AP Macroeconomics Exam Guide | AP Macroeconomics Class Notes | Fiveable (2025)

Key Terms to Review (20)

Aggregate demand: Aggregate demand is the total quantity of goods and services demanded across all levels of the economy at a given overall price level and in a given time period. It reflects the total spending on domestic goods and services in an economy, encompassing consumption, investment, government spending, and net exports. Changes in aggregate demand can influence economic growth, inflation, and employment levels.

Aggregate Demand-Aggregate Supply (AD-AS) Model: The Aggregate Demand-Aggregate Supply (AD-AS) Model is a macroeconomic framework that illustrates the relationship between the total demand for goods and services in an economy (aggregate demand) and the total supply of goods and services available (aggregate supply). This model helps analyze economic fluctuations, inflation, and unemployment by showing how changes in these components can impact overall economic activity.

Balance of Payments Accounts: The Balance of Payments Accounts is a comprehensive record of a country's economic transactions with the rest of the world over a specific period. It provides vital insights into how much money flows in and out of a country, categorized into the current account, capital account, and financial account, reflecting trade balance, investment income, and capital transfers. This data is crucial for understanding a nation’s economic standing and its interactions with global markets.

Crowding Out Effect: The crowding out effect refers to the phenomenon where increased government spending leads to a reduction in private sector investment. This occurs because government borrowing can raise interest rates, making it more expensive for individuals and businesses to borrow money, ultimately decreasing private investment and consumption.

Deficits and National Debt: Deficits refer to the shortfall when a government's expenditures exceed its revenues in a given fiscal year, leading to the need for borrowing. When a government runs a deficit, it increases its national debt, which is the total amount of money that a government owes to creditors at any point in time. This relationship between deficits and national debt is crucial in understanding fiscal policy and economic stability.

Economic Growth: Economic growth refers to the increase in the production of goods and services in an economy over time, usually measured by the rise in real Gross Domestic Product (GDP). It is an essential indicator of economic health, indicating improvements in living standards and overall wealth within a society.

Exchange Rates: Exchange rates are the prices at which one currency can be exchanged for another, determining the relative value of currencies in the foreign exchange market. They play a crucial role in international trade and finance, influencing how much goods and services cost when bought or sold across borders. Exchange rates can fluctuate due to various factors, including economic conditions, interest rates, and political stability, impacting both consumers and businesses engaged in global transactions.

Fiscal Policy: Fiscal policy refers to the government's use of spending and taxation to influence the economy. By adjusting its expenditure and revenue collection, the government aims to manage economic growth, stabilize prices, and reduce unemployment. This policy plays a key role in the context of short-run economic fluctuations and is vital for understanding the dynamics of aggregate demand and supply.

Foreign exchange market: The foreign exchange market is a global decentralized platform where currencies are traded, determining exchange rates for different currencies. This market plays a crucial role in international trade and finance, as it allows for the conversion of one currency into another, influencing global economic dynamics. Changes in the foreign exchange market can affect net exports, impacting a nation's trade balance and overall economic performance.

Free Response Questions (FRQs): Free Response Questions (FRQs) are open-ended questions that require students to demonstrate their understanding of economic concepts and apply their knowledge in a written format. They are designed to assess critical thinking and analytical skills by requiring students to explain, analyze, and evaluate economic situations, theories, or policies using appropriate economic terminology and reasoning.

Loanable Funds Market: The Loanable Funds Market is a theoretical framework that illustrates how the supply and demand for funds interact to determine the real interest rate in an economy. It shows how savers supply funds for borrowing by consumers and businesses, while borrowers demand these funds to finance their investments, leading to equilibrium in interest rates. This market plays a crucial role in understanding how financial markets function, including the impact of international capital flows, public policy decisions, and the distinction between nominal and real interest rates.

Long-Run Aggregate Supply (LRAS): Long-Run Aggregate Supply (LRAS) represents the total output of goods and services that an economy can produce when operating at full employment, with all resources being used efficiently. It is depicted as a vertical line on the aggregate supply and demand graph, indicating that in the long run, the economy's output is determined by factors such as technology, resources, and productivity rather than price levels.

Monetary Policy: Monetary policy refers to the actions taken by a country's central bank to manage the money supply and interest rates to achieve macroeconomic goals such as controlling inflation, managing employment levels, and stabilizing the currency. It influences economic activity by affecting how much money is available for businesses and consumers to spend and invest, which can also impact international trade and capital flows.

Money Growth and Inflation: Money growth refers to the increase in the amount of money circulating in an economy, while inflation is the rate at which the general level of prices for goods and services rises, eroding purchasing power. The relationship between money growth and inflation is fundamental in understanding how monetary policy influences economic conditions, as increasing the money supply can lead to higher inflation if it outpaces economic growth.

Money Market: The money market is a sector of the financial market where short-term borrowing and lending of funds occurs, typically involving instruments with maturities of one year or less. It plays a crucial role in providing liquidity to the economy by allowing individuals, businesses, and governments to manage their short-term funding needs. The money market also influences interest rates and overall economic stability by facilitating the flow of funds between savers and borrowers.

Money Supply: Money supply refers to the total amount of monetary assets available in an economy at a specific time, which includes cash, coins, and balances held in checking and savings accounts. It plays a crucial role in influencing economic activity, affecting inflation rates, interest rates, and overall financial stability.

Multiple Choice: Multiple choice refers to a question format in which respondents are presented with several answer options and must select the correct one. This format is widely used in assessments, allowing for quick evaluation and clear grading criteria. It’s particularly effective in measuring knowledge on specific topics, as well as in gauging comprehension and recall of key concepts.

Nominal vs. Real Interest Rates: Nominal interest rates refer to the stated interest rates on loans and investments without adjusting for inflation, while real interest rates are adjusted for the effects of inflation, reflecting the true purchasing power of money. Understanding the difference between these two types of interest rates is crucial for evaluating financial decisions and economic conditions, as it helps in assessing the cost of borrowing and the returns on investments in a way that accounts for changes in price levels over time.

Phillips Curve: The Phillips Curve is an economic concept that illustrates the inverse relationship between inflation and unemployment in an economy. This curve suggests that when unemployment is low, inflation tends to be high, and vice versa, creating a trade-off that policymakers must navigate. Understanding this dynamic is essential for grasping how monetary policy can influence economic stability and growth.

Short-run Aggregate Supply (SRAS): Short-run Aggregate Supply (SRAS) refers to the total quantity of goods and services that producers in an economy are willing and able to supply at a given overall price level in the short run. In the short run, some prices are sticky, meaning they do not adjust immediately to changes in economic conditions, which can lead to a positive relationship between the price level and the quantity of output supplied. This concept plays a crucial role in understanding inflation, unemployment, and the effects of fiscal policy.