I. Basic economic concepts  

A macroeconomics course introduces students to fundamental economic concepts such as scarcity and opportunity costs. Students will study comparative advantage to determine the basis on which mutually advantageous trade can take place between countries and to identify comparative advantage from differences in output levels and labor costs. Other basic concepts that are explored include the functions performed by an economic system and the way the tools of supply and demand can be used to analyze a market economy. Coverage of these concepts provides students with the foundation for a thorough understanding of macroeconomics and puts the macroeconomic material of the course in proper perspective.

II. Measurement of economic performance

Since the performance of the economy as a whole is usually measured by trends in gross national product, gross domestic product, inflation, and unemployment, an effective AP course is structured with the importance of these concepts in mind. The course covers the components of gross income measures and the costs of inflation and unemployment. It makes clear the important distinction between nominal and real values, and gives students some exposure to the use of price indices to convert nominal magnitudes into real magnitudes. Students learn how the unemployment rate is measured and consider the seeming paradox of a positive unemployment rate when there is so-called full employment. As the course moves from mere static descriptions to dynamic models, it considers the actual levels of U.S. inflation, unemployment, gross national product, and gross domestic product, as well as the ways that changes in one may affect the others.

III. National income and price determination

Analysis of the determination of national income and of the aggregate price level is the core of a well-planned AP Macroeconomics course. This analysis often begins with a general discussion of the nature and shape of the aggregate demand and supply curves. The course can then present the differences between the Keynesian and classical views of the shape of the aggregate supply curve and the importance of the shape in determining the effect of changes in aggregate demand on the economy. Once students grasp the traditional Keynesian and classical views, they are ready to consider alternative views held by macroeconomists on the shape of the aggregate supply curve.

A detailed study of aggregate demand may begin with an outline of the circular flow of goods and earnings in the economy. The basic Keynesian expenditure model can be used to identify the total spending/output equilibrium and to demonstrate the importance of the spending multiplier concept. By including an investigation of the effect of government fiscal policy on aggregate demand, the course requires students to examine the differing effects of discretionary tax and expenditure policies, and to discuss the role of automatic stabilizers.

An important step in analyzing aggregate demand is the study of the effect of monetary policy. Here the course introduces students to the definition of money, fractional reserve banking, and the Federal Reserve System. It is also appropriate for the teacher to introduce the topics of multiple-deposit expansion and money creation, and to discuss the tools of monetary policy. In learning about monetary policy, students find it helpful to define the determinants of the demand for money. From a study of these determinants, they can proceed to investigate how equilibrium in the money market determines interest rates, how the investment demand curve provides the link between changes in the money market and changes in aggregate demand, and how changes in aggregate demand affect the money market.

With both monetary and fiscal policies now incorporated in the analysis of aggregate demand, an understanding of the interaction between the two is essential. Some knowledge of the concepts of "crowding out'' and accommodating monetary policy is important, as is some acquaintance with the issues dividing the monetarists and traditional Keynesians. After gaining an understanding of the monetarist and Keynesian views of macroeconomics, students are ready to analyze other theories of macroeconomic behavior. In their study of the proper mix between monetary and fiscal policies, students should examine the economic effects of government budget deficits, consider the issues involved in determining the burden of the national debt, and explore the relationships between deficits, interest rates, and inflation.

Having studied aggregate demand in detail, the course can now present the aggregate supply curve. It is important for students to understand why many economists believe that this curve may be upward-sloping in the short run but vertical in the long run. With this understanding, students can distinguish between the short-run and long-run impacts of monetary and fiscal policies and trace the short-run and long-run effects of supply shocks. Short-run and long-run Phillips curves can be introduced to help students gain an understanding of the inflation-unemployment trade-off and how this trade-off may differ in the short and long run. A well-rounded course also includes an examination of inflationary expectations and an analysis of how disagreements over both the cause and rate of change of these expectations separate traditional Keynesians and new classical economists.

IV. Economic Growth  

Students should understand the contributions of economic growth to job creation and economic well-being. The determinants of economic growth should be emphasized. Furthermore, the impacts of monetary and fiscal policies on the growth of a nation’s economy should be studied.

V. International finance, exchange rates, and balance of payments

The formulation of macroeconomic policy has important ramifications for international economics. Students need to understand that the combination of monetary and fiscal policies used in addressing problems of inflation and unemployment has an effect on international factors such as exchange rates and the balance of payments. Students also need to understand the reverse: that international forces, often beyond a country’s control, affect a country’s exchange rates, which, in turn, affect a country’s price level, unemployment, and level of output. It is important to examine what the effects of trade restrictions are, how the international payments system hinders or facilitates trade, how domestic policy actions affect international finance and trade, and how international exchange rates affect domestic policy goals.