The following content includes crucial equations, formulas, and graphs essential for the AP Macroeconomics exam. This formula sheet is organized according to the six units of study outlined in the AP Macroeconomics course. Each equation and graph corresponds to specific tasks or skills identified in the AP Macroeconomics Course Description, which outlines the knowledge you are expected to master for the exam. Additionally, a section of key terms and definitions is provided at the end for further reference.

Unit 1: Basic Economic Concepts

1.2: Calculate opportunity cost

Note that opportunity costs are always expressed in terms of the good that is given up.

1.3: Calculate mutually beneficial terms of trade

Mutually beneficial terms of trade are determined by looking at the two opportunity costs plotted on a Production Possibilities Curve (PPC) Model and choosing a number that falls between the opportunity costs.

Key graph:

1.6: Calculate (using graphs as appropriate) the surplus or shortage in the market experience an imbalance

Key graph:

Unit 2: Economic Indicators and the Business Cycle

2.1: Calculate nominal GDP

2.3: Calculate the unemployment rate and the labor force participation rate (LFPR)

The unemployment rate is the percentage of the labor force that is unemployed:

The LFPR is the percentage of the eligible population that is in the labor force: 

2.4: Calculate the CPI, the inflation rate, and changes in real variables

2.6: Calculate the real GDP and the GDP deflator

Key Graphs:

Unit 3: National Income and Price Determination

3.2: Calculate how changes in spending and taxes lead to changes in real GDP

3.8: Calculate the short-run effects of a fiscal policy action

We can show the impact of fiscal policy on output and the price level using the AD-AS Model:

Unit 4: Financial Sector

4.2: Calculate the nominal and real interest rate

Nominal interest rate:

Real interest rate:

4.3: Calculate (using data as appropriate) measures of money

4.4: Calculate (using data and balance sheets as appropriate) the effects of changes in the banking system

Calculate excess reserves:

Excess reserves = Deposits – (Deposits x reserve requirement)

Maximum new loans from a deposit:

Maximum increase in loans = (Deposit - reserves) x money multiplier

Key Graphs:

4.6: Calculate (using data and balance sheets as appropriate) the effects of a monetary policy action

Monetary policy can be used to mitigate the impact of fiscal policy on interest rates:

Unit 5: Long-Run Consequences of Stabilization Policy

5.3: Calculate the money supply, velocity, the price level, and real output using the quantity theory of money

The equation of exchange:

The equation of exchange states that the effective money supply is equal to nominal GDP:

𝑀 𝑥 𝑉 = 𝑃 𝑥 𝑌

Where:

𝑀 𝑥 𝑉 = the effective money supply is the money supply(𝑀)multiplied by the velocity of money(𝑉)

𝑃 𝑥 𝑌 = is the price level(𝑃)multiplied by real GDP(𝑌)

Note that 𝑃 𝑥 𝑌 is the same as nominal GDP

5.6: Calculate (using graphs and data as appropriate) per capita GDP and economic growth

GDP per capita = GDP/population

Key Graphs:

Unit 6: Open Economy--International Trade and Finance

6.1: Calculate the CA, the CFA, and the BOP

6.2: Calculate the value of one currency relative to another

Key Graphs:

Key Terms and Definitions:

• Opportunity cost - the value of the next best alternative to any decision you make

• Production possibilities curve (PPC) - (also called a production possibilities frontier) a graphical model that represents all of the different combinations of two goods that can be produced; the PPC captures scarcity of resources and opportunity costs.

• Surplus - when the quantity supplied of a good, service, or resource is greater than the quantity demanded

• Shortage - when the quantity demanded of a good, service, or resource is greater than the quantity supplied

• Demand - Demand is an economic principle referring to a consumer's desire to purchase goods and services and willingness to pay a price for a specific good or service

• Supply - describes the total amount of a specific good or service that is available to consumers

• Equilibrium - in a market setting, an equilibrium occurs when price has adjusted until quantity supplied is equal to quantity demanded

• Disequilibrium - in a market setting, disequilibrium occurs when quantity supplied is not equal to the quantity demanded; when a market is experiencing a disequilibrium, there will be either a shortage or a surplus.

• GDP - measures the value of the output of all goods and services produced within the country in a year

• Nominal GDP - the market value of the final production of goods and services within a country in a given period using that year’s prices (also called “current prices”)

• Real GDP - nominal GDP adjusted for changes in the price level, using prices from a base year (constant prices) instead of “current prices” used in nominal GDP; real GDP adjusts the level of output for any price changes that may have occurred over time

• GDP deflator - a price index used to adjust nominal GDP to find real GDP; the GDP deflator measures the average prices of all finished goods and services produced within a nation’s borders over time.

• Unemployment rate - when people are not working, but they are actively looking for work; for example, Glenn did not work at all last week, though he tried to find a job, so he is considered unemployed.

• Labor force participation rate - thhe percentage of the eligible population that is in the labor force

• CPI - an index that calculates the cost of a market basket of goods purchased by a typical family that lives in an urban area; the purpose of the CPI is to track changes in the cost of living over time.

• Inflation rate - the pace at which the overall price level is increasing; this is the percentage increase in the price level from one period to the next.

• Circular flow model - GDP can be represented by the circular flow diagram as a flow of income going in one direction and expenditures on goods, services, and resources going in the opposite direction. In this diagram, households buy goods and services from businesses and businesses buy resources from households.

• AD-AS model - The AD-AS (aggregate demand-aggregate supply) model is a way of illustrating national income determination and changes in the price level. We can use this to illustrate phases of the business cycle and how different events can lead to changes in two of our key macroeconomic indicators: real GDP and inflation.

• Fiscal policy - the use of taxes, government spending, and government transfers to stabilize an economy; the word “fiscal” refers to tax revenue and government spending.

• Nominal interest rate - the interest rate that you earn (or pay) on a loan; this is the amount you see on a sign advertising interest rates.

• Real interest rate - the nominal interest rate adjusted for inflation; this is the effective interest rate that you earn (or pay).

• Money multiplier - the ratio of the money supply to the monetary base (money in bank vaults and money in circulation); the money multiplier tells us how many additional dollars will be created with each addition to the monetary base, such as when there is a $1$1dollar sign, 1 increase in a bank’s reserves.