AP Macroeconomics Review Kit
A unit-by-unit review of every AP Macro topic — key concepts, must-know formulas, the traps graders see most often, and links to deeper explanations. Written by a PhD economist. Free, and no email required to read.
Exam structure at a glance
Section I
60 multiple-choice questions — 70 minutes — 66.67% of score
Section II
3 free-response questions (1 long, 2 short) — 60 minutes — 33.33% of score
Table of contents
- Unit 1 — Basic Economic Concepts(5–10% of the exam)
- Unit 2 — Economic Indicators and the Business Cycle(12–17% of the exam)
- Unit 3 — National Income and Price Determination(17–27% of the exam)
- Unit 4 — Financial Sector(18–23% of the exam)
- Unit 5 — Long-Run Consequences of Stabilization Policies(20–30% of the exam)
- Unit 6 — Open Economy: International Trade and Finance(10–13% of the exam)
Unit 1 — Basic Economic Concepts
5–10% of the examKey concepts
- •Scarcity, opportunity cost, trade-offs
- •Production Possibilities Curve (PPC/PPF)
- •Comparative vs. absolute advantage; gains from trade
- •Marginal analysis; the demand and supply model macro reuses
- •Positive vs. normative statements
Must-know formulas
- Opportunity cost of a good = output of the other good given up to make it
- Comparative advantage: lower opportunity cost (not lower absolute cost)
Common traps
- !Confusing absolute advantage (more output per input) with comparative advantage (lower opportunity cost).
- !Forgetting that macro still rests on supply and demand — the money market, loanable funds, and foreign exchange are all just supply-and-demand graphs.
- !Treating points inside the PPC as efficient. Inside is inefficient (idle resources), on the curve is efficient, outside is unattainable without growth.
Unit 2 — Economic Indicators and the Business Cycle
12–17% of the examKey concepts
- •GDP and the expenditure approach; what GDP excludes
- •Nominal vs. real GDP; the GDP deflator
- •Unemployment rate, labor-force participation, the natural rate
- •Frictional, structural, and cyclical unemployment
- •Inflation, the CPI, and real vs. nominal values
- •The business cycle; recessionary and inflationary output gaps
Must-know formulas
- Real GDP
- Unemployment rate
- Inflation rate
- Real interest rate nominal rate $-$ inflation rate
Common traps
- !Counting transfer payments, used goods, intermediate goods, or pure financial transactions in GDP. GDP counts only final goods and services produced this year.
- !Calling discouraged workers 'unemployed'. They have left the labor force, so they are in neither the numerator nor the denominator of the unemployment rate.
- !Confusing the CPI (fixed basket, includes imports) with the GDP deflator (current output, domestic only).
- !Comparing nominal values across years as if they were real. Always deflate before comparing.
Unit 3 — National Income and Price Determination
17–27% of the examKey concepts
- •Aggregate demand: why it slopes down (wealth, interest-rate, exchange-rate effects)
- •Shifters of AD: changes in C, I, G, and NX
- •Short-run aggregate supply (SRAS) and sticky wages; long-run AS vertical at potential
- •Short-run equilibrium; recessionary and inflationary gaps
- •The spending and tax multipliers; MPC and MPS
- •Expansionary vs. contractionary fiscal policy; automatic stabilizers
Must-know formulas
- Spending multiplier
- Tax multiplier
Common traps
- !Using the spending multiplier when the question changes taxes. The tax multiplier is smaller in magnitude and has the opposite sign.
- !Confusing a shift of AD with a movement along it. Only the price level moving causes a movement; everything else shifts the curve.
- !Forgetting that the balanced-budget multiplier is 1 — equal increases in spending and taxes still raise real GDP.
- !Drawing the long-run adjustment backwards. A recessionary gap closes when SRAS shifts right (wages fall); an inflationary gap closes when SRAS shifts left.
Deeper explanations
Unit 4 — Financial Sector
18–23% of the examKey concepts
- •Functions of money; M1 and M2
- •Fractional-reserve banking and the money multiplier
- •The money market: money demand, vertical money supply, the nominal interest rate
- •The loanable funds market and the real interest rate
- •Central bank tools: open market operations, the reserve requirement, the discount rate, interest on reserves
- •The quantity theory of money
Must-know formulas
- Money multiplier
- Max change in money supply $=\times$ money multiplier
- Equation of exchange:
Common traps
- !Mixing up the money market and the loanable funds market. The money market sets the nominal rate; loanable funds sets the real rate.
- !Getting the direction of open market operations wrong. To expand, the central bank buys bonds — reserves rise, the money supply rises, the nominal rate falls.
- !Applying the money multiplier to total reserves instead of excess reserves.
- !Forgetting that bond prices and interest rates move in opposite directions.
Deeper explanations
Unit 5 — Long-Run Consequences of Stabilization Policies
20–30% of the examKey concepts
- •Fiscal and monetary policy in the AD–AS model, short run vs. long run
- •The Phillips curve: short-run trade-off, long-run vertical at the natural rate
- •Crowding out of private investment
- •Money growth and inflation in the long run; the neutrality of money
- •Long-run economic growth as a rightward shift of LRAS
- •Government deficits and the national debt
Must-know formulas
- Real interest rate $=-$ expected inflation
- Long run:
Common traps
- !Confusing a movement along the short-run Phillips curve with a shift of it. Higher expected inflation shifts the whole SRPC up; the long-run Phillips curve stays vertical at the natural rate.
- !Missing crowding out. Deficit-financed spending raises the demand for loanable funds, pushes up the real interest rate, and reduces private investment.
- !Treating a short-run AD expansion as 'growth'. True growth is a rightward shift of LRAS, not a temporary boom.
- !Forgetting that money is neutral only in the long run — in the short run, monetary policy moves real output.
Deeper explanations
Unit 6 — Open Economy: International Trade and Finance
10–13% of the examKey concepts
- •Balance of payments: the current account and the financial (capital) account
- •The foreign exchange market; currency appreciation and depreciation
- •How interest rates drive capital flows and exchange rates
- •The real exchange rate and net exports
- •The link between the loanable funds market and the foreign exchange market
Must-know formulas
- Current account $+= 0$ (they offset)
- A higher domestic real interest rate capital inflow currency appreciates
Common traps
- !Reversing appreciation and depreciation. A stronger currency makes exports more expensive abroad, so net exports fall.
- !Mislabeling the foreign exchange graph. Be clear about which currency is on the axis and who is demanding vs. supplying it.
- !Forgetting that a current account deficit is financed by a financial account surplus — foreigners are buying domestic assets.
- !Ignoring the loanable-funds link: expansionary fiscal policy that raises the real rate also tends to appreciate the currency and shrink net exports.
Last-week study plan
- 7 days out —Skim every unit above. Circle any concept where you can't immediately produce the definition or graph from memory.
- 5 days out — Re-draw the core graphs from scratch on paper: AD–AS with both gaps, the money market, loanable funds, the Phillips curve (short and long run), and the foreign exchange market. If any are fuzzy, open the matching lesson.
- 3 days out — Drill FRQs. Most FRQ points come from correctly labeling graphs and showing the right causal chain — for example, rate cut → investment up → AD right → real GDP up, price level up.
- 1 day out —Light review only. Sleep, hydrate, and re-read the "Common traps" blocks above.
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