AP Macro Key Equations and Relationships

Labor Participation Rate

(Number of people in labor force) / (Working age population) x100

Unemployment Rate

(Number of people unemployed) / (Number of people in labor force) x100

% Change in GDP

(New GDP - Old GDP) / Old GDP x100

Consumer Price Index (CPI)

(Vale of Market basket of goods and services) / (Value of Market basket in base year) x100

GDP Deflator

(Nominal GDP) / (Real GDP) x100

GDP (Expenditure Approach)

C + I + G + (X - M)

GDP (Income Approach)

Wages + Rent + Interest + Profit

Marginal Propensity to Save (MPS)

1 - MPC (Marginal Propensity to Consume)

Spending Multiplier

1 / MPS

Tax Multiplier

MPC/MPS

Money Multiplier

1 / Reserve R

Real Interest Rate

Nominal Interest Rate - Expected Inflation

Quantity Theory of Money

MV = PY

Increase Human Capital →

→ Increase Economic Growth

Increase Demand →

→ Increase Equilibrium Price

Increase Supply →

→ Decrease Equilibrium Price

Increase Consumer Spending →

→ Increase Real GDP

Increase Interest Rates →

→ Decrease Investment

Increase Inflation →

→ Decrease Real Wages

Increase Discouraged Workers →

→ Decrease Unemployment Rate

Increase Aggregate Demand →

→ Increase Price Level

Increase Short Run Aggregate Supply →

→Decrease Price Level

Increase Government Spending →

→Increase Real GDP

Increase Taxes →

→ Decrease Disposable Income

Increase MPC →

→ Increase Spending Multiplier

Increase Interest Rates →

→ Decrease Bond prices

Increase Money Supply →

→ Decrease Nominal Interest Rates

Increase Reserve Requirement →

→ Decrease Money Supply

Increase Discount Rate →

→ Decrease Money Supply

Increase Central banks buy bonds →

→Increase Money Supply

Increase Interest on reserves →

→ Decrease Aggregate Demand

Increase Inflation →

→Decrease Real Interest Rates

Increase Deficit Spending →

→ Increase Real Interest Rates

Increase Capital Stock →

→ Increase Economic Growth

Increase Appreciation →

→ Decrease Net Exports

Increase Interest Rates →

→ Increase Net Capital Inflow

Comparative Advantage -

a country makes a good at a lower opportunity cost than another country

Investment -

business spending on physical capital, never personal investing

Full Employment -

when there is only frictional and structural unemployment

Long-Run Self-Adjustment -

when there’s a positive or negative output gap, short-run aggregate supply will eventually shift

Fiscal Policy -

government changes in spending and/or taxes. This shifts aggregate demand

Monetary Policy -

when there are limited reserves, central banks can influence interest rates by changing the reserve requirement, discount rate, or by doing Open Market Operations. This shifts aggregate demand.

Open Market Operations -

when central banks buy or sell bonds

Crowding Out -

deficit spending leads to higher real interest rate and less investment

Capital Inflow -

high interest rates decrease investment but attract more foreign financial capital