Download AP Macro: The Very Basics to Know The Production Possibilities

AP Macro: The Very Basics to Know
The Production Possibilities Model
• A point inside the frontier is an inefficient/recessionary economy
• A point on the frontier is an efficient economy
• A point outside the frontier is unattainable, for now
• The frontier will move outward with new factors of production in the future
Supply and demand problems
• If price changes first in a market, this is a quantity change.
• Floors are created to help producers and will cause greater surpluses.
• Ceilings are created to help consumers and will cause greater shortages.
• All other factors of change are either demand or supply changes and will change EP/EQ.
Currency exchanges
• Know the determinants that change supply and demand of currencies.
• Know the rules of changes on currency graphs.
• Connect depreciation and appreciation of currencies with exports.
• Exports affect GDP in a positive way with money coming to a country.
Circular Flow
• Know the product market versus the factor market.
• Know the impact of government: transfers for citizens, subsidies for businesses.
• Know the impact of the international market with exports as a positive, imports as a
negative
Business Cycles
• The ‘quarter’ system
• Recessions lasting about 14 months naturally
• Expansions should have extra inflation
• Recessions have extra unemployment
• Stagflation is a time of excess inflation and unemployment
Gross Domestic Product Accounting
• C + Ig +G + Xn
• There is an income approach to GDP (but the counting varies)
• The importance of “C” in the US economy
• The difference between nominal and real
• The “trick” that Ig is a component of AD
• The items that don’t count…
Employment and Unemployment
• Part time employees are counted as employed, even if they aren’t pleased with that job.
• Those no longer looking are “discouraged” and are not counted.
Consumer Price Index and Inflation
• How to adjust for inflation over time
• Index years must always be 100.
• Nominal versus Real
• How to apply the Rule of 70
• Why the CPI measures a smaller part of the economy than the GDP deflator
Spending/Consumption Multiplier Effect
• The consumption multiplier is used when the public gets unexpected disposable income,
usually through a tax cut
• DI will always contain either spending or savings.
• The spending formula for marginal propensities is 1/MPS or 1/1-MPC
Aggregate Model: AD/SRAS/LRAS
• (Know the graph completely)
• Equilibrium is inside FE: the economy is inefficient and usually called a recession
• Equilibrium is on the LRAS: the economy is efficient
• Equilibrium is outside FE: the economy is overextended
• The determinants that change AD (especially factors of Ig)
• The determinants that change SRAS
• The things needed to move LRAS
Fiscal Policies
• Only Congress conducts fiscal policies (not “government”)
• Congress has 2 tools
• Congress targets AD
• All of this is supported by Keynesians
• The Money Market and the Loanable Funds Market are affected negatively by expansionary
policies (Crowding Out Effect)
• Keynesians believe that gains in C and G out-weigh any potential losses in Ig
• Domestically, we borrow and pay interest. Therefore, low interest is good, high is bad.
• Internationally, we invest and earn interest. Therefore, high interest is good, low is bad.
Monetary Policies
• Only the Fed conducts Monetary Policies (not “government”)
• The Fed policies target interest rates and Ig
• Monetary policies have now crowding out flaw
• Recessions: Buy Bonds
• Inflation: Sell Bonds
• Be able to graph policies on the AD/SRAS, Money Market, Loanable Funds
• Know the manipulation the 3 other major Fed tools
Banking T accounts and the Money Multiplier
• Bank assets versus liabilities
• The Money Multiplier (1/rr)
• Initial changes versus changes in the entire banking system
• Changes in Demand Deposits
• Changes in the Money Supply
• Public actions, Fed Open Market Actions, Fed Banking Actions
Returning to Full Employment
• Assumptions of self-correcting markets in Neo-Classical approaches
• Two changes in AD, Two changes in SRAS
• Stagflation and Supply Shocks
Phillips Curves
• Inflation versus unemployment in inverse relationships
• Movements along the SRPC during the business cycle
• Changing the SRPC due to supply shocks, stagflation, productivity changes
• Moving the LRPC if a nation changes the way the NRU occurs
• The way the Phillips connects to the AD/SRAS model
Monetarism and Growth
• Monetarism is NOT the same thing as Monetary Policy from the Fed
• Quantity Theory of Money (M x V = P x Y) or M x V = P x Q
(Money, Velocity, Price, GDP Output, Quantity)
• Monetarist’s belief that Money Velocity is Stable in the Short Run
Balances of Payments: BOP Accounts
• BOP assets/credits
• BOP liabilities/debits
• BOP Current Account items
• BOP Financial Account items
• Current Accounts will equal Financial Accounts
• Assets are demand for a currency
• Liabilities are supply of a currency
Comparative Advantages in International Trade
• Absolute advantages if two countries have similar resources
• Output comparative advantages
• Input comparative advantages
• Lowest opportunity costs for outputs
• Least effort needed to create one output for input problems
• Least effort needed to create one output for input problems
• Trade options will be an improvement over domestic opportunity costs