Transcription
Here we go, macro students. It's time to get ready for the 2026 AP macro FRQs. Before we jump into it, I have three quick announcements.
Number one, I'm going to be leading live review sessions 2 days before each AP exam. This video is live on my YouTube channel, but I'm going to record it and repost the video later. Make sure to watch it because it's going to include my predictions for this year's free responses.
Number two, follow the link in the description to get a free preview of my ultimate exam slayer. In there is a free video called study tips you need to know. You definitely want to watch that as you get ready for the AP test. It also includes test tip videos, over 400 multiple choice questions, and two full-length practice AP exams.
And number three, when you get a chance, take a look at my website acdcecon, where I have all the free responses organized by year and topic. This allows you to see trends and patterns and helps you figure out what you need to study. And there's also free response predictions by teachers throughout the world.
Now, what I'm about to show you are the secondary or niche concepts that you might see on the exam, but they're not the most important concepts. In other words, if you can't use aggregate demand and supply or the Phillips curve to draw a negative output gap, full employment, or a positive output gap, don't worry about these other concepts. Make sure you know the more important stuff first. With that said, here are six concepts you might see on this year's FRQs.
Number one is a question about balance of payments, the two different accounts, the current account and the capital and financial account. You learn this in unit six. Just remember the main component of the current account is net exports. If exports increase or imports decrease, then the current account's going to move towards a surplus. And if exports decrease or imports increase, the current account's going to move towards a deficit. And for the other account, the capital and financial account, if more money comes in the country, for example, there's more foreign direct investment, that's going to move that account towards a surplus. And if there's a decrease in inflow or an increase in outflow of foreign financial capital, that'll move that account towards a deficit. And last year they asked a question about the relationship between the two. It's not hard, just know when one account moves towards a deficit, the other has to move towards a surplus.
Sneaky topic number two is also in unit six, it's managed exchange rates. As you know, exchange rates are set by supply and demand and each currency can appreciate or depreciate. Lately the college board has been asking more questions about what the government can do to manipulate the exchange rate. For example, the central bank might sell its own currency to increase the supply and cause the currency to depreciate. A depreciated currency would make their products cheaper and increase net exports. But they usually don't ask questions about the motive. You just need to understand what the central bank or the government can do to manipulate its currency.
The third niche concept that you need to know is a lot easier, it's the idea of spending multiplier and closing output gaps. It's one of those questions where they give you the marginal propensity to consume or the marginal propensity to save and an output gap. You have to use the multiplier to figure out how much to close the gap. It's not particularly that hard. Just remember that all of government spending is multiplied in the economy. However, when there's a tax cut, there's one less ripple effect. In other words, the tax multiplier is always one less than the spending multiplier. When it comes to calculations in the AP test, this is one of those easier concepts. Make sure you practice.
Okay, the fourth one is pretty niche, it's the idea of automatic stabilizers. Last summer I was at the AP annual conference and the chief reader mentioned the students had a real problem with this. He said a lot of students didn't understand the difference between automatic stabilizers and a long-run self-adjustment. When there's a negative output gap, eventually wages and resource prices will fall, the short-run aggregate supply will shift to the right and put us back at full employment. And when there's a positive output gap, eventually wages and resource prices will go up, short-run aggregate supply will shift to the left, putting us back at full employment. Again, this is the idea of a long-run self-adjustment. There's no policy, but the economy self-corrects. Automatic stabilizers or what's called non-discretionary fiscal policy are laws that are already on the books that help stabilize the economy. For example, when there's a negative output gap and there's high unemployment, people automatically move down to lower tax brackets, which increases their disposable income and increases spending. So, our progressive tax bracket system is an automatic stabilizer. It automatically lowers taxes when the economy is in a negative output gap. And it does the same thing when there's a positive output gap. If the economy's overheating, people move into higher tax brackets that increase the taxes and slow spending. I think the problem here has to do with vocab. Students hear the words automatic stabilizer, they assume the economy automatically self-corrects. Nope, these are two different concepts.
The next concept you might see is from unit two, it's the idea of calculating GDP and the GDP deflator. After not asking questions about this for years, they've done it three times in the last four sets of FRQs. These questions aren't particularly hard, but just remember the nominal GDP is not adjusted for inflation. The real GDP uses base year prices and is adjusted for inflation. Also, make sure you know the equation for the GDP deflator, it's the nominal divided by the real times 100. Based on what we've seen over the last couple of years, they're going to ask you some question we have to calculate something. It's probably either GDP or unemployment.
Now, the sixth secondary and I would say the most important topic that you have to know is the reserve market. Every set of FRQs in the last 2 years have had questions about the reserve market and limited and ample reserves. The concepts aren't really that hard. In fact, here's a clip from my exam slayer that explains monetary policy. Monetary policy is done by the central bank, it's increasing and decreasing the money supply to affect interest rates and affect the overall economy. So, the central bank, which is like the bankers' bank, does monetary policy to affect the policy rate. The policy rate is the benchmark or the target they're shooting for to say we're doing a good job increasing or decreasing interest rates. In the United States, the policy rate is the federal funds rate. It's the rate that commercial banks charge each other for overnight loans. Now, how the central bank actually does it depends if there's limited or ample reserves in the banking system. Limited reserves means commercial banks have very few reserves with the central bank. Ample reserves means there's a ton of money out there. These commercial banks have a ton of money with the central bank. If there's limited reserves, then the three traditional ways of increasing or decreasing money supply to affect interest rates are going to work. The first one is the reserve requirement, which is how much banks have to hold by law. The second one is the discount rate, which is the rate the central bank charges commercial banks. And the third one's the most important one, it's open market operations when the central bank buys or sells bonds. Again, those are the three traditional methods of monetary policy. But when there's ample reserves, those other ones don't really work, so the central bank has only one option, which is increasing or decreasing the interest on reserves. It's the interest that commercial banks earn by depositing money with the central bank. Now, let's stop here for a second. Both of these, the discount rate and interest on reserves, are called administered rates. The central bank has direct control of them. They can increase them, they can decrease them, which is different than the policy rate. Again, the policy rate is the target rate and the central bank doesn't have direct control over that. And that's why the central bank does monetary policy, to increase or decrease the policy rate to affect the overall economy. What are you talking about? It's I mean Why don't you let me get my head above water for 2 seconds?
Now, to go along with those concepts, you have to be able to draw and shift the reserve market. This graph was on both sets of free responses from last year and it's likely going to be on this year's FRQs as well. The great news is I have a free video on YouTube that explains that graph, but you're definitely going to have to practice.
Okay, that's it for secondary or sneaky topics you might see. Make sure to take a look at my live review session where you can see my predictions for this year's FRQ. Thanks for watching. Till next time.