AP Macroeconomics covers the economy as a whole. The FRQ almost always includes at least one AD-AS diagram and one money market diagram. Mastering these graphs and their shift logic is essential for a 5.
Units 1–2: GDP and National Income
GDP = C + I + G + (X − M) — expenditure approach. Excluded from GDP: intermediate goods, non-market production, transfers, financial transactions, used goods. Real GDP adjusts for inflation using a price index; nominal GDP uses current prices. GDP deflator = (nominal GDP/real GDP) × 100. Unemployment: cyclical (recession), structural (skills mismatch), frictional (job searching). Natural rate of unemployment (NRU) = structural + frictional. Inflation measured by CPI; CPI understates if base year is outdated.
Units 3–4: Aggregate Demand and Supply
AD slopes downward: wealth effect, interest rate effect, net export effect. AD shifters: C (consumer confidence, wealth), I (interest rates, expectations), G (government spending), NX (exchange rates, foreign income). Short-run AS (SRAS) slopes upward; long-run AS (LRAS) is vertical at potential output. Expansionary gap (AD too far right): price level rises, wages adjust, SRAS shifts left back to LRAS. Recessionary gap: opposite. Keynesian cross: equilibrium where C + I + G = Y; spending multiplier = 1/(1 − MPC).
Units 5–6: Fiscal Policy and Money
Expansionary fiscal policy: increase G or decrease T → AD shifts right. Tax multiplier < spending multiplier (because some tax cut is saved). Automatic stabilizers: unemployment insurance, progressive taxes. Crowding out: government borrowing raises interest rates → reduces private investment. Money supply components: M1 (currency + demand deposits), M2 (M1 + savings). Money creation: money multiplier = 1/reserve ratio. Federal Reserve tools: open market operations (buying bonds → increases money supply), discount rate, reserve requirement.
Unit 7: International Trade and Exchange Rates
Comparative advantage drives trade; terms of trade must fall between the two countries' opportunity costs. Balance of payments: current account (trade, income) + capital/financial account = 0. Flexible exchange rate: demand for a currency increases → currency appreciates → exports fall, imports rise. Purchasing power parity. If Fed raises interest rates → capital inflows → dollar appreciates.
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