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)
Point C on the PPC is inefficient
Points A and B are efficient
Point D is unattainable
***Point C could represent
unemployment or underproduction and
Point D could be reached if you changed
technology***
Shifters of the PPC: Quantity of
Resources, Technology, and Trade
This PPC shows increasing Opportunity
cost and a diagonal curve would show
constant opportunity costs
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+Government
Spending+Net Exports(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%)
Shifters of AD: Consumer Spending, Investments,
Government Spending, and Net Exports
When AD Shifts, there will be movement ALONG
the Phillips Curve
Shifters of AS: Price of Resources Change, Taxes
and Subsidies to Businesses, and Productivity
When AS Shifts, this will in return move the entire
Short Run Phillips Curve
***Make sure when labeling this graph to write
PRICE LEVEL and NOT PRICE***
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:
Shifters of Money Supply:
Reserve Requirement (RR): Percentage
of Money that Banks don’t use. When
RR increases, Supply of Money (Sm)
Decreases and when RR Decreases Sm
Increases
Money Multiplier= 1/RR
Discount Rate (DR): Rate FED Charges
Banks. When DR Decreases, Sm
Increases and when DR Increases, Sm
Decreases
Open Market Operations: FED Buys and
Sells Bonds. FED Buys=Sm Increase. FED
Sells=Sm Decreases
“Buy Big, Sell Small”
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: