Macroeconomics · Unit 5: Long-Run Consequences of Stabilization Policies · 14 min read · Updated 2026-05-11
Economic Growth — AP Macroeconomics
AP Macroeconomics · Unit 5: Long-Run Consequences of Stabilization Policies · 14 min read
1. What Is Economic Growth?★☆☆☆☆⏱ 3 min
Economic growth is defined as a sustained increase in an economy's potential real output (real GDP) over time. For measuring changes in average living standards, economists use real GDP per capita growth, which adjusts total GDP growth for changes in population size.
This differs from short-run "cyclical growth," which is just an increase in actual output as an economy recovers from a recession toward its existing potential output. Long-run economic growth, the core concept tested in AP Macroeconomics Unit 5, represents an increase in potential output itself, shifting the long-run aggregate supply (LRAS) curve to the right.
Economic growth concepts make up 15-20% of the overall AP exam score. You can expect 3-5 multiple-choice questions on this topic, and it is often the core theme of a 10-point long free-response question.
2. The Rule of 70★★☆☆☆⏱ 4 min
The Rule of 70 is a simple approximation to calculate how long it takes a variable growing at a constant annual rate to double in value. It is most commonly used for comparing how fast different economies grow their GDP per capita, but it can also be applied to inflation, population, or any other compounding variable.
\text{Doubling Time (years)} \approx \frac{70}{g}
Where $g$ is the annual growth rate of the variable, measured in percentage points. The approximation comes from the math of continuous compounding, and is very accurate for growth rates between 0.1% and 10%, which covers almost all cases you will see on the AP exam.
Exam tip: Always confirm the growth rate is entered in percentage points (e.g., 2.5 for 2.5% growth), not decimal form (0.025). Entering decimals will give a doubling time 100 times too large, which is one of the most common tested mistakes.
3. Growth Accounting with the Aggregate Production Function★★★☆☆⏱ 4 min
Growth accounting is a method to break down total economic growth into contributions from different sources: input accumulation (more labor, more capital) and productivity growth (better technology, better institutions). The standard aggregate production function used in AP Macroeconomics is the Cobb-Douglas form:
Y = A * K^\alpha * L^{1-\alpha}
Where $Y$ = total real output, $A$ = total factor productivity (TFP, which captures technology, human capital, and institutional quality), $K$ = physical capital stock, $L$ = labor input, and $\alpha$ = the share of national income that goes to owners of capital (usually 0.3 to 0.4 in most developed economies).
To get the growth accounting formula, take the percentage change of both sides, which simplifies to:
\%\Delta Y = \%\Delta A + \alpha(\%\Delta K) + (1-\alpha)(\%\Delta L)
Exam tip: On FRQs, always write out the full formula before plugging in values. Partial credit is almost always awarded for the correct formula setup even if your final calculation is wrong.
4. Long-Run Effects of Stabilization Policy on Growth★★★☆☆⏱ 3 min
Stabilization policies (fiscal and monetary policies used to smooth short-run business cycles) have long-run consequences for economic growth, which is the core focus of this unit. The effect on growth depends on the type of policy and how it is implemented:
**Expansionary fiscal policy**: Deficit-funded stimulus raises interest rates and crowds out private investment, slowing long-run growth. If the deficit funds productive public investment (infrastructure, education, R&D), it increases TFP and crowds in private investment, accelerating growth.
**Expansionary monetary policy**: Money is neutral in the long run: permanent money supply increases only raise prices, not potential output. Low, stable inflation reduces uncertainty and encourages investment, while permanently high inflation reduces growth.
**Supply-side fiscal policy**: Policies like investment tax credits, lower capital gains taxes, and deregulation increase incentives for saving and investment, accelerating capital accumulation and TFP growth.
Exam tip: Never assume all expansionary fiscal policy reduces long-run growth. Always check what the deficit spending is used for before concluding the effect on growth.
5. AP-Style Concept Check★★★★☆⏱ 4 min
Common Pitfalls
Why: Students confuse percentage growth rates with the decimal form used in standard compound interest formulas
Why: Both increase measured real GDP, so students mix up the two concepts on exam questions
Why: Students learn the crowding out effect and generalize it to all deficit spending, regardless of its purpose
Why: Students confuse the size of inputs with their output elasticity when calculating growth contributions
Why: Students see that low nominal rates increase investment in the short run, and forget the long-run neutrality of money
Why: Students forget that population growth erodes gains in total GDP