💶AP Macroeconomics AP Cram Sessions 2021

Key Concepts and Definitions

• Scarcity the fundamental economic problem of having limited resources to satisfy unlimited wants and needs
• Opportunity cost the next best alternative foregone when making a choice
  • Involves trade-offs between competing options
• Comparative advantage the ability to produce a good or service at a lower opportunity cost than another producer
• Absolute advantage the ability to produce a good or service using fewer resources than another producer
• Demand the quantity of a good or service that consumers are willing and able to purchase at various prices
• Supply the quantity of a good or service that producers are willing and able to sell at various prices
• Equilibrium the point at which the quantity demanded equals the quantity supplied, resulting in a stable price

Economic Models and Graphs

• Production possibilities curve (PPC) a graph that shows the maximum combinations of two goods an economy can produce given its resources and technology
  • Illustrates scarcity, opportunity cost, and efficiency
• Circular flow model a simplified representation of the economy that shows the flow of money, goods, and services between households and firms
• Demand curve a graphical representation of the relationship between the price of a good and the quantity demanded, holding other factors constant
  • Downward-sloping due to the law of demand
• Supply curve a graphical representation of the relationship between the price of a good and the quantity supplied, holding other factors constant
  • Upward-sloping due to the law of supply
• Market equilibrium the point at which the demand and supply curves intersect, determining the equilibrium price and quantity
• Shifts in demand and supply curves result from changes in determinants other than price (income, preferences, input costs, technology)

Supply and Demand Analysis

• Law of demand as the price of a good increases, the quantity demanded decreases, ceteris paribus
• Law of supply as the price of a good increases, the quantity supplied increases, ceteris paribus
• Determinants of demand income, prices of related goods, preferences, expectations, and number of buyers
• Determinants of supply input prices, technology, expectations, number of sellers, and government policies
• Elasticity a measure of the responsiveness of quantity demanded or supplied to changes in price or other factors
  • Price elasticity of demand (PED) measures the responsiveness of quantity demanded to changes in price
  • Income elasticity of demand measures the responsiveness of quantity demanded to changes in income
• Consumer and producer surplus the difference between the willingness to pay (or sell) and the market price

Macroeconomic Indicators

• Gross Domestic Product (GDP) the total value of all final goods and services produced within a country's borders in a given period
  • Nominal GDP is measured in current prices, while real GDP is adjusted for inflation
• Unemployment rate the percentage of the labor force that is actively seeking work but unable to find employment
  • Types of unemployment: frictional, structural, and cyclical
• Inflation rate the percentage change in the average price level of goods and services over time
  • Measured by the Consumer Price Index (CPI) or the GDP deflator
• Business cycles the fluctuations in economic activity over time, characterized by periods of expansion and contraction
• Aggregate demand (AD) the total demand for goods and services in an economy at various price levels
• Aggregate supply (AS) the total supply of goods and services in an economy at various price levels

Fiscal and Monetary Policy

• Fiscal policy the use of government spending and taxation to influence economic activity
  • Expansionary fiscal policy increases aggregate demand through higher spending or lower taxes
  • Contractionary fiscal policy decreases aggregate demand through lower spending or higher taxes
• Government budget the difference between government revenue and expenditure
  • Budget deficit occurs when expenditure exceeds revenue
  • Budget surplus occurs when revenue exceeds expenditure
• Monetary policy the actions taken by a central bank to influence the money supply and interest rates
  • Expansionary monetary policy increases the money supply and lowers interest rates to stimulate economic activity
  • Contractionary monetary policy decreases the money supply and raises interest rates to combat inflation
• Tools of monetary policy open market operations, reserve requirements, and the discount rate
• Crowding-out effect when government borrowing leads to higher interest rates, reducing private investment

International Trade and Finance

• Absolute advantage a country's ability to produce a good using fewer resources than another country
• Comparative advantage a country's ability to produce a good at a lower opportunity cost than another country
• Specialization and trade countries specialize in producing goods for which they have a comparative advantage and trade with others
• Exchange rates the price of one currency in terms of another currency
  • Appreciation an increase in the value of a currency relative to another currency
  • Depreciation a decrease in the value of a currency relative to another currency
• Balance of payments a record of a country's transactions with the rest of the world
  • Current account includes trade in goods and services, income, and transfers
  • Capital account includes financial transactions and changes in foreign reserves
• Tariffs taxes on imported goods, used to protect domestic industries or raise revenue
• Quotas quantitative limits on the amount of a good that can be imported

Common Exam Questions and Strategies

• Understand and apply key economic concepts, such as scarcity, opportunity cost, and comparative advantage
• Analyze and interpret economic models and graphs, including the production possibilities curve, demand and supply curves, and the circular flow model
• Explain the determinants of demand and supply and how changes in these factors affect market equilibrium
• Calculate and interpret elasticity measures, such as price elasticity of demand and income elasticity of demand
• Identify and explain macroeconomic indicators, such as GDP, unemployment rate, and inflation rate
• Analyze the effects of fiscal and monetary policies on aggregate demand, aggregate supply, and economic growth
• Apply the concepts of absolute and comparative advantage to international trade and the benefits of specialization
• Practice time management during the exam, allocating sufficient time for each question based on its complexity and point value

Real-World Applications

• Analyzing the impact of changes in consumer preferences on the demand for electric vehicles (Tesla, Nissan Leaf)
• Evaluating the effects of a minimum wage increase on the labor market and employment levels in the fast-food industry (McDonald's, Burger King)
• Examining the role of comparative advantage in the global trade of agricultural products (US corn exports, Brazilian coffee exports)
• Assessing the effectiveness of expansionary fiscal policy in stimulating economic growth during a recession (2008 financial crisis, COVID-19 pandemic)
• Investigating the impact of exchange rate fluctuations on the competitiveness of a country's exports (US dollar appreciation, Chinese yuan depreciation)
• Analyzing the effects of tariffs on the domestic steel industry and the downstream industries that use steel as an input (US-China trade war)
• Evaluating the role of monetary policy in controlling inflation and maintaining price stability (Federal Reserve's target inflation rate)
• Examining the impact of changes in interest rates on the housing market and mortgage lending (subprime mortgage crisis, historically low interest rates)