AP® Macroeconomics

Graphs and formulas you must know

The exam gives you no formula sheet. These are the calculations and the graphs it expects you to know, in our own words: what each means, when to use it, and the trap that costs points. The ones students most often get wrong are flagged "Easy to forget".

Easy to forget

These 10 formulas and 4 graphs cost the most points every year. Each is flagged below.

Opportunity cost per unit, read off a PPC or an output table. Comparative advantage goes to the lower opportunity cost, not the larger output (that is absolute advantage).
The inflation rate: the percent change in a price index. Divide by the old index; a fall in inflation (disinflation) is not deflation.
A real value (real GDP, a real wage). Use the index of the same year as the nominal value; divide, never multiply.
The unemployment rate. The labor force is employed plus unemployed, not the whole adult population.
Cyclical unemployment. Positive in a recessionary gap, negative in an inflationary gap; at full employment it is 0, not the natural rate.
The tax multiplier (negative: a tax rise lowers output). Its size is always one less than the spending multiplier, and a tax cut raises output.
The change in spending that closes a gap. Divide, do not multiply; decide the direction first.
The most the banking system can add to the money supply. Multiply excess reserves, not total deposits or total reserves.
The real interest rate: the nominal rate minus expected inflation. Unexpected inflation lowers the real rate a lender earns; i = r + expected inflation.
An exchange rate read the other way round. In the market for a currency, its price is in units of the other currency per unit of it.
Money market. The nominal interest rate, and a vertical money supply.
Market for bank reserves (ample reserves). With ample reserves the policy rate moves with the administered rate; reserve supply stays put.
Loanable funds market. The real interest rate; government borrowing shifts demand for loanable funds right.
Foreign exchange market. The price of a currency is the other currency per unit of it (dollars per euro in the market for euros).

Choices and trade

Formula and a worked line	What it is and when to use it	The trap	Learn it in
Easy to forget $\text{opportunity cost of 1 unit of X}$ $= \frac{\text{units of Y given up}}{\text{units of X gained}}$ Worked: $\frac{20 \text{ tons}}{10 \text{ tractors}}$ $= 2\,\text{ tons per tractor}$	Opportunity cost per unit, read off a PPC or an output table. Comparative advantage and moving along a PPC.	Comparative advantage goes to the lower opportunity cost, not the larger output (that is absolute advantage).	Unit 1 Comparative Advantage and Gains from TradePractice it: PPC and trade

Output and prices

Formula and a worked line	What it is and when to use it	The trap	Learn it in
$\text{GDP}$ $= C + I + G + (X - M)$ Worked: $500 + 150 + 200 + (60 - 80)$ $= 830$	GDP by the expenditure approach. Adding up spending on final goods and services.	Imports are subtracted; transfers and used goods are left out.	Unit 2 The Circular Flow and GDPPractice it: Indicators lab
$\text{net exports} = X - M$ Worked: $60 - 80 = -20$	Net exports: exports minus imports. The foreign part of GDP and of aggregate demand.	A negative value (a trade deficit) lowers GDP; it is not a budget deficit.	Unit 2 The Circular Flow and GDPPractice it: Indicators lab
$\text{GDP per capita}$ $= \frac{\text{GDP}}{\text{population}}$ Worked: $\frac{900}{30} = 30$	Output per person. Comparing living standards across countries or years.	If population grows faster than GDP, GDP per capita falls.	Unit 2 Limitations of GDPPractice it: Indicators lab
$\text{CPI}$ $= \frac{\text{basket cost now}}{\text{basket cost in the base year}} \times 100$ Worked: $\frac{330}{300} \times 100 = 110$	The consumer price index. Comparing the cost of the same basket across years.	The base year is always 100; divide by the base year, not the other way round.	Unit 2 Price Indices and InflationPractice it: Indicators lab
Easy to forget $\text{inflation rate}$ $= \frac{\text{new index} - \text{old index}}{\text{old index}} \times 100$ Worked: $\frac{110 - 100}{100} \times 100$ $= 10\,\%$	The inflation rate: the percent change in a price index. From two years of CPI or the GDP deflator.	Divide by the old index; a fall in inflation (disinflation) is not deflation.	Unit 2 Price Indices and InflationPractice it: Indicators lab
$\text{GDP deflator}$ $= \frac{\text{nominal GDP}}{\text{real GDP}} \times 100$ Worked: $\frac{1200}{1000} \times 100 = 120$	The GDP deflator. Turning nominal GDP into real GDP, or the reverse.	Real GDP = nominal / deflator x 100: students often multiply instead.	Unit 2 Real v. Nominal GDPPractice it: Indicators lab
Easy to forget $\text{real value}$ $= \frac{\text{nominal value}}{\text{price index}} \times 100$ Worked: $\frac{1200}{120} \times 100 = 1{,}000$	A real value (real GDP, a real wage). Removing the effect of prices.	Use the index of the same year as the nominal value; divide, never multiply.	Unit 2 Real v. Nominal GDPPractice it: Indicators lab
$\text{growth rate of real GDP}$ $= \frac{\text{real GDP this year} - \text{real GDP last year}}{\text{real GDP last year}} \times 100$ Worked: $\frac{1050 - 1000}{1000} \times 100$ $= 5\,\%$	The growth rate of real GDP. How fast output grows from one year to the next.	Use real GDP; growth in nominal GDP mixes output with price changes.	Unit 2 Real v. Nominal GDPPractice it: Indicators lab

Unemployment

Formula and a worked line	What it is and when to use it	The trap	Learn it in
$\text{labor force}$ $= \text{employed}$ $+ \text{unemployed}$ Worked: $190 + 10 = 200$	The labor force. The denominator of the unemployment rate.	People not looking for work (retirees, discouraged workers) are not in it.	Unit 2 UnemploymentPractice it: Indicators lab
Easy to forget $\text{unemployment rate}$ $= \frac{\text{unemployed}}{\text{labor force}} \times 100$ Worked: $\frac{10}{200} \times 100 = 5\,\%$	The unemployment rate. From counts of employed and unemployed people.	The labor force is employed plus unemployed, not the whole adult population.	Unit 2 UnemploymentPractice it: Indicators lab
$\text{participation rate}$ $= \frac{\text{labor force}}{\text{adult population}} \times 100$ Worked: $\frac{200}{320} \times 100 = 62.5\,\%$	The labor force participation rate. How much of the adult population works or looks for work.	Discouraged workers leave the labor force: the unemployment rate falls though no one found a job.	Unit 2 UnemploymentPractice it: Indicators lab
$\text{natural rate}$ $= \text{frictional}$ $+ \text{structural}$ Worked: $2\% + 3\% = 5\,\%$	The natural rate of unemployment. Unemployment at full employment.	Cyclical unemployment is not in it.	Unit 2 UnemploymentPractice it: Indicators lab
Easy to forget $\text{cyclical rate}$ $= \text{actual rate} - \text{natural rate}$ Worked: $7\% - 5\% = 2\,\%$	Cyclical unemployment. Reading how far the economy is from full employment.	Positive in a recessionary gap, negative in an inflationary gap; at full employment it is 0, not the natural rate.	Unit 2 UnemploymentPractice it: Indicators lab

Multipliers

Formula and a worked line	What it is and when to use it	The trap	Learn it in
$\text{MPS} = 1 - \text{MPC}$ Worked: $1 - 0.8 = 0.2$	The marginal propensity to save. Every multiplier starts from it.	MPC + MPS = 1, so with MPC 0.8 the MPS is 0.2.	Unit 3 MultipliersPractice it: Multiplier lab
$\text{spending multiplier}$ $= \frac{1}{1 - \text{MPC}}$ $= \frac{1}{\text{MPS}}$ Worked: $\frac{1}{1 - 0.8} = 5$	The spending (expenditure) multiplier. How much real GDP changes per dollar of new spending.	With MPC 0.8 the multiplier is 5, not 1.25.	Unit 3 MultipliersPractice it: Multiplier lab
Easy to forget $\text{tax multiplier}$ $= \frac{-\text{MPC}}{\text{MPS}}$ Worked: $\frac{-0.8}{0.2} = -4$	The tax multiplier (negative: a tax rise lowers output). The effect of a change in taxes or transfers.	Its size is always one less than the spending multiplier, and a tax cut raises output.	Unit 3 MultipliersPractice it: Multiplier lab
$\text{balanced-budget multiplier}$ $= \frac{1}{\text{MPS}}$ $+ \frac{-\text{MPC}}{\text{MPS}}$ $= 1$ Worked: $\frac{1}{0.2} + \frac{-0.8}{0.2} = 1$	The balanced-budget multiplier: the spending and tax multipliers added. Government purchases and taxes rise (or fall) by the same amount.	It is 1, not 0: the two effects do not cancel, so output rises by the amount of the change.	Unit 3 MultipliersPractice it: Multiplier lab
$\Delta \text{real GDP}$ $= \text{change in spending} \times \text{multiplier}$ Worked: $20 \times 5 = 100$	The largest change in real GDP from a change in spending or taxes. Forward: from a policy or a shock to its effect on output.	Use the tax multiplier for taxes and transfers, the spending multiplier for purchases and investment.	Unit 3 MultipliersPractice it: Multiplier lab
Easy to forget $\text{change needed}$ $= \frac{\text{gap}}{\text{multiplier}}$ Worked: $\frac{100}{4} = 25$	The change in spending that closes a gap. Backward: from a recessionary or inflationary gap to the policy.	Divide, do not multiply; decide the direction first.	Unit 3 Fiscal PolicyPractice it: Multiplier lab
$\text{money multiplier}$ $= \frac{1}{\text{required reserve ratio}}$ Worked: $\frac{1}{0.1} = 10$	The money (deposit) multiplier (limited reserves). How far new excess reserves can expand the money supply.	A cash deposit does not change the money supply at first.	Unit 4 Banking and the Expansion of the Money SupplyPractice it: Multiplier lab

Banks, interest rates and money

Formula and a worked line	What it is and when to use it	The trap	Learn it in
$\text{required reserves}$ $= \text{deposits} \times \text{required reserve ratio}$ Worked: $1000 \times 0.1 = 100$	Required reserves (limited reserves). A bank balance sheet.	The ratio applies to deposits, not to reserves.	Unit 4 Banking and the Expansion of the Money SupplyPractice it: Reserves lab
$\text{excess reserves}$ $= \text{reserves} - \text{deposits} \times \text{ratio}$ Worked: $200 - 1000 \times 0.1 = 100$	Excess reserves: what a bank may lend. A bank balance sheet.	Required reserves come off first.	Unit 4 Banking and the Expansion of the Money SupplyPractice it: Reserves lab
Easy to forget $\text{largest change in the money supply}$ $= \text{excess reserves} \times \text{money multiplier}$ Worked: $100 \times 10 = 1{,}000$	The most the banking system can add to the money supply. After a deposit or a bond purchase under limited reserves.	Multiply excess reserves, not total deposits or total reserves.	Unit 4 Banking and the Expansion of the Money SupplyPractice it: Multiplier lab
Easy to forget $r = i - \pi^{e}$ Worked: $6\% - 2\% = 4\,\%$	The real interest rate: the nominal rate minus expected inflation. Lenders, borrowers and the loanable funds market.	Unexpected inflation lowers the real rate a lender earns; i = r + expected inflation.	Unit 4 Nominal v. Real Interest RatesPractice it: Reserves lab
$M \times V = P \times Y$ Worked: $V = \frac{2 \times 500}{250} = 4$	The quantity theory of money. Money growth and inflation in the long run.	With V and Y steady, faster money growth shows up as inflation.	Unit 5 Money Growth and InflationPractice it: Policy chain
$\text{budget balance}$ $= \text{tax revenue} - \text{government outlays}$ Worked: $3000 - 3400 = -400$	The government budget balance (negative is a deficit). Deficits, surpluses and the national debt.	The debt is the sum of past deficits minus surpluses; a deficit is one year.	Unit 5 Government Deficits and the National DebtPractice it: Policy chain

Exchange rates

Formula and a worked line	What it is and when to use it	The trap	Learn it in
Easy to forget $\text{price of B in A}$ $= \frac{1}{\text{price of A in B}}$ Worked: $\frac{1}{4 \text{ bels per arl}}$ $= 0.25\,\text{ arls per bel}$	An exchange rate read the other way round. Switching between "bels per arl" and "arls per bel".	In the market for a currency, its price is in units of the other currency per unit of it.	Unit 6 Exchange RatesPractice it: Forex lab
$\text{price in A}$ $= \text{price in B} \times \text{units of A per unit of B}$ Worked: $100 \times 0.25 = 25\,\text{ arls}$	A foreign price in the home currency. What an import costs, or what an export earns.	Check the units: bels times arls per bel gives arls.	Unit 6 Exchange RatesPractice it: Forex lab

The graphs you must draw

Label every axis and curve exactly as here, and show each shift with a new curve (AD2) and the new equilibrium.

Production possibilities curve. Label both goods; growth shifts the whole curve out. Opportunity Cost and the Production Possibilities Curve (PPC)

Supply and demand. A change in the good's own price is a movement along a curve, not a shift. Market Equilibrium, Disequilibrium, and Changes in Equilibrium

Aggregate demand and aggregate supply. Price level and real GDP, not price and quantity; LRAS is vertical at full employment. Equilibrium in the Aggregate Demand-Aggregate Supply (AD-AS) Model

Easy to forget

Money market. The nominal interest rate, and a vertical money supply. The Money Market

Easy to forget

Market for bank reserves (ample reserves). With ample reserves the policy rate moves with the administered rate; reserve supply stays put. Monetary Policy

Easy to forget

Loanable funds market. The real interest rate; government borrowing shifts demand for loanable funds right. The Loanable Funds Market

Phillips curves. The LRPC is vertical at the natural rate; a supply shock shifts the SRPC. The Phillips Curve

Easy to forget

Foreign exchange market. The price of a currency is the other currency per unit of it (dollars per euro in the market for euros). The Foreign Exchange Market

A bank's balance sheet (dollars)
Assets		Liabilities
Required reserves	100	Checkable deposits	1,000
Excess reserves	100
Loans	800

Bank balance sheet. Assets on the left, liabilities on the right, and the two sides equal. With a 10% requirement, required reserves are 10% of deposits; the rest of the reserves are excess reserves, which the bank may lend. Banking and the Expansion of the Money Supply

Habits that save points

Label everything. Every axis, every curve and every point the question names (P1, Y1, YF). A mislabeled graph loses the graph point and usually the shift point. Shifts Versus Movements Along a Curve
Show the direction. Draw the shift with an arrow and label the new curve (AD2) and the new equilibrium. Where Curves Cross
Explain with every link. "Explain" needs the causal link, not the conclusion: the rate falls, so investment rises, so AD rises. Fiscal and Monetary Policy Actions in the Short Run
Show your work. "Calculate" needs the formula or the steps, not just the number. Multipliers

On exam day

Four-function calculator. Bluebook has one built in (add, subtract, multiply, divide, square root, percent) for both sections; no scientific or graphing calculator.
No formula sheet. Nothing on this page is given on exam day.
Graphs by hand. Free responses are handwritten in a paper booklet, graphs drawn by hand.

Practice with it

Free unit practice tests · Formula flashcards · Graph studio · Free notes for every topic · Full practice exams