The purpose of an AP course in macroeconomics is to give students a thorough understanding of the principles of economics that apply to an economic system as a whole. Such a course places particular emphasis on the study of national income and price-level determination, and also develops students’ familiarity with economic performance measures, the financial sector, stabilization policies, economic growth, and international economics.
Basic Economic Concepts
This course will introduce students to fundamental economic concepts such as scarcity and opportunity costs. Students understand the distinction between absolute and comparative advantage and apply the principle of comparative advantage to determine the basis on which mutually advantageous trade can take place between individuals and/or countries and to identify comparative advantage from differences in opportunity costs. Other basic concepts explored include the functions performed by an economic system and the way the tools of supply and demand are used to analyze the workings of a free-market economy. The course will introduce the concept of the business cycle to give an overview of economic fluctuations and to highlight the dynamics of unemployment, inflation, and economic growth.
Economic Indicators and the Business Cycle
A model of the circular flow of income and products that contain the four sectors: households, businesses, government and international, will be introduced. Key measures of economic performance: gross domestic product (GDP), unemployment, and inflation, will be examined. In studying the concept of GDP students will learn how it is measured and have a clear understanding of its components. Students will be able to distinguish between real and nominal GDP.The nature and causes of unemployment will be examined as well as the costs of unemployment, and how the employment rate is measured, including the criticisms associated with the measurement of the unemployment rate. Natural unemployment and the factors that affect it will also be studied. Inflation will also be studies as well as the costs of inflation, main price indices, such as the consumer price index (CPI) and the gross domestic product deflator. Students will learn how these indices are constructed and used to convert nominal values into real values, as well as to convert dollar values in the past to dollar values in the present. Difference between the two indices will be highlighted as well as problems associated with each measure.
National Income and Price Determination
Aggregate supply (AS) and aggregate demand (AD) will be introduced to explain the determination of equilibrium national output and general price level, as well as to analyze and evaluate the effects of public policy. The aggregate demand and supply model will also be studied so that students have a full understanding of the mechanics.The analysis of AS and AD will include general discussion of the nature and shape of the AD and AS curves and the factors that affect them. The four components of AD will be studied: consumption, investment, government spending, and net exports. The AD curve will be studied to understand how changes in the determinants affect the curve. The spending multiplier concept and its impact on AD, and how crowding out lessens this impact, will be demonstrated as well. Definition and determinants of AS will be presented, the different views about the shape of the AS curve in the short run and in the long run, and the importance of the shape and the changes of AD on the economy will also be presented. Students should be able to analyze, draw and use the AD and AS model to determine equilibrium income and price level and to analyze the impact of fluctuations on the economy’s output and price level, both in the short run and in the long run.
Financial Sector
Students will be introduced to the definition of money and other financial assets such as bonds and stocks, the time value of money, measures of the money supply, fractional reserve banking, and the Federal Reserve System. Multiple-deposit expansion and money creation using T-accounts and the use of the money multiplier will be studied. Students will study the determinants of the money demand, as well as how the equilibrium in the money market determines the equilibrium interest rate, how the investment demand curve provides the link between changes in the interest rate and changes in AD, and how changes in AD affect real output and price level. Students will study the financial markets and the working of the loan able funds market in determining the real interest rate. Students should develop a clear understanding of the differences between the money market and the loanable funds market. Having an understanding of the financial markets, students should identify and examine the tools of central bank policy and their impact on the money supply and interest rate. Students should understand the difference between real and nominal interest rate, and the effect of monetary policy on real output growth and inflation.
Long-Run Consequences of Stabilization Policies
Public policy affects the economy’s output, price level, and level of employment, both in the short run and in the long run. Students will learn to analyze the impacts of fiscal and monetary policies on AD and on AS, as well as on the economy’s output and price level both in the short run and in the long run. It is also important that students understand how an economy responds to a short-run shock and adjusts to long-run equilibrium in the absence of any public policy actions.With both monetary and fiscal policies now incorporated in the analysis of AD and AS, an understanding of the interactions between the two is essential. Students will examine the economic effects of government budget deficits, including crowding out; consider the issues involved in determining the burden of the national debt; and explore the relationships between deficits, interest rates, and inflation. The course should distinguish between the short-run and long-run impacts of monetary and fiscal policies and trace the short-run and long-run effects of supply shocks. Short-run and long-run Phillips curves will be introduced to help students gain an understanding of the inflation/unemployment trade-off and how this trade-off may differ in the short and long run. The course will introduce the framework and examine how long-run economic growth occurs. Students should understand the role of productivity in raising real output and the standard of living, and the role of investment in human capital formation and physical capital accumulation, research and development, and technical progress in raising productivity. Students should examine how public policies influence the long-run economic growth of an economy.
Open Economy: International Trade and Finance
An open economy interacts with the rest of the world both through the goods market and the financial markets, and it is important to understand how a country’s transactions with the rest of the world are recorded in the balance of payments accounts. Students should understand the meaning of trade balance, and the implications for the foreign exchange market.The course will also introduce the foreign exchange market and examine how the equilibrium exchange rate is determined. Students should understand how market forces and public policy affect currency demand and currency supply in the foreign exchange markets and lead to a currency to appreciate or depreciation. How capital flows affect exchange rates, and how appreciation or depreciation of a currency affects a country’s net exports will be studied. Students should understand how changes in net exports and capital flows affect financial and goods markets. Trade restrictions will be studied, as well as how the international payments system hinders or facilitates trade, how domestic policy actions affect international finance and trade, and how international exchange rates affect domestic policy goals.