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Unit 2 · Economic Indicators & the Business Cycle Unit Hub Flashcards Cheat Sheet Essentials Visual Review MC Practice FRQ Practice

AP Macroeconomics Unit 2 Visual Review

An 8-slide visual review of Economic Indicators & the Business Cycle — the circular flow, GDP, unemployment, inflation, and the business cycle, built right into the page.

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UNIT 2 · SLIDE 1 The Circular Flow Model PRODUCT MARKET households BUY goods & services · firms SELL Households own the factors Firms produce output FACTOR MARKET firms BUY labor & resources · households EARN wages Two loops, one economy Money flows one direction; goods, services, and resources flow the other. Every dollar spent is earned. Leakages vs. injections Leakages OUT: savings, taxes, imports Injections IN: investment, gov spending, exports Why it matters for GDP Total spending = total income = total output, so GDP can be measured by expenditure OR income approach. One person's spending is another person's income — that identity powers the whole model. The Review Hub · AP Macroeconomics Unit 2
Households sell resources and buy products; firms buy resources and sell products. Money circulates one way, real stuff the other — which is why total spending, income, and output are all the same number: GDP.
UNIT 2 · SLIDE 2 GDP and Its Four Components GDP = C + I + G + Xn C · Consumption Household spending — the biggest slice (~68% of U.S. GDP). I · Investment Business equipment, new construction, inventories. NOT stocks or bonds! G · Government Purchases of goods & services only. Transfer payments don't count. Xn · Net exports Exports − imports. Imports SUBTRACT — Xn is usually negative. What GDP does NOT count • Intermediate goods (avoids double counting) • Used / secondhand sales (already counted once) • Financial transactions — stocks & bonds • Transfer payments (Social Security, welfare) • Nonmarket production (your own housework) • Underground / illegal economy MCQ trap: buying a share of stock is NOT investment — only new capital goods count as "I". GDP = market value of all FINAL goods & services produced within a country in a year. The Review Hub · AP Macroeconomics Unit 2
Memorize C + I + G + Xn and the exclusion list. The most-tested traps: transfer payments aren't in G, buying stock isn't investment, and imports subtract from GDP.
UNIT 2 · SLIDE 3 Unemployment — Measurement & Types The formulas Unemployment rate = unemployed ÷ labor force × 100 Labor force = employed + unemployed (16+, seeking) LFPR = labor force ÷ adult population × 100 Why the official rate misleads • Discouraged workers stopped searching — they're NOT in the labor force, so the rate UNDERSTATES • Part-time workers who want full-time still count as fully employed (underemployment hidden) Retirees, students, stay-at-home parents: not in labor force Frictional — between jobs Job search, new grads. Short-term, always exists, even healthy — better matches take time. Structural — skills mismatch Technology or trade makes skills obsolete (automation). Longer-lasting; needs retraining. Cyclical — recession-driven Caused by downturns in the business cycle. Equals ZERO at full employment. Natural rate of unemployment = frictional + structural (≈ 4–5%) — full employment ≠ 0%. The Review Hub · AP Macroeconomics Unit 2
Know the formula, the three types, and the traps: discouraged workers make the rate understate joblessness, and "full employment" still includes frictional + structural unemployment — the natural rate.
UNIT 2 · SLIDE 4 Measuring the Price Level: Real GDP, Deflator & CPI Real vs. nominal GDP Nominal = valued at CURRENT prices Real = valued at BASE-YEAR prices (inflation removed) Always compare years using REAL GDP In the base year, real GDP = nominal GDP GDP deflator Deflator = (nominal GDP ÷ real GDP) × 100 Real GDP = nominal ÷ (deflator ÷ 100) Rearrange the deflator formula for any missing piece. CPI — the consumer price index CPI = (basket cost now ÷ basket cost in base yr) × 100 Inflation rate = % change in CPI between years Tracks a FIXED basket a typical consumer buys Inflation = (CPI new − CPI old) ÷ CPI old × 100 Why CPI overstates inflation • Substitution bias — buyers switch to cheaper goods • New products enter the basket late • Quality improvements look like pure price hikes Deflator covers ALL domestic output; CPI only consumer goods. Real values strip out inflation — only real GDP growth means the economy actually produced more. The Review Hub · AP Macroeconomics Unit 2
Nominal uses current prices; real uses base-year prices. The GDP deflator converts between them, and CPI tracks a fixed consumer basket — know both formulas and CPI's upward biases.
UNIT 2 · SLIDE 5 Two Kinds of Inflation — and Who It Hurts Demand-pull inflation "Too much money chasing too few goods" • AD shifts RIGHT (spending boom, stimulus) • Price level ↑ AND real output ↑ Typical late in an expansion, beyond full employment Cost-push inflation Supply-side shock raises production costs • SRAS shifts LEFT (oil shock, wage spike) • Price level ↑ BUT real output ↓ = STAGFLATION — the worst of both worlds UNEXPECTED inflation helps… • Borrowers — repay with cheaper dollars • Anyone locked into paying fixed rates The real value of the debt they owe shrinks …and hurts • Lenders & savers — repaid in weaker dollars • People on fixed incomes (pensions) Plus menu costs & shoe-leather costs for everyone Unexpected inflation redistributes wealth from lenders to borrowers — anticipated inflation gets priced in. The Review Hub · AP Macroeconomics Unit 2
Demand-pull: AD right, output and prices both rise. Cost-push: SRAS left, prices rise while output falls (stagflation). Unexpected inflation transfers wealth from lenders and savers to borrowers.
UNIT 2 · SLIDE 6 The Business Cycle peak trough recession ↓ expansion ↑ trend growth Real GDP Time The four phases Expansion → Peak → Recession → Trough → repeat Recession ≈ two consecutive quarters of falling real GDP; unemployment rises, inflation cools. Output gaps (preview of Unit 3) Below trend = recessionary gap (cyclical unemployment) Above trend = inflationary gap (overheating) The dashed line = potential output (full employment) — it grows over time as LRAS / the PPC shifts out. The economy fluctuates AROUND its long-run trend — gaps between actual and potential drive all of Unit 3. The Review Hub · AP Macroeconomics Unit 2
Real GDP cycles around a rising trend: expansion, peak, recession, trough. Where actual output sits relative to potential output defines the gaps that Unit 3's AD/AS model analyzes.
UNIT 2 · SLIDE 7 What GDP Can't Tell You Missing production Household work, volunteering, and the underground economy never show up in official GDP. Says nothing about distribution A rising total can hide stagnant incomes for most people — GDP is a total, not a distribution. Ignores costs of growth Pollution and environmental damage aren't subtracted; cleanup spending even ADDS to GDP. Ignores leisure & well-being Working every waking hour would raise GDP — but not quality of life. Leisure has value too. The better yardstick for living standards Real GDP per capita = real GDP ÷ population Adjusts for both inflation AND population — the standard measure for comparing countries or eras GDP measures production, not happiness — use real GDP per capita when comparing living standards. The Review Hub · AP Macroeconomics Unit 2
GDP misses nonmarket and underground production, ignores distribution, environmental costs, and leisure. For living standards, the exam wants real GDP per capita.
UNIT 2 · SLIDE 8 Unit 2 Quick Reference — Know These Cold Core formulas Unemployment = unemployed ÷ labor force × 100 Inflation = %Δ CPI · Deflator = nominal ÷ real × 100 GDP = C + I + G + Xn Real GDP per capita = the living-standards measure GDP counting rules Final goods only · produced THIS year · within borders No transfers, used goods, or financial assets Imports subtract; inventory changes count in I Spending approach = income approach = output Unemployment types Frictional (searching) + Structural (mismatch) = natural rate · Cyclical = recession only Discouraged workers → rate understates Full employment = natural rate, NOT zero Inflation essentials Demand-pull: AD→, P↑ Y↑ · Cost-push: SRAS←, P↑ Y↓ Unexpected inflation: borrowers win, lenders lose CPI overstates (substitution, quality, new goods) Anticipated inflation gets built into nominal rates Unit 2 is 12–17% of the exam — indicator definitions and calculation questions are easy points to lock in. The Review Hub · AP Macroeconomics Unit 2
Everything Unit 2 tests: the formulas, the GDP counting rules, the three unemployment types, and the two inflation stories. These are the fastest points on the whole exam.
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How to use the visual review

Spend 30 seconds per step before clicking next. Look at the diagram, then ask yourself: "Could I sketch this from memory and label every part?"

Use the dots below the diagram to jump straight to any step, or the arrow keys to move forward and back.

This is great for review the night before the exam — fast, visual, and covers every core diagram you need to remember from Unit 2.