AP Macroeconomics cheat sheet

Scarcity forces choice; opportunity cost is the value of the next-best alternative forgone, not the sum of all alternatives.

Production possibilities frontier: points on the curve are efficient, points inside are inefficient, points beyond are unattainable with current resources and technology.

PPF is bowed outward because resources are not perfectly adaptable between goods; constant opportunity cost yields a straight-line PPF.

Law of demand: price and quantity demanded move in opposite directions, ceteris paribus; law of supply: price and quantity supplied move together.

Shift of a curve vs. movement along it: a change in the good's own price moves along the curve; changes in determinants (income, tastes, input costs, technology) shift the curve.

Equilibrium occurs where quantity demanded equals quantity supplied; a binding price ceiling below equilibrium creates shortage, a binding price floor above equilibrium creates surplus.

GDP measures final goods and services produced within a nation's borders in a period; intermediate goods and purely financial transactions are excluded.

Comparative advantage is determined by lowest opportunity cost, not absolute productivity; specialization and trade raise total output.

Demand-pull inflation arises from rightward aggregate demand shifts; cost-push inflation arises from leftward short-run aggregate supply shifts.

An economy in short-run equilibrium beyond potential output has a positive output gap and downward pressure on unemployment below the natural rate.

Crowding out: government borrowing raises real interest rates, reducing private investment and interest-sensitive consumption.

Automatic stabilizers (progressive taxes, unemployment insurance, welfare transfers) dampen fluctuations without new legislation.

Expansionary fiscal policy shifts aggregate demand right; expansionary monetary policy lowers interest rates, shifting aggregate demand right through investment and consumption.

Long-run Phillips curve is vertical at the natural rate of unemployment; only unanticipated inflation yields a short-run tradeoff.

Economic growth in the long run comes from increases in capital stock, labor force, human capital, and technological progress, not demand stimulus.

Rational expectations imply anticipated policy has no real effect in the long run; short-run effects require unanticipated policy or sticky wages and prices.

Binding price ceiling set below equilibrium: quantity supplied falls, quantity demanded rises, shortage results, and deadweight loss appears.

Binding price floor set above equilibrium: surplus results; with a minimum wage above equilibrium, unemployment rises.

Positive externality of consumption implies marginal social benefit exceeds marginal private benefit; a subsidy can move output toward the social optimum.

Negative externality of production implies marginal social cost exceeds marginal private cost; a Pigouvian tax or tradable permits internalize the cost.

A tariff raises domestic price, increases domestic quantity supplied, reduces imports, creates deadweight loss, and transfers surplus to producers and government.

If a country's inflation rate exceeds a trading partner's, its currency tends to depreciate under purchasing power parity.

Higher real interest rates attract financial capital inflows, appreciating the currency and reducing net exports.

An increase in the money supply lowers the nominal interest rate in the short run, increasing investment, aggregate demand, real output, and the price level.

Money is a medium of exchange, unit of account, and store of value; it must be durable, portable, divisible, and scarce to function well.

The money multiplier equals 1 divided by the required reserve ratio (ignoring excess reserves and currency holdings).

Central bank open-market purchases increase bank reserves and the money supply; sales decrease both.

Fiscal policy multipliers: the spending multiplier is 1/(1−MPC); the tax multiplier is −MPC/(1−MPC).

Classical view: long-run output is determined by resources and technology; money affects only the price level (quantity theory).

Keynesian view: prices and wages are sticky, so aggregate demand changes can affect real output in the short run.

Monetarist view: monetary policy affects output with long and variable lags; rules are preferred to discretion.

Supply-side policy targets aggregate supply through lower marginal tax rates, deregulation, and investment in human capital.

GDP = C + I + G + (X − M); use expenditures on final goods only to avoid double counting.

Real GDP = (Nominal GDP / GDP deflator) × 100; GDP deflator = (Nominal GDP / Real GDP) × 100.

Nominal interest rate = real interest rate + expected inflation (Fisher approximation); real rate = nominal rate − inflation.

Unemployment rate = (unemployed / labor force) × 100; labor force = employed + unemployed; discouraged workers are excluded.

Labor force participation rate = (labor force / adult population) × 100.

Inflation rate = [(CPI this year − CPI last year) / CPI last year] × 100.

Spending multiplier = 1/(1−MPC) = 1/MPS; total change in GDP = multiplier × change in autonomous spending.

Tax multiplier = −MPC/(1−MPC); balanced-budget multiplier = 1.

Money multiplier = 1/reserve ratio; maximum change in money supply = initial excess reserves × money multiplier.

Label axes on all graphs: price level on the vertical axis and real GDP on the horizontal axis for AD–AS; price and quantity for microeconomic supply and demand.

Short-run aggregate supply slopes upward due to sticky wages and prices; long-run aggregate supply is vertical at potential output.

Aggregate demand slopes downward due to the wealth, interest-rate, and foreign-trade effects.

Money market graph: vertical money supply, downward-sloping money demand; equilibrium determines the nominal interest rate.

Loanable funds graph: upward-sloping supply of savings, downward-sloping demand for investment funds; government borrowing shifts supply left and raises the rate.

Phillips curve: short-run curve slopes downward between inflation and unemployment; long-run curve is vertical at the natural rate.

Foreign exchange graph: upward-sloping supply of and downward-sloping demand for a currency; equilibrium determines the exchange rate.

For a shift, draw the new curve and mark the new equilibrium; arrows show direction of change in price level and real GDP.