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AP MACROECONOMICS STUDY SHEET – FOR THE FINAL
SECTION 1
Module 3:
Production Possibilities Curve
Module 4:
Comparative Advantage
SECTION 2
Modules 5-8:
--Make sure you know the basics of supply and demand.
-- Module 8 – Price floors and ceilings
SECTION 3
Modules 10-11:
--Know what is included in GDP.
-- You won’t have to calculate real GDP from nominal GDP, but know
that real GDP is adjusted for inflation.
Modules 12-13:
-- Three types of unemployment (frictional, structural and cyclical)
-- Full employment =natural rate of unemployment and is between 4-5%
-- Know who is included in the labor force.
-- Know how to calculate the unemployment rate.
Modules 14-15:
-- Demand Pull Inflation – caused by excess of total spending (rightward
shift in AD curve).
-- Cost Push Inflation – caused by rising resource costs → raises per-unit
production costs→ leftward shift in AS curve.
-- Real interest rates + expected inflation = nominal interest rates.
-- Consumer Price Index.
SECTION 4
Module 16:
--Spending Multipliers
-- Know the relationship between disposable income, consumption and
savings.
Modules 17-19:
-- Know the AD/AS model
-- AD =C+I+G+X - IM
-- Aggregate Supply Curve- up-sloping in short-run and vertical in long
run at full employment. Flexibility of wages in the long-run self correct
the economy back to full employment and account for the vertical long run
AS curve.
Rightward shift of long-run AS demonstrates economic growth, which is
affected by new technology and improvements in worker productivity.
-- Negative and Positive Demand and Supply Shocks
Negative Supply Shock-- Stagflation—increases in both
unemployment and inflation. In 1970’s caused by “supply shocks”
(↑oil prices). As the AS curve shifted to the left, the Phillips
Curve shifted to the right.
--Recessionary and inflationary gaps.
Modules 20-21:
-- Discretionary vs. non-discretionary fiscal policy
-- Discretionary fiscal policy is when the government deliberately
changes taxes, government spending, government transfers or a
combination of all 3 to stabilize the economy.
- Keynesian theory explains that changes in taxes
will affect AD. Supply sides economics argues that decreases in
taxes will increase AS.
--Expansionary Fiscal Policy-- ↑government spending or ↓taxes or both
→ creates a budget deficit which is funded through sale of government
securities. This creates an increased demand for loanable funds (loanable
funds market graph)which increases real interest rates→crowds out
business investment. This is called the Crowding Out Effect.
-- Contractionary Fiscal Policy-- ↑ taxes or ↓ government spending or
both.
SECTION 5
Module 23, 25, 26-28
-- Definitions of M1, M2
-- Our money supply is not backed by gold. It is fiat money, meaning it
derives its value from the fact that the government decrees it as legal
tender.
--Money Market Model. Fed determines the supply of money –Sm is a
vertical line. Demand for money is comprised of the demand for
transactions and the demand for money we hold as a store of value (asset
demand.
Sm ↑→ interest rates ↓
Sm ↓ →interest rates ↑
--Know the general organization and responsibilities of the Federal
Reserve System (Fed).
--Actual reserves = required reserves (RR) + excess reserves (ER)
-- Reserve Ratio – established by the Fed and determines the % of demand
deposits that must be held as required reserves.
-- Money multiplier = _______1_____
reserve ratio
-- Calculating Change in Money Supply (M1)
Take a change in excess reserves at one bank and multiply it by the money
multiplier to give you the potential change in the money supply (M1). If
the change in excess reserves was caused by an increase in demand
deposits, you must decide if the demand deposit was previously held as
currency in the hands of the public; if it was, it doesn’t constitute a change
in M1 and you don’t have to add it to get your final answer, if it was not
previously held as currency in the hands of the public (came from the Fed
or a “stranger from another economic system”) add it to get your final
answer.
Limitations: people may hold currency and not redeposit it, banks may
not lend out all of their excess reserves.
-- Monetary Policy – When the Fed alters the money supply (MS) for the
purpose of stabilizing aggregate output (GDP) employment and the price
level.
-- 3 major Monetary Policy Tools
1. Open Market Operations
2.) Changing the Reserve Ratio
3.) Changing the Discount Rate
-- Easy Money Policy( Expansionary Monetary Policy) –will stimulate
AD to help the country divert or get out of recession. Fed will ↑ ER
→↑MS→↓interest rates→↑business investment (BI), GDP,
employment and price levels.
Fed buying government bonds, ↓reserve ratio or ↓discount rate achieves
this policy.
Tight Money Policy (Contractionary Monetary Policy) – will contract the
economy (decrease AD) to control inflation. Fed will
↓ER→↓MS→↑interest rates→↓BI, GDP, employment and prices.
Fed selling government bonds, ↑reserve ratio or ↑discount rate.
Module 29:
The Market for Loanable Funds (pgs. 277-282).
SECTION 6
Module 34: NOTE: THIS WILL ONLY BE ON THE FINAL IF WE GET TO IT IN
CLASS. IT IS DEFINITELY COVERED ON THE AP EXAM THOUGH AND WE
WILL COVER THIS MATERIAL IN REVIEW SESSIONS.
-- Phillips Curve – shows the trade-off between unemployment and
inflation. Most economists agree the trade-off exists in the short-run, but
not in the long run. In the long-run the Phillips curve is vertical at full
employment, just like the aggregate supply curve (AS), because wages
and prices are flexible in the long-run.
SECTION 8
Module 42:
-- Be able to answer questions pertaining to foreign exchange transactions
and trade.