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Principles of Macroeconomics

Macroeconomics refers to the 'big picture' study of the performance, structure, behavior and decisions of an economy: national, regional or global. The field of Macroeconomic study was born during the Great Depression in order to measure the health of the economy and provide data needed by the government to aid economic stability and growth.

The Principles of Macroeconomics exam covers material that is usually taught in a one-semester undergraduate course in this subject. This aspect of economics deals with principles of economics that apply to an economy as a whole, particularly the general price level, output and income, and interrelations among sectors of the economy.

The exam places particular emphasis on the determinants of aggregate demand and aggregate supply, and on monetary and fiscal policy tools that can be used to achieve particular policy objectives. Students will need to demonstrate their knowledge of the institutional structure of the Federal Reserve Bank and the monetary policy tools it uses to stabilize economic fluctuations and promote long-term economic growth.

The exam contains approximately 80 questions to be answered in 90 minutes. Some of these are pretest questions that will not be scored. The College Board sets the parameters of the exam which are listed below.

WHAT YOU NEED TO KNOW ABOUT MACROECONOMICS:

  • Understanding of important economic terms and concepts
  • Interpretation and manipulation of economic graphs
  • Interpretation and evaluation of economic data
  • Application of simple economic models

The subject matter of the Principles of Macroeconomics exam is drawn from the following topics.

BASIC ECONOMIC CONCEPTS: 8-12% of the exam

  • Scarcity, choice, and opportunity costs
  • Production possibilities curve
  • Comparative advantage, specialization, and exchange
  • Demand, supply, and market equilibrium

MEASUREMENT of ECONOMIC PERFORMANCE: 12-16% of the exam

National income accounts:

  • Circular flow
  • Gross domestic product
  • Components of gross domestic product
  • Real versus nominal gross domestic product

Inflation measurement and adjustment:

  • Price indices
  • Nominal and real values
  • Demand-pull versus cost-push inflation
  • Costs of inflation

Unemployment:

  • Definition and measurement
  • Types of unemployment
  • Natural rate of unemployment

NATIONAL INCOME and PRICE DETERMINATION: 15-20% of the exam

Aggregate demand:

  • Determinants of aggregate demand
  • Multiplier and crowding-out effects

Aggregate supply:

  • Short-run and long-run analyses
  • Sticky versus flexible wages and prices
  • Determinants of aggregate supply

Macroeconomic equilibrium:

  • Real output and price level
  • Short and long run
  • Actual versus full-employment output
  • Business cycle and economic fluctuations

FINANCIAL SECTOR: 15-20% of the exam

Money, banking, and financial markets:

  • Definition of financial assets: money, stocks, bonds
  • Time value of money: present and future values
  • Measures of money supply
  • Banks and creation of money
  • Money demand
  • Money market
  • Loanable funds market

Central bank and control of the money supply:

  • Tools of central bank policy
  • Quantity theory of money
  • Real versus nominal interest rates

INFLATION, UNEMPLOYMENT and STABILIZATION POLICIES: 20-25% of the exam

Fiscal and monetary policies:

  • Demand-side effects
  • Supply-side effects
  • Policy mix
  • Government deficits and debt

Inflation and unemployment:

  • The Phillips curve: short run versus long run
  • Role of expectations

ECONOMIC GROWTH and PRODUCTIVITY: 5-10% of the exam

  • Investment in human capital
  • Investment in physical capital
  • Research and development, and technological progress
  • Growth policy

OPEN ECONOMY: INTERNATIONAL TRADE and FINANCE: 9-13% of the exam

Balance of payments accounts:

  • Balance of trade
  • Current account
  • Financial account (formerly called capital account)

Foreign exchange market:

  • Demand for and supply of foreign exchange
  • Exchange rate determination
  • Currency appreciation and depreciation
  • Exchange rate policies

Inflows, outflows and restrictions:

  • Net exports and capital flows
  • Links to financial and goods markets
  • Tariffs and quotas

Each college sets their own credit-granting policies for the exam, so check with your college admission office, test center, or academic adviser before taking the test.

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