AP Macroeconomics Course Outline

AP course in Macroeconomics is aimed and designed in such a way to nurture you with thorough understanding of the principles of economics that apply to an economic system as a whole. The following course then emphasises on the study of national income and price determination, and also makes you familiar and aware with the economic performance measures, economic growth and international economics.

Following topics will be covered in the course:

Basic Economic Concepts

The macroeconomics course makes students familiar with the various economic concepts such as scarcity and opportunity costs. Students must have to understand the difference between absolute and comparative advantage and should use the principle of comparative advantage to analyse the basis on which mutually advantageous trade can take place between individuals and countries and to identify comparative advantage from differences in opportunity costs. Various other basic concepts that are included in the course includes the economic system and its functions and the tools of supply and demand, which are used to analyse the workings of a free market economy. Introduction of the concept of the business cycle to give students an overview of economic fluctuations and to show the dynamics of unemployment, inflation, and economic growth are also included in the course. The concepts that have been covered provides students with the foundation for overall understanding of macroeconomic concepts and issues.

Measurement of Economic Performance

The course starts with a model of the circular flow of income and products that includes 4 sectors namely: Households, businesses, government, and international. To provide the crux of how an economy works, It is necessary to detect and evaluate the prime measures of economic performance: Gross domestic product, unemployment, and inflation.

While studying, GDP i.e.gross domestic product it is necessary that students learn how gross domestic product is measured. A clear understanding of its components, and ablility to distinguish between real and nominal gross domestic product is very crucial.

Unemployment i.e.nature and causes are also examined by the course, the costs of unemployment, and how the unemployment rate is measured, including the criticisms associated with the measurement of the unemployment rate. Concept such as natural rate of unemployment and the factors that affect it, are very important to evaluate. Students must also have the knowledge of inflation and how it is measured. In the following section, the course covers the costs of inflation, the main price indices, such as the consumer price index (CPI), and the GDP deflator. Students must have an understanding on how these indices are being 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. It is necessary to differentiate the two price indices as a measure of inflation and the problems associated with each measure.

National Income and Price Determination

The following section introduces and focuses on the aggregate (total) supply and aggregate demand model to explain the determination of equilibrium national output and the general price level as well as to analyse and eludicate the effects of public policy. It is necessary to discuss the concepts of aggregate demand and aggregate supply individually to provide students a clear understanding of the mechanics of the aggregate demand supply model.

The total demand and total supply analysis often starts with a general discussion of the nature and shape of the aggregate demand and aggregate supply curves and the factors that affect them. A detailed study of aggregate demand may begin by defining the four components of aggregate demand: Consumption, investment, government spending, and net exports. It also focuses on why the aggregate demand curve slopes downward and how changes in the determinants (factors) affect the aggregate demand curve. The spending-multiplier concept and its impact on aggregate demand should be demonstrated as well. The course present the definition and determinants of aggregate supply, the different views about the shape of the aggregate supply curve in the short run and in the long run, and highlight the importance of the shape in determining the effect of changes in aggregate demand on the economy. It is also important to understand sticky-price and sticky-wage models and their implication for the aggregate supply curve as compared to flexible prices and wages.

The aggregate demand and aggregate supply model to determine equilibrium income and price level should be used by the students and how to analyse the impact of economic fluctuations on the economy's output and price level, both in the short and long run.

Financial Sector

Students must understand the definitions of the money supply and money demand as well as the factors that affect both of them, for understanding the monetary policy. Here the course involves 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. In delivering the money supply, it is necessary to introduce the process of multiple-deposit expansion and money creation using T-accounts, and the use of the money multiplier. To learn a monetary policy, it is important to define money demand and evaluate its determinants. By a thorough study of money supply and money demand, the course should proceed to investigate how 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 aggregate demand, and how changes in aggregate demand affect real output and price level. Knowledge of financial markets and the working of the loanable funds market in determining the real interest rate is important. It is necessary that students focus on development of a clear understanding of the differences between the money market and loanable funds market.

With a clear and brief understanding of the financial markets, students can now analyse and examine the tools of central bank policy and the influence of the same on the money supply and interest rate. Students should be clear with their thoughts on the distinction between nominal and real interest rate. Introduction of the quantity theory of money, to the students and how to examine and understand the effect of monetary policy on real output growth and inflation is important.

Inflation, Unemployment, and Stabilization Policies

The economy's output, price level, and level of employment, both in the short run and in the long run are affected by public policy. Students should learn to analyse the consequences of fiscal and monetary policy on aggregate demand and on aggregate supply as well as on the economy's output and price level both in the short run and in the long run. It is also vital to understand how an economy reacts with a short-run shock and how it adjusts to long-run equilibrium in the absence of any public policy actions.

Both monetary and fiscal policies are now incorporated in the analysis of aggregate demand and aggregate supply, an understanding of the clubbing between the two is essential. The economic effects of government budget deficits, including crowding out; considering the issues evolves in determining the burden of the national debt; and exploring the relationships between deficits, interest rates, and inflation are examined by the students. The course also differentiate between the short-run and long-run impacts of monetary and fiscal policies and try to analyse the short-run and long-run effects of supply shocks. Short-run and long-run Phillips curves are introduced to help the students in gaining the knowledge of the inflation-unemployment trade-off and how this trade-off may differ in the short and long run. The following section, clarify the causes of inflation and illustrates them by using the total demand and total supply model. The course also includes an examination of the influence of expectations, including inflationary expectations.

Economic Growth and Productivity

The following course leads to the introducion of the framework and focuses on how long-run economic growth occurs. Productivity roles in raising real output, standard of living, role of investment in human capital formation and physical capital accumulation, research and development, and technical progress in raising productivity are necessary for students, to be familiar with such concepts. Enhancing the knowledge on the determinants of growth, students can achieve profound knowledge on how public policies influence the long-run economic growth of an economy.

Open Economy: International Trade and Finance

An open economy is an economy that communicate with the rest of the world both through the goods and the financial markets, and the manner of a country's transactions with the rest of the world and balance of payments accounts are important to analyse, Understanding the meaning of trade balance, differentiation between the current account balance and the capital account balance, and the implications for the foreign exchange market.

The course also throws a light on the foreign exchange market and evaluate the determination of equilibrium exchange rate. Understanding how market forces and public policy affect currency demand and currency supply in the foreign exchange markets and how it leads to currency appreciation or depreciation is very important. How capital flows affect exchange rates, and how appreciation or depreciation of a currency affects a country's net exports are the crucial parts of the presentation. By learning foreign exchange markets, students can now analyse how changes in net exports and capital flows influence financial and goods markets.

The effects of trade restrictions are very important to analyse, in which manner the international payments system hinders or facilitates trade, how domestic policy actions affect international finance and trade, and how international exchange rates is affected by domestic policy goals.