AP econ

⭐ AP Macroeconomics Study Guide (Units 1–6)

Perfect for midterms, finals, or the AP exam

UNIT 1 — Basic Economic Concepts

✔ Scarcity & Choice

• Scarcity means limited resources, unlimited wants.
  
  

• Leads to trade-offs and opportunity cost (next best alternative).
  
  

• Rational people think at the margin (MB vs. MC).
  
  

✔ Economic Systems

• Command: government decides (Russia, N. Korea).
  
  

• Market: individuals/businesses decide.
  
  

• Mixed: combination (U.S., most countries).
  
  

✔ PPC (Production Possibility Curve)

• Shows efficiency, trade-offs, opportunity cost.
  
  

• Inside curve: inefficient.
  
  

• On curve: efficient.
  
  

• Shift right: more resources, tech improvement.
  
  

✔ Comparative Advantage & Trade

• Comparative advantage: lowest opportunity cost.
  
  

• Absolute advantage: produces more with same resources.
  
  

• Trade helps both sides if they specialize.
  
  

UNIT 2 — Economic Indicators & Business Cycle

✔ GDP (Gross Domestic Product)

• Measures value of all final goods & services produced domestically.
  
  

• Not included: used goods, intermediate goods, financial assets.
  
  

✔ GDP Approaches

1. Expenditure: C + I + G + (X − M)
   
   

2. Income: wages + rent + interest + profit
   
   

✔ Nominal vs. Real GDP

• Real GDP adjusts for inflation.
  
  

• Real GDP = Nominal GDP ÷ Price Index
  
  

✔ Unemployment

• Frictional: between jobs.
  
  

• Structural: skills don’t match.
  
  

• Cyclical: due to downturn (bad!).
  
  

• Natural rate = frictional + structural
  
  

✔ Inflation

• CPI measures average price changes.
  
  

• Inflation hurts savers, helps borrowers with fixed-rate loans.
  
  

✔ Business Cycle

• Expansion → Peak → Recession → Trough.
  
  

UNIT 3 — Aggregate Demand & Aggregate Supply

✔ Aggregate Demand (AD)

AD = C + I + G + (X – M)

Shifters:

• Consumer spending
  
  

• Investment
  
  

• Government spending
  
  

• Net exports
  
  

✔ Aggregate Supply

SRAS shifters:

• Resource prices
  
  

• Productivity
  
  

• Taxes/subsidies/regulations
  
  

LRAS shifters:

• Technology
  
  

• Resources
  
  

• Human capital
  
  

• Capital stock
  
  

✔ Short-Run Equilibrium

• AD + SRAS determine price level & output.
  
  

✔ Stagflation

• SRAS decreases → high inflation + low output.
  
  

UNIT 4 — Money, Banking, Monetary Policy

✔ Money Functions

• Medium of exchange
  
  

• Unit of account
  
  

• Store of value
  
  

✔ Money Types

• M1: cash, checking
  
  

• M2: M1 + savings deposits
  
  

✔ Fractional Reserve Banking

Money multiplier = 1 / reserve requirement

✔ Central Bank (Fed) Tools

1. Open Market Operations (OMO)
   
   

   • Buy bonds → increase money supply → lower interest rates
     
     

   • Sell bonds → decrease money supply → raise interest rates
     
     

2. Reserve requirement
   
   

3. Discount rate
   
   

✔ Monetary Policy Goals

• Low inflation
  
  

• Stable GDP
  
  

• Low unemployment
  
  

UNIT 5 — Long-Run Growth & Fiscal Policy

✔ Long-Run Growth

Growth comes from:

• Physical capital
  
  

• Human capital
  
  

• Technology
  
  

• Institutions
  
  

✔ Fiscal Policy

• Expansionary: ↑ G, ↓ taxes
  
  

• Contractionary: ↓ G, ↑ taxes
  Goal: stabilize economy through AD.
  
  

✔ Spending Multiplier

1 / (1 – MPC)

✔ Crowding Out

Government borrowing raises interest rates → reduces private investment.

UNIT 6 — Open Economy: Trade & Exchange Rates

✔ Balance of Payments

Two major accounts:

• Current account: goods/services, income, transfers
  
  

• Financial (capital) account: asset purchases (stocks, bonds, real estate)
  
  

✔ Exchange Rates

• Appreciation: currency strengthens → exports fall; imports rise
  
  

• Depreciation: currency weakens → exports rise; imports fall
  
  

✔ Foreign Exchange Market Shifters

Demand & supply for currency shift from:

• Interest rate changes
  
  

• Inflation differences
  
  

• Preferences for goods
  
  

• Capital flows
  
  

✔ Capital Inflow/Outflow

• High domestic interest rates → foreign investors buy domestic assets → currency appreciates.
  
  

🎯 EXAM TIPS

Graphs to Know Cold

• PPC
  
  

• Circular Flow
  
  

• Loanable Funds Market
  
  

• AD/AS
  
  

• Money Market
  
  

• Phillips Curve
  
  

• Foreign Exchange Market
  
  

Things AP LOVES asking:

• Opportunity cost tables
  
  

• AD/AS shifts & effects
  
  

• Monetary vs. fiscal policy
  
  

• Real vs. nominal values
  
  

• MPC/MPS & multipliers
  
  

• Phillips Curve trade-off
  
  

• Exchange rate appreciation/depreciation
  
  

• Financial vs. current account
  
  

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