AP Macroeconomics: Key Concepts

What are the four components of GDP when using the expenditure approach?

The four components are Consumption (C), Investment (I), Government Spending (G), and Net Exports (NX, which is Exports minus Imports).

How does Real GDP differ from Nominal GDP?

Real GDP is adjusted for inflation using constant prices from a base year, while Nominal GDP is measured using current market prices.

What type of unemployment occurs when there is a mismatch between a worker's skills and the requirements of available jobs?

Structural unemployment.

What is the formula for calculating the Consumer Price Index (CPI)?

CPI = (Price of market basket in current year / Price of market basket in base year) x 100.

If the Federal Reserve decreases the interest rate, how does this typically affect Aggregate Demand (AD)?

Aggregate Demand increases because lower interest rates stimulate investment spending and interest-sensitive consumption.

What causes a shift in the Short-Run Aggregate Supply (SRAS) curve but not the Long-Run Aggregate Supply (LRAS) curve?

Changes in input prices (like wages or energy costs) or temporary supply shocks.

What is the formula for the simple spending multiplier?

The spending multiplier is 1 / MPS (Marginal Propensity to Save) or 1 / (1 - MPC).

Why is the tax multiplier always smaller than the spending multiplier?

The tax multiplier is smaller because part of a tax cut is saved by households rather than spent, whereas government spending enters the economy directly.

What are the two primary tools of discretionary fiscal policy?

Changes in government spending and changes in personal or corporate taxes.

Explain the 'crowding out' effect resulting from expansionary fiscal policy.

Crowding out occurs when government deficit spending increases the demand for loanable funds, raising interest rates and reducing private investment.