AP Macroeconomics Cram Sheet

• •Calculate opportunity cost from output and input tables without hesitation.
• •Determine terms of trade that benefit both countries (between the two opportunity costs).
• •Distinguish a movement along the PPC (trade-off) from a shift of the PPC (growth).
• •Refresh supply/demand shifts, macro reuses them inside AD-AS and foreign exchange graphs.

1.1 Scarcity

Watch out: Treating scarcity and shortage as synonyms. Scarcity is the universal, permanent condition of limited resources; a shortage is a temporary gap between quantity demanded and quantity supplied at a specific price.

1.2 Opportunity Cost and the Production Possibilities Curve (PPC)

Watch out: Reading a bowed-out PPC as constant opportunity cost. Concave-to-the-origin means opportunity cost increases as you produce more of a good; only a straight-line PPC has constant opportunity cost.

1.3 Comparative Advantage and Gains from Trade

Watch out: Assigning comparative advantage to whoever produces the most, that is absolute advantage. Comparative advantage always goes to the producer with the lower opportunity cost, so compute the per-unit cost table first.

1.4 Demand

Watch out: Shifting the demand curve when the good's own price changes. Own-price changes move you along the curve (change in quantity demanded); only the non-price determinants shift the curve itself.

1.5 Supply

Watch out: Writing that a higher market price 'increases supply.' A higher price increases quantity supplied along a fixed curve; supply itself increases only when a determinant like input costs or technology shifts the curve right.

1.6 Market Equilibrium, Disequilibrium, and Changes in Equilibrium

Watch out: Giving a definite answer for both price and quantity in a double-shift question. When both curves move, one of the two is indeterminate unless the question states the relative sizes of the shifts.

• •Know what counts in GDP (final goods, produced this year, inside the country) and what does not (transfers, used goods, intermediate goods).
• •Classify unemployment as frictional, structural, or cyclical, the natural rate includes only the first two.
• •Calculate inflation with CPI and convert nominal to real using the deflator or real = nominal ÷ price index × 100.
• •Label the business cycle phases (expansion, peak, contraction/recession, trough) and tie them to output gaps.

2.1 The Circular Flow and GDP

Watch out: Counting transfer payments, used-good sales, or stock purchases in GDP. GDP only counts current production of final goods and services, transfers and financial transactions produce nothing new.

2.2 Limitations of GDP

Watch out: Claiming the country with the higher total GDP has the higher standard of living. Living-standard comparisons need per-capita GDP at minimum, and even that ignores distribution, leisure, and nonmarket production.

2.3 Unemployment

Watch out: Counting discouraged workers as unemployed. They stopped actively searching, so they leave the labor force, which is why the unemployment rate can fall even as the economy gets worse.

2.4 Price Indices and Inflation

Watch out: Reporting the CPI level as the inflation rate. A CPI of 130 does not mean 30% inflation this year, the inflation rate is the percentage CHANGE between two index values, e.g. from 125 to 130 it is 4%.

2.5 Costs of Inflation

Watch out: Reversing the winners: saying lenders gain from unanticipated inflation. Lenders locked into fixed nominal rates get repaid in cheaper dollars, borrowers gain, lenders and savers lose.

2.6 Real v. Nominal GDP

Watch out: Using nominal GDP growth as evidence the economy produced more. Nominal GDP can rise on inflation alone, deflate it first (real = nominal ÷ price index × 100) before making any claim about output.

2.7 Business Cycles

Watch out: Calling any slowdown a recession. If real GDP grows 3% one year and 1% the next, the economy is still expanding, a recession requires real GDP to actually fall.

• •Draw the full AD-AS graph with LRAS at full employment; show recessionary and inflationary gaps.
• •Compute multipliers: spending = 1/MPS, tax = −MPC/MPS; know why the tax multiplier is smaller.
• •Trace fiscal policy: government spending or tax changes → AD shifts → output, price level, unemployment.
• •Explain self-correction through wage adjustment shifting SRAS (see our SRAS vs LRAS guide).

3.1 Aggregate Demand (AD)

Watch out: Explaining AD's downward slope like a single-market demand curve ('people buy substitutes'). At the economy level there is no substitute for all output, you must cite the wealth, interest-rate, or net-export effect.

3.2 Multipliers

Watch out: Using the spending multiplier for a tax change. The tax multiplier is −MPC/MPS, negative and one smaller in absolute value, because part of any tax cut leaks into saving before it is ever spent.

3.3 Short-Run Aggregate Supply (SRAS)

Watch out: Shifting SRAS when the price level changes. The price level moves the economy along the SRAS curve; only cost-side changes, input prices, expectations, productivity, policy, shift the curve itself.

3.4 Long-Run Aggregate Supply (LRAS)

Watch out: Drawing LRAS upward-sloping or shifting it in response to price-level or AD changes. LRAS is vertical at potential output and moves only when resources, capital, or technology change, the same forces that shift the PPC.

3.5 Equilibrium in the Aggregate Demand–Aggregate Supply (AD–AS) Model

Watch out: Marking equilibrium output and full-employment output at the same spot when the question describes a gap. If output is below (or above) potential, current equilibrium must sit visibly left (or right) of LRAS on the horizontal axis.

3.6 Changes in the AD–AS Model in the Short Run

Watch out: Explaining stagflation with an AD shift. AD shifts move output and the price level in the same direction, only a leftward SRAS shift produces the rising-prices-plus-falling-output combination.

3.7 Long-Run Self-Adjustment

Watch out: Showing self-adjustment by shifting AD or LRAS. Self-correction works entirely through nominal wages changing production costs, it is always the SRAS curve that shifts back toward full employment.

3.8 Fiscal Policy

Watch out: Mixing fiscal and monetary tools, writing that the government 'lowers interest rates' or the Fed 'cuts taxes.' Fiscal policy is spending and taxes by Congress; interest rates and the money supply belong to the central bank.

3.9 Automatic Stabilizers

Watch out: Calling a new stimulus bill an automatic stabilizer. Automatic means no new legislation, the effect flows from existing tax brackets and transfer rules. A stimulus package Congress passes is discretionary fiscal policy.

• •Money market vs loanable funds: money market uses the NOMINAL rate and money supply is vertical; loanable funds uses the REAL rate and is driven by saving and borrowing.
• •Trace expansionary monetary policy: Fed buys bonds → money supply right → nominal rate falls → investment rises → AD shifts right.
• •Use the money multiplier (1/reserve ratio) on deposit-expansion questions, and know bond prices move inversely with interest rates.
• •Apply the Fisher equation: real rate ≈ nominal rate − expected inflation.

4.1 Financial Assets

Watch out: Saying bond prices and interest rates rise together. They move INVERSELY: when interest rates rise, previously issued bonds with lower fixed payments lose value.

4.2 Nominal v. Real Interest Rates

Watch out: Flipping the Fisher equation, the real rate is nominal MINUS expected inflation. If a bank charges 6% and expected inflation is 4%, the lender's expected real return is only 2%.

4.3 Definition, Measurement, and Functions of Money

Watch out: Counting credit cards as money. A credit card creates a loan you must repay, it is not a store of value and appears in neither M1 nor M2.

4.4 Banking and the Expansion of the Money Supply

Watch out: Multiplying the entire deposit by the money multiplier. Maximum money creation starts from EXCESS reserves: a $1,000 cash deposit with rr = 10% creates at most $900 × 10 = $9,000 of new money, the original $1,000 was already money.

4.5 The Money Market

Watch out: Labeling the money market's y-axis as the real interest rate, that belongs to the loanable funds market. The money market determines the NOMINAL rate.

4.6 Monetary Policy

Watch out: Reversing open market operations. The Fed BUYS bonds to expand the money supply and lower interest rates, and SELLS bonds to contract it, 'buy big, sell small.'

4.7 The Loanable Funds Market

Watch out: Labeling the loanable funds y-axis 'nominal interest rate.' Loanable funds determines the REAL rate, the nominal rate belongs to the money market.

• •Map AD-AS to the Phillips curve: an AD shift moves you along the SRPC; an SRAS shift moves the SRPC itself.
• •Draw crowding out: deficits raise demand for loanable funds → real rate rises → private investment falls.
• •Know the long-run: money growth raises inflation, not output; the LR Phillips curve is vertical at the natural rate.
• •Tie growth to its sources: more capital (physical and human), more labor, and better technology shift LRAS right.

5.1 Fiscal and Monetary Policy Actions in the Short Run

Watch out: Assuming combined expansionary fiscal and monetary policy must raise interest rates. Fiscal expansion pushes rates up, monetary expansion pushes them down, the interest-rate effect is indeterminate, while output unambiguously rises.

5.2 The Phillips Curve

Watch out: Shifting the SRPC when aggregate demand changes. A demand shift is a movement ALONG the short-run Phillips curve; only supply shocks or changed inflation expectations shift the curve itself.

5.3 Money Growth and Inflation

Watch out: Claiming a money supply increase raises real output in the long run. Money is neutral in the long run, it raises the price level while real GDP returns to potential.

5.4 Government Deficits and the National Debt

Watch out: Using 'deficit' and 'debt' interchangeably. The deficit is a one-year FLOW; the debt is the accumulated STOCK, a smaller deficit still grows the debt.

5.5 Crowding Out

Watch out: Drawing crowding out in the money market. Government borrowing works through the LOANABLE FUNDS market and the real interest rate, the Fed hasn't changed the money supply.

5.6 Economic Growth

Watch out: Calling a recovery from recession 'economic growth.' Returning to potential output is a movement back to the curve; growth is an outward shift OF the PPC (a rightward LRAS shift).

5.7 Public Policy and Economic Growth

Watch out: Treating a demand stimulus as a growth policy. Growth policies raise the economy's capacity and shift LRAS; AD shifts only move output temporarily relative to potential.

• •Draw the FOREX graph: demand and supply for a currency, with the exchange rate on the vertical axis.
• •Trace the chain: higher U.S. interest rates → foreign capital inflows → dollar demand rises → dollar appreciates → U.S. net exports fall.
• •Remember appreciation makes exports more expensive to foreigners; depreciation boosts net exports.
• •Know that the current account and the capital/financial account mirror each other.

6.1 Balance of Payments Accounts

Watch out: Putting foreign purchases of U.S. stocks or bonds in the current account. Asset purchases belong in the capital and financial account; only goods, services, investment income, and transfers go in the current account.

6.2 Exchange Rates

Watch out: Misreading a rise in the dollars-per-euro rate as dollar appreciation. If it takes MORE dollars to buy a euro, the dollar has DEPRECIATED and the euro has appreciated.

6.3 The Foreign Exchange Market

Watch out: Shifting the DEMAND for dollars when Americans buy more imports. Americans supply dollars to obtain foreign currency, that shifts the dollar SUPPLY curve right, depreciating the dollar.

6.4 Effect of Changes in Policies and Economic Conditions on the Foreign Exchange Market

Watch out: Forgetting everything is RELATIVE. A rate hike abroad with U.S. rates unchanged still depreciates the dollar, what matters is the interest-rate differential, not the U.S. level alone.

6.5 Changes in the Foreign Exchange Market and Net Exports

Watch out: Reversing the sign: a WEAKER currency helps net exports. Depreciation makes your goods cheaper abroad, so exports rise, imports fall, and net exports increase.

6.6 Real Interest Rates and International Capital Flows

Watch out: Comparing nominal rates across countries. Capital chases the REAL interest-rate differential, a high nominal rate paired with even higher inflation repels capital rather than attracting it.

Formulas you must know

GDP

GDP = C + I + G + (X − M) where Xn = X − M (net exports)

Real GDP

Real GDP = (Nominal GDP ÷ GDP deflator) × 100

GDP Deflator

GDP deflator = (Nominal GDP ÷ Real GDP) × 100

Inflation Rate

Inflation rate = [(CPI₂ − CPI₁) ÷ CPI₁] × 100

Unemployment Rate

Unemployment rate = (Unemployed ÷ Labor force) × 100 | Labor force = Employed + Unemployed

Spending Multiplier

Spending multiplier = 1 ÷ (1 − MPC) = 1 ÷ MPS | ΔGDP = multiplier × Δspending | Tax multiplier = −MPC ÷ MPS

CPI

CPI = (cost of basket in current year ÷ cost of basket in base year) × 100

Real Interest Rate

Real interest rate ≈ Nominal interest rate − Inflation rate

Money Multiplier

Money multiplier = 1 ÷ required reserve ratio | Δmoney supply = money multiplier × excess reserves

Comparative Advantage

Opportunity cost of 1 unit of Good A = (units of Good B given up) ÷ (units of Good A gained). Lower ratio = comparative advantage.

Tax Multiplier

Tax multiplier = −MPC ÷ (1 − MPC) = −MPC ÷ MPS | ΔGDP = tax multiplier × Δtaxes

MPC & MPS

MPC = ΔC ÷ ΔY | MPS = ΔS ÷ ΔY | MPC + MPS = 1

Labor Force Participation

LFPR = (Labor force ÷ working-age population) × 100 | Labor force = employed + unemployed

Velocity of Money

M × V = P × Q (quantity theory of money), so V = (P × Q) ÷ M = nominal GDP ÷ money supply

Opportunity Cost

Per-unit opportunity cost of good A = units of good B given up ÷ units of good A gained

GDP per Capita

GDP per capita = Real GDP ÷ Population

Economic Growth Rate

Growth rate (%) = ((Real GDP in year 2 − Real GDP in year 1) ÷ Real GDP in year 1) × 100

Percentage Change

Percentage change = ((New value − Old value) ÷ Old value) × 100

Balanced Budget Multiplier

Balanced budget multiplier = spending multiplier + tax multiplier = 1 ÷ (1 − MPC) + (−MPC ÷ (1 − MPC)) = (1 − MPC) ÷ (1 − MPC) = 1 | ΔGDP = 1 × Δspending (when Δspending = Δtaxes)

Present Value

PV = FV ÷ (1 + r)ⁿ where r = interest (discount) rate as a decimal, n = number of years

Graphs you must be able to draw

Drawing points are the easiest points to lose. Practice each of these until you can draw it from memory, fully labeled.

Then test yourself: draw the graph for a graded check or watch a shock move through it step by step.