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AP Macroeconomics review: key concepts

AP Macroeconomics cards on GDP, inflation, unemployment, AD-AS, multipliers, money and banking, fiscal and monetary policy and trade, with worked numbers.

37 cards6 topicsAbout 15 minutes a roundAP Macroeconomics style course content (one-term introductory university macroeconomics)

Independent study material written by StudyBrix. AP and SAT are trademarks of College Board and ACT is a trademark of ACT, Inc.; neither organisation is involved with or has reviewed this deck.

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About this deck

This deck is for students in an AP Macroeconomics style course and for first-year university students who want a quick, structured review. It starts with scarcity, opportunity cost and comparative advantage, then covers national income accounting, inflation and unemployment, the aggregate demand and aggregate supply model, spending multipliers, money and the banking system, monetary and fiscal policy, the Phillips curve, growth, and international trade and exchange rates. Examples use the United States, as the AP course does, but every idea applies to Canada too.

You only need basic algebra and percentages. Most cards come with a small calculation; do it before flipping. The graphs matter as much as the arithmetic, so sketch the relevant graph (AD-AS, money market, loanable funds or foreign exchange) for every policy card and label the shift.

A useful study routine is the chain: for any shock or policy, trace the effect step by step through interest rates, investment, aggregate demand, real output, price level and unemployment. Then do the same for the long run. Questions frequently ask for exactly that chain.

Common mistakes: confusing a shift of aggregate demand with a movement along it; mixing up nominal and real values; claiming that the central bank sets the money supply directly in every system; and forgetting that the tax multiplier is smaller than the spending multiplier. Students also confuse the deficit (a yearly flow) with the debt (the accumulated stock).

Before you start: Basic algebra, percentages and graph reading; no prior economics course is required.

All 37 cards

Cover the definitions with a sheet of paper and test yourself, or use the study modes above.

Basic economic concepts

Opportunity cost: The value of the next best alternative given up when a choice is made.Example: Spending Saturday working a $120 shift instead of studying: the cost of the shift is the study time lost, and vice versa.
Production possibilities curve: Graph of the maximum combinations of two goods an economy can make with its resources and technology; points inside show unemployment and the curve shifts out with growth.Example: A bowed-out curve shows increasing opportunity cost as resources are moved.
Comparative advantage: The ability to produce a good at a lower opportunity cost than another producer; trade based on it benefits both sides.Example: A: 10 wheat or 5 cloth. B: 6 wheat or 2 cloth. Cloth costs A 2 wheat and B 3 wheat, so A should make cloth.
Shifts in demand and supply: A change in a nonprice factor shifts the whole curve; a change in the good's own price moves along the curve.Example: Higher incomes shift demand for a normal good right, raising both equilibrium price and quantity.

Economic indicators

GDP by the expenditure approach: The market value of all final goods and services produced within a country in a year: C + I + G + NX.Example: C = 500, I = 150, G = 200, NX = -30 (billions): GDP = 820 billion.
Real GDP: Output measured in constant base-year prices, so changes reflect quantity rather than price changes. Real = nominal/deflator x 100.Example: Nominal GDP 1100 with a deflator of 110: real GDP 1000.
Consumer price index (CPI): Measures the cost of a fixed basket of consumer goods relative to a base year; its percentage change is the usual inflation rate.Example: CPI rising from 240 to 252: (252 - 240)/240 = 5% inflation.
Unemployment rate: Unemployed people divided by the labour force (employed plus unemployed people actively seeking work), times 100.Example: 6 million unemployed and a labour force of 120 million: 5%.
Frictional, structural and cyclical unemployment: Frictional is short-term job searching; structural comes from skill or location mismatch; cyclical comes from recessions. The natural rate includes only the first two.Example: A factory worker whose job is automated and who lacks the skills for the new jobs is structurally unemployed.
Business cycle: Short-run fluctuations of real GDP around its long-run trend: expansion, peak, contraction (recession) and trough.Example: Unemployment typically rises during a contraction.
Nominal versus real interest rate: Real rate is approximately the nominal rate minus inflation; borrowers gain when inflation turns out higher than expected.Example: A 6% loan with 2% inflation has a real rate of about 4%.

National income and price determination

Marginal propensity to consume (MPC): The fraction of each extra dollar of disposable income spent on consumption; MPC + MPS = 1.Example: Income rises by $100 and spending rises by $80: MPC = 0.8, MPS = 0.2.
Spending multiplier: 1/(1 - MPC) or 1/MPS: the total change in real GDP from an initial change in spending.Example: MPC 0.8 gives 5; a $20 billion rise in government purchases raises GDP up to $100 billion.
Tax multiplier: -MPC/MPS; smaller in size than the spending multiplier because part of a tax cut is saved.Example: MPC 0.8: tax multiplier -4, so a $20 billion tax cut raises GDP up to $80 billion.
Aggregate demand curve slope: Downward because a lower price level raises real wealth, lowers interest rates and makes exports cheaper.Example: A falling price level increases the quantity of real output demanded, a movement along AD.
Short-run aggregate supply: Upward sloping because some input prices, especially wages, are sticky in the short run.Example: A rise in oil prices shifts SRAS left.
Long-run aggregate supply: Vertical at full-employment output, because in the long run all prices and wages adjust.Example: Better technology shifts LRAS to the right.
Recessionary gap: Real output is below full-employment output and unemployment is above its natural rate.Example: Short-run equilibrium at 900 with potential output at 1000: a gap of 100.
Inflationary gap: Real output is above full-employment output, putting upward pressure on wages and prices.Example: Equilibrium at 1080 with potential at 1000: output exceeds potential by 80.
Cost-push inflation and stagflation: A leftward SRAS shift raises the price level while reducing output, causing inflation and unemployment together.Example: The oil shocks of the 1970s produced stagflation.

Financial sector

Functions of money: Money serves as a medium of exchange, a unit of account and a store of value.Example: Pricing a bike at $300 uses money as a unit of account.
M1 and M2: M1 is the most liquid money (currency, checkable deposits and, since 2020 in US data, savings deposits); M2 adds small time deposits and money market funds.Example: Moving $500 from a checking account into a 1-year term deposit lowers M1 but leaves M2 unchanged.
Money multiplier: 1/required reserve ratio: the maximum expansion of deposits from new excess reserves in a simple banking model.Example: Reserve ratio 10%: multiplier 10, so $500 of new excess reserves can support up to $5000 of new money.
Money market: Graph of money demand and money supply that sets the nominal interest rate; money demand slopes down with the interest rate.Example: If the central bank increases the money supply, the nominal interest rate falls.
Loanable funds market: Market for borrowing and lending that sets the real interest rate; government borrowing raises demand for loanable funds.Example: A rise in household saving shifts supply right, lowering the real interest rate.
Open market operations: Central bank purchases or sales of government bonds; buying bonds adds reserves and pushes rates down.Example: The Fed buys $10 billion in bonds to support spending during a recession.
Interest on reserves (ample reserves): In an ample reserves system the central bank steers short-term rates mainly by setting the interest rate it pays on bank reserves.Example: Raising that rate encourages banks to keep reserves rather than lend at lower rates, lifting the federal funds rate.

Stabilization policies

Expansionary fiscal policy: Increasing government purchases or cutting taxes to shift AD right and close a recessionary gap.Example: A $50 billion infrastructure program during a recession.
Crowding out: Government borrowing raises real interest rates and reduces private investment, weakening the effect of a deficit-financed policy.Example: Higher rates from deficit spending cause firms to delay building new plants.
Automatic stabilizers: Taxes and transfers that change on their own with the economy and soften the business cycle.Example: Unemployment insurance (employment insurance in Canada) payments rise automatically when layoffs increase.
Budget deficit versus national debt: A deficit is one year's shortfall of revenue below spending; the debt is the total accumulated from past deficits minus surpluses.Example: Deficits of 40, 30 and 20 billion over three years add 90 billion to the debt.
Short-run and long-run Phillips curves: The short-run curve shows an inverse trade-off between inflation and unemployment; the long-run curve is vertical at the natural rate.Example: Higher expected inflation shifts the short-run curve up.
Quantity theory of money: MV = PQ: money supply times velocity equals nominal GDP; with stable V and Q, money growth leads to inflation.Example: M = 500 and V = 4: nominal GDP = 2000.
Rule of 70: Approximate doubling time in years = 70 divided by the annual growth rate in percent.Example: Real GDP per person growing 2% a year doubles in about 35 years.

Open economy

Balance of payments: Record of a country's international transactions; the current account and the capital and financial account sum to about zero.Example: A current account deficit is matched by a financial account surplus (net foreign investment inflow).
Currency appreciation: A rise in the value of a currency in terms of other currencies; it makes exports dearer for foreigners and imports cheaper at home.Example: The dollar moving from 0.90 to 1.00 euro per dollar has appreciated.
Foreign exchange market and interest rates: Higher domestic interest rates attract foreign financial investment, increasing demand for the currency and causing it to appreciate.Example: A US rate hike raises demand for dollars, so net exports tend to fall.