AP Economics Study Guide

Business Cycle: The business cycle refers to the fluctuations in economic activity occurring over time.

Expansion: Economic growth with increased production, employment, and spending.

Peak: The highest point of economic activity before decline.

Contraction: Decrease in economic activity, resulting in reduced spending and layoffs.

Trough: The lowest point in the cycle, followed by recovery and a new expansion.

Relationship between GDP, unemployment, and inflation:

When GDP grows, the economy expands and grows with it.

When GDP grows, unemployment decreases.

When inflation increases, purchasing power decreases, which can lead to reduced consumer spending and potentially higher unemployment rates.

How to calculate Nominal GDP: Consumption + Investment + Government Spending + (Exports- Imports)

Real GDP: Nominal GDP/GDP Deflator

Frictional Unemployment: Short term unemployment when seeking a job or transitioning into another

Structural Unemployment: Long term unemployment because current skills are replaced by advanced technology.

Cyclical Unemployment: Arises from natural causes, like seasonal jobs or travel places when less people travel.

Natural unemployment rate: Frictional + Structural

Unemployment CPI: Cost of market basket over the base market basket times 100.

How to calculate inflation: CPI in current year - CPI in previous year times 100

Leakages: taxes, savings, imports, and exports

Fiscal policy: refers to the government's use of spending and taxation to influence the economy's overall activity and stability.

Reducing taxes can boost demand

Increased government spending can increase employment

Financial aid can reduce unemployment.

Comparative advantage: ability to produce a good/service at a lower cost than others.