AP Macroeconomics Cheat Sheet 2026
Key Formulas
| Formula | Meaning |
|---|---|
| GDP = C + I + G + (X − M) | Expenditure approach: Consumption + Investment + Gov spending + Net exports |
| GDP = W + R + I + P | Income approach: Wages + Rent + Interest + Profit |
| Real GDP = Nominal GDP / Price Level × 100 | Adjusts for inflation using base-year prices |
| GDP Deflator = (Nominal/Real) × 100 | Broad price index |
| CPI = (Cost of basket / Base year cost) × 100 | Measures cost of living |
| Inflation rate = (CPI₂ − CPI₁) / CPI₁ × 100 | % change in price level |
| Unemployment rate = Unemployed / Labor force × 100 | Labor force = employed + unemployed (seeking work) |
| Money multiplier = 1 / Reserve requirement | Max expansion of money supply from $1 deposit |
| Spending multiplier = 1 / (1 − MPC) = 1 / MPS | Total change in GDP from change in spending |
| Tax multiplier = −MPC / MPS | Negative because tax ↑ → spending ↓ |
| MPC + MPS = 1 | Marginal propensity to consume + save |
| Exchange rate effect: $ appreciates → exports ↓, imports ↑ | Strong dollar makes US goods expensive abroad |
Required Graphs — What to Draw and Label
1. AD-AS Model (Most Important)
Axes: Price Level (P) on vertical, Real GDP (Y) on horizontal.
Curves: AD (downward sloping), SRAS (upward sloping), LRAS (vertical at full employment Yf).
| Shift AD right | Shift AD left |
|---|---|
| ↑ Government spending (fiscal stimulus) | ↓ Government spending (fiscal austerity) |
| ↓ Taxes (expansionary fiscal) | ↑ Taxes (contractionary fiscal) |
| ↓ Interest rates (expansionary monetary) | ↑ Interest rates (contractionary monetary) |
| ↑ Consumer confidence, ↑ net exports | ↓ Consumer confidence, ↓ net exports |
| Shift SRAS right | Shift SRAS left |
|---|---|
| ↓ Input prices (oil, wages, raw materials) | ↑ Input prices |
| ↑ Productivity, ↑ technology | Supply shocks (natural disasters) |
| ↓ Business regulations | ↑ Business regulations |
2. Money Market
Axes: Interest rate (i) on vertical, Quantity of money (Qm) on horizontal.
Curves: Money demand (Md, downward sloping), Money supply (Ms, vertical — set by Fed).
- Fed buys bonds → Ms shifts right → interest rates fall → investment rises → AD shifts right
- Fed sells bonds → Ms shifts left → interest rates rise → investment falls → AD shifts left
3. Loanable Funds Market
Axes: Real interest rate on vertical, Quantity of loanable funds on horizontal.
Curves: Supply of LF (upward sloping = savings), Demand for LF (downward sloping = investment).
- Government deficit → D for LF shifts right → real interest rate rises → crowding out of private investment
- Tax incentives for saving → S shifts right → real interest rate falls
4. Foreign Exchange Market
Axes: Exchange rate (price of USD in foreign currency) on vertical, Quantity of USD on horizontal.
- ↑ US interest rates → foreigners demand more USD → USD appreciates → exports ↓, imports ↑
- ↑ Foreign income → demand for US exports ↑ → USD appreciates
5. Production Possibilities Curve (PPC)
Shows tradeoffs between two goods. Points inside = inefficient. Points on curve = efficient. Points outside = unattainable. Economic growth shifts PPC outward.
Fiscal Policy
| Situation | Expansionary (Stimulate) | Contractionary (Slow) |
|---|---|---|
| Economy below full employment (recessionary gap) | ↑ G, ↓ T → AD shifts right | — |
| Economy above full employment (inflationary gap) | — | ↓ G, ↑ T → AD shifts left |
| Effect on budget | Creates/increases deficit | Creates/increases surplus |
| Spending multiplier effect | $\Delta GDP = \text{multiplier} \times \Delta G$ | Same formula, negative |
| Tax multiplier effect | $\Delta GDP = \text{tax multiplier} \times \Delta T$ (smaller than spending) | Same, positive for tax increase |
Monetary Policy (The Fed)
| Tool | Expansionary | Contractionary |
|---|---|---|
| Open market operations | Buy bonds → ↑ money supply | Sell bonds → ↓ money supply |
| Reserve requirement | ↓ Reserve req → ↑ money multiplier | ↑ Reserve req → ↓ money multiplier |
| Discount rate | ↓ Discount rate → banks borrow more | ↑ Discount rate → banks borrow less |
| Interest on reserves | ↓ IOR → banks lend more | ↑ IOR → banks hold more reserves |
Transmission mechanism: ↑ Money supply → ↓ interest rates → ↑ investment → ↑ AD → ↑ Real GDP and Price Level
International Trade
| Concept | Definition |
|---|---|
| Comparative advantage | Produce the good with the lower opportunity cost |
| Current account | Exports, imports, income, transfers |
| Capital/Financial account | Foreign investment flows |
| Balance of payments | Current account + Capital account = 0 |
| Trade deficit | Imports > Exports; capital account surplus (foreigners invest in US) |
| Currency appreciation | Dollar buys more foreign currency → exports ↓ (more expensive abroad), imports ↑ |
| Currency depreciation | Dollar buys less foreign currency → exports ↑, imports ↓ |
Key Concepts Quick Reference
| Term | Definition |
|---|---|
| Recessionary gap | Actual GDP < Potential GDP; unemployment above natural rate |
| Inflationary gap | Actual GDP > Potential GDP; economy overheating |
| Natural rate of unemployment | Frictional + structural unemployment; economy at full employment |
| Frictional unemployment | Between jobs voluntarily; always exists |
| Structural unemployment | Skills mismatch; technological displacement |
| Cyclical unemployment | Due to recession; what policy aims to reduce |
| Phillips curve (SR) | Inverse relationship between inflation and unemployment |
| Long-run Phillips curve | Vertical at natural rate; no long-run tradeoff |
| Crowding out | Government borrowing raises interest rates → reduces private investment |
| Stagflation | High inflation + high unemployment; caused by negative supply shock |