demanded.

• Market-clearing price and quantity are determined at equilibrium.

Consumer and Producer Surplus

• Consumer surplus: Difference between what consumers are willing to pay and what they actually pay.

• Producer surplus: Difference between the price received and the minimum price producers are willing to accept.

Price Ceilings and Price Floors

• Price ceiling: Maximum legal price (e.g., rent control) – can cause shortages.

• Price floor: Minimum legal price (e.g., minimum wage) – can cause surpluses.

Gross Domestic Product (GDP) and Economic Indicators

Definition of GDP

• GDP is the total market value of all final goods and services produced within a country in a given period.

• Measured using expenditure or income approach.

Unemployment

• Occurs when people are willing and able to work but cannot find jobs.

• Types: frictional, structural, cyclical, and seasonal.

Inflation

• General increase in price level over time, measured by the Consumer Price Index (CPI).

• Reduces purchasing power of money.

Stages of the Business Cycle

• Expansion, peak, contraction (recession), trough.

Difference Between Recession and Expansion

• Recession: Period of declining GDP and rising unemployment.

• Expansion: Period of rising GDP and falling unemployment.

Aggregate Demand and Aggregate Supply

Short-Run vs. Long-Run Aggregate Supply

• Short-Run Aggregate Supply (SRAS): Upward sloping; prices and wages are sticky.

• Long-Run Aggregate Supply (LRAS): Vertical; represents full employment output.

Shifts of Aggregate Demand and Supply

• Caused by changes in consumer confidence, fiscal/monetary policy, input prices, technology, etc.

Fiscal and Monetary Policy

Fiscal Policy

• Government adjusts spending and taxation to influence the economy.

• Expansionary: Increase spending or decrease taxes to boost output.

• Contractionary: Decrease spending or increase taxes to reduce inflation.

Monetary Policy

• Central bank (e.g., Federal Reserve) manages money supply and interest rates.

• Expansionary: Lower interest rates, increase money supply.

• Contractionary: Raise interest rates, decrease money supply.

Role of the Fed

• Conducts monetary policy, regulates banks, maintains financial stability.

Money and Banking

Functions of Money

• Medium of exchange

• Store of value

• Unit of account

Money Multiplier Formula

• Shows how an initial deposit leads to a greater increase in the money supply.

$\text{Money Multiplier} = \frac{1}{\text{Reserve Ratio}}$

International Trade and Finance

Balance of Payments

• Records all economic transactions between residents of a country and the rest of the world.

• Includes current account (trade in goods/services) and capital/financial account (investment flows).

Exchange Rates

• Price of one currency in terms of another.

• Determined by supply and demand in the foreign exchange market.

Trade Deficits and Surpluses

• Trade deficit: Imports exceed exports.

• Trade surplus: Exports exceed imports.

Special Topics

Economic Growth

• Increase in real GDP over time, driven by productivity, investment, technology, and human capital.

Causes of Inflation

• Demand-pull inflation: Excess demand over supply.

• Cost-push inflation: Rising production costs.

Capital Account and Current Account

• Capital account records cross-border investments and loans.

• Current account records trade in goods/services, income, and transfers.

Key Graphs and Models to Know

• AS/AD Model (including LRAS)

• Bank Balance Sheet

• Loanable Funds Market

• Production Possibility Curve

• Money Market

Sample Table: Types of Unemployment

Type	Description	Example
Frictional	Short-term, between jobs	Recent graduate job searching
Structural	Mismatch of skills and jobs	Factory worker replaced by automation
Cyclical	Due to economic downturn	Layoffs during recession
Seasonal	Due to seasonal work patterns	Holiday retail jobs

Additional info: This guide expands on the listed topics with academic context, definitions, and examples to ensure comprehensive exam preparation.