AP Macroeconomics — Cheatsheet
Formulas, exam-day tips, and key terms on one page.
Formulas & relationships
The rational decision rule
Do one more unit while MB ≥ MC; stop where MB = MC
Marginal benefit is the extra benefit from one more unit; marginal cost is the opportunity cost of that unit. Net benefit is maximized where the two are equal.
Opportunity cost along a straight-line PPC
Opportunity cost of 1 unit of X = (units of Y given up) / (units of X gained)
Read the trade-off directly off the axes. On a bowed PPC this ratio grows as you specialize; on a straight-line PPC it stays constant.
Opportunity cost from an output table
OC of 1 unit of Good A = (units of Good B produced) / (units of Good A produced)
Compute this ratio for each producer. Lower opportunity cost = comparative advantage. Remember "Other Over Own" when using output data.
GDP — expenditure approach
GDP = C + I + G + Xn (where Xn = exports − imports)
The four spending categories. Transfer payments and purely financial transactions are excluded because no new good or service is produced.
Real vs. nominal GDP
Real GDP = (Nominal GDP / GDP deflator) × 100
Nominal GDP uses current-year prices; real GDP holds prices constant at a base year to strip out inflation. Only real GDP reflects a true change in output.
Unemployment rate & natural rate
Unemployment rate = (Unemployed / Labor force) × 100 · Natural rate = frictional % + structural %
Labor force = employed + unemployed. The natural rate excludes cyclical unemployment, which is zero at full employment.
Inflation rate from the CPI
Inflation rate = [(CPI_new − CPI_old) / CPI_old] × 100
A simple percentage change in the index. The same formula finds the rate between any two years once you know the CPI for each.
The components of aggregate demand
AD ≡ C + I + G + Xn
A rise in any component shifts AD right; a fall shifts AD left. This mirrors the GDP expenditure identity, now viewed as a demand relationship at each price level.
The multipliers
Spending multiplier = 1 / (1 − MPC) = 1 / MPS · Tax multiplier = −MPC / (1 − MPC)
MPC + MPS = 1. Total ΔGDP = (multiplier) × (initial change). The tax multiplier is always smaller in absolute value than the spending multiplier.
Spending needed to close a gap
Required ΔG = Output gap / Spending multiplier
Using taxes instead: Required ΔT = − Output gap / Tax multiplier. Because the tax multiplier is smaller, the required tax change is larger than the required spending change.
Real vs. nominal interest rate (Fisher)
Real interest rate ≈ Nominal interest rate − Expected inflation rate
The money market sets the nominal rate; borrowers and lenders care about the real rate. Rearranged: nominal rate = real rate + expected inflation.
Money multiplier & maximum money creation
Money multiplier = 1 / RR · Max Δ money supply = Excess reserves × (1 / RR)
RR is the required reserve ratio as a decimal. From a new deposit, excess reserves = deposit × (1 − RR); the required portion is deposit × RR.
The monetary transmission chain (expansionary)
Buy bonds → MS ↑ → interest rate ↓ → investment ↑ → AD ↑ → real GDP ↑, unemployment ↓
Reverse every arrow for contractionary policy (sell bonds → MS ↓ → interest rate ↑ → investment ↓ → AD ↓).
Phillips curve ↔ AD–AS correspondence
AD ↑ ⇒ move up-left along SRPC (inflation ↑, unemployment ↓) · negative supply shock ⇒ SRPC shifts right
Demand changes are movements along the SRPC; supply shocks shift it. The LRPC sits vertically at the natural rate of unemployment.
Deficit, debt, and crowding out
Debt(this year) = Debt(last year) + Deficit(this year) · Gov’t borrowing ↑ ⇒ real interest rate ↑ ⇒ private investment ↓
The deficit is a yearly flow that adds to the debt stock. In loanable funds, government borrowing raises demand for funds, lifting the real rate and crowding out investment.
Growth in real GDP
Growth rate of real GDP = [(Real GDP_new − Real GDP_old) / Real GDP_old] × 100
Sustained positive growth in *real* GDP (and in real GDP per capita, which divides by population) reflects a rising standard of living.
Balance of payments identity
Current account + Financial (capital) account ≈ 0
A current account deficit is matched by a financial account surplus (net capital inflow), and vice versa. The two accounts offset.
Exchange rate movements
Increase in demand for a currency ⇒ appreciation · Increase in supply of a currency ⇒ depreciation
One currency’s appreciation is the other’s depreciation. Appreciation raises export prices and lowers import prices; depreciation does the reverse.
The interest rate → exchange rate → net exports chain
Domestic real interest rate ↑ → capital inflow → currency appreciates → net exports ↓ → AD ↓
Reverse every arrow when the domestic interest rate falls: capital outflow, depreciation, higher net exports, AD up.
On the exam
- When a free-response question asks for the "opportunity cost" of a policy or choice, name the specific forgone alternative and, where possible, quantify it. Vague answers like "you lose money" do not earn the point — identify *what* is given up.
- Label PPC diagrams precisely: axes for the two goods, a point *on* the curve for efficiency, a point *inside* for unemployment, and a *shifted* curve for growth. Graders award points for correct labeling and the correct type of change (movement vs. shift).
- On comparative-advantage problems, always compute opportunity costs first, then remember the shortcut for output tables: "Other over Own." Mixing up output and input data is the most common error — with **input** data (time or resources per unit) the ratio flips to "Own over Other."
- When a question reports rising nominal GDP, always check the price level before concluding output grew. If prices rose just as fast, real GDP is unchanged. "Growth" on the AP exam means an increase in **real** GDP.
- Watch the labor-force denominator. Adding or removing people who are *not actively seeking work* changes the unemployment rate without any change in the number of jobs. The exam loves discouraged-worker and new-entrant scenarios.
- Link the indicators together: at a peak, expect low unemployment and rising inflation (inflationary gap); in a recession, expect high cyclical unemployment and falling prices or disinflation (recessionary gap). Free-response questions often ask you to connect the business-cycle phase to both unemployment and inflation.
- Always draw the full AD–AS diagram with **three** curves (AD, SRAS, LRAS) and mark potential output. Free-response graders check that you correctly identify the gap relative to LRAS and shift the *correct* curve in the *correct* direction.
- Memorize both multiplier formulas and always compute MPS = 1 − MPC first. A frequent free-response task gives you the MPC and asks for the spending needed to close a specific output gap: divide the gap by the spending multiplier.
- Distinguish **automatic** stabilizers (built-in, no legislation — progressive taxes, unemployment benefits) from **discretionary** fiscal policy (new laws changing spending or tax rates). Free-response prompts often reward you for correctly classifying which one is at work.
- Draw the money market with a **vertical money supply** and a **downward-sloping money demand**, and label the axes "nominal interest rate" and "quantity of money." A common exam task is to link a money-supply change to the interest rate and then to investment and AD.
- On money-creation problems, separate the initial deposit from newly created money, and always start from **excess** reserves. If a question gives the reserve requirement as a percentage, convert to a decimal before taking the reciprocal.
- On free-response questions, spell out **every link** in the transmission chain — money supply, interest rate, investment, AD, and real GDP — in the correct direction. Skipping the interest-rate or investment step usually costs a point even if your final answer is right.
- Pair the Phillips curve with AD–AS in your answers. A rightward AD shift = up-left move along the SRPC; a leftward SRAS shift (supply shock) = an outward shift of the SRPC. Consistency between the two models earns full credit.
- To show crowding out on the exam, draw the **loanable funds market**: government borrowing shifts **demand right**, the **real interest rate rises**, and **investment falls**. Then connect lower investment to slower long-run growth via a smaller future capital stock.
- When a question asks about **long-run growth**, reach for capacity-expanding causes — capital, labor, human capital, technology — and show them as **outward shifts of LRAS and the PPC**. Do not answer a growth question with a short-run AD story.
- Remember the offset: **current account deficit ⇔ financial account surplus**. If an exam prompt says a nation imports far more than it exports, expect a matching inflow of foreign capital financing that gap.
- On forex diagrams, label the axis carefully: the price is the exchange rate (foreign currency per unit of the currency shown). Shift the correct curve — **demand** for capital-inflow and export stories, **supply** for capital-outflow and import stories — and state the effect on net exports.
- Free-response questions increasingly chain the three markets: money market → interest rate → forex → net exports → AD. Practice tracing a single policy all the way through, keeping every arrow’s direction consistent — that full linkage is where the points are.
How to get a 5
- Label BOTH axes and all curves on every graph — "correctly labeled" is a literal rubric requirement; unlabeled axes forfeit the point.
- State the direction of change AND the causal chain (e.g., "MS right → rate down → investment up → AD right → real GDP up") — graders reward the chain.
- Keep the two markets straight: money market uses the NOMINAL rate with a vertical MS set by the central bank; loanable funds uses the REAL rate from saving/borrowing.
- Watch the tax multiplier: it's negative and smaller in magnitude than the spending multiplier because part of a tax cut is saved.
Key terms
Components of M1 — Currency in circulation, checkable/demand deposits, and traveler's checks (the most liquid money).
Money multiplier — 1 / (reserve requirement). rr = 0.20 → multiplier = 5.
What shifts AD? — Changes in C, I, G, or Xn (consumption, investment, government spending, net exports).
Crowding-out effect — Government borrowing raises the real interest rate, reducing private investment.
GDP expenditure formula — GDP = C + I + G + Xn (Xn = exports − imports).
Fisher equation — Real ≈ nominal − expected inflation; nominal = real + expected inflation.
Contractionary monetary tools — Sell bonds, raise the discount rate, raise reserve requirement → MS falls, rate rises.
Spending multiplier — 1 / (1 − MPC) = 1 / MPS.
Tax multiplier — −MPC / (1 − MPC); smaller in magnitude than the spending multiplier.
Long-run Phillips curve — Vertical at the natural rate of unemployment; no long-run inflation–unemployment tradeoff.
Why AD slopes downward — Wealth effect, interest-rate effect, and exchange-rate (net export) effect.
Larger budget deficit in loanable funds — Increases demand for loanable funds → real interest rate rises.