AP Macroeconomics Exam Review
Thursday May 14 at 12pm
Unit One: Basic Economic Concepts (8-12%)
Scarcity: Unlimited Wants/Limited Resources
Opportunity Cost: The Best Alternative
Trade-Offs: All Alternatives
Production Possibilities Curve (PPC; sometimes referred to as PPF)
Types of Economic Systems: Command Economy, Free Market, and Mixed
Supply and Demand Curves:
Comparative Advantage: Lower Opportunity Cost to produce a particular good
***Understand the Circular Flow Model and make sure to label EVERYTHING!!!***
Unit Two: Measurement of Economic Performance (12-16%)
Gross Domestic Product: GDP is the market value of all final goods and services produced within a country in a given period of time. Consumer Spending+Investments from Businesses+GovernmentSpending+NetExports(Exports-Imports). C+I+G+X-M.
***Memorize this because it is essential for how the economy increases and decreases!!!***
Real GDP: GDP adjusted for inflation
Nominal GDP: Not adjusted for inflation
Categories of Unemployment: Structural (Wrong Skills), Frictional (Between Jobs), and Cyclical (Recession/Bad Economy)
To Calculate Natural Rate of Unemployment, you add Frictional and Structural together
Labor Force: Number of Employed + Number of Unemployed
Unemployment Rate= Number of Unemployed/Labor Force X 100
Labor Force Participation Rate= Labor Force/Adult Population X 100
***The problems of the Unemployment Rate is that it does not include Discouraged Workers.***
Calculate Inflation= Price of Basket/Price of Basket in Base Year (this shows how prices have changed since the base year)
GDP Deflator= Nominal GDP/Real GDP X 100
Business Cycle:
Unit Three: National Income and Price Determination (10-15%)
Fiscal Policy: The Setting of the level of government spending and taxation by government policymakers
Multiplier Effect: Additional shifts in AD that result when expansionary fiscal policy increases income and thereby increases consumer spending
Expansionary Policy: To Increase AD; You either Increase Government Spending or Decrease Taxes which would Decrease Consumer Spending which would then Increase AD
Contractionary Policy: To Decrease AD; You either Decrease Government Spending or Increase Taxes which would Decrease Consumer Spending which would then Decrease AD
***The Graph on the left is an example of a Recessionary Gap. To fix a Recessionary Gap, you would use Expansionary Policy. The Graph on the Rights is an example of an Inflationary Gap. To fix an Inflationary Gap, you would us Contractionary Policy.
GOVERNMENT SPENDING HAS MORE OF AN EFFECT THAN CUTTING TAXES!!!
Phillips Curve: Shows the relationship between Inflation and Unemployment
Unit Four: Money and Monetary Policy (15-25%)
Types of Money:
Fiat Money has no intrinsic value and Commodity Money is like Gold and Silver.
Functions of Money:
The Federal Reserve (FED): Controls the Central Banks’ Monetary Policy
Monetary Policy: The setting of the money supply by policymakers in the central bank
Expansionary Monetary Policy: Sm Increases= Interest Rates Decrease= Investments Increase= AD Increases
Contractionary Monetary Policy: Sm Decreases= Interest Rates Increase= Investments Decrease= AD Decreases
Loanable Funds Graph:
Bank Balance Sheet: Make sure you know the types of Liabilities and Assets. Also remember that the two should equal each other out!
Nominal Interest Rate: Real Rate + Inflation
Real Interest Rate: Nominal Rate- Inflation
Unit Five: Trade and Foreign Exchange (10-15%)
Balance of Payments: Measures ALL international Transactions. There are two sub accounts (Current and Capital).
Current Account: Goods and Services
Capital/Financial Account: Financial Assets like bonds, stocks, real estate
***If there is a deficit in the current account, then there is a surplus in the capital account. The USA has a deficit in the capital account.
Trade Deficit= Exports < Imports
Trade Surplus= Exports> Imports
Exchange Rates and Trade: If Currency Appreciates, then Net Exports will Decrease. If Currency Depreciates, then Net Exports will Increase
Foreign Exchange Graph: