AP Macro Relationships

Opportunity Cost ↑

Available choices ↓

Comparative advantage

If it can make a good with a lower opportunity cost

Law of Demand

As price increases, quantity demanded decreases

Law of Supply

As price increases, quantity supplied increases

Demand ↑

Quantity and Price Level increase

Supply ↓

Price increases, Quantity Decreases

GDP ↑

Economy is growing

Unemployment ↑

Increased chance of a recession

Inflation ↑

Purchasing power decreases

Price Level ↑

Real wages decrease

Real Interest Rate

Nominal Interest Rate - Inflation Rate

Consumer/Investment/Gov/Net Exports ↑

Aggregate Demand, Price Level, and GDP increases

Input costs ↑

Aggregate Supply and GDP Decrease, Price Level Increases

AD Shifts

Demand Side Shocks

AS Shifts

Supply Side Shocks

Stagflation

High inflation, slow economic growth, and high unemployment

Taxes ↓ / Gov spending ↑

Expansionary Fiscal Policy, Aggregate Demand increases

Taxes ↑ / Gov spending ↓

Contractionary Fiscal Policy, Aggregate Demand decreases

Multiplier effect

1 change in spending can result in a bigger change in GDP as the multiplier carries throughout people

Spending Multiplier

1/ (1-MPC)

Marginal Propensity To Consume

Change In Consumer Spending/Change in Consumer Income, 1-MPS

Marginal Propensity to Save

Change in Consumer Saving/Change in Consumer Income, 1-MPC

Money supply ↑

Interest Rates decrease, Aggregate Demand and Investment increase

Money supply ↓

Interest Rates increase, Aggregate Demand and Investment decrease

Buying bonds

Monetary Policy, Results in bigger money supply

Selling Bonds

Monetary Policy, results in smaller money supply

Discount rate or Reserve requirement ↑

Money supply decreases

Discount Rate

The interest rate at which commercial banks can borrow money from the central bank

Reserve Requirement

The amount of money that banks must hold in either cash or deposits

Inflation ↑

Unemployment decreases in the short run

AD ↑ (In Terms of Phillips Curve)

Move along Short Run Phillips Curve to lower unemployment, higher inflation

Short Run Phillips Curve

Graph that shows as inflation increases, unemployment decreases

Long Run Phillips Curve

Vertical line that indicates in the long run there is no relationship between unemployment and inflation

AS ↓ (in terms of Phillips Curve)

Stagflation increases, Short Run Phillips Curve shifts right, both inflation and unemployment increase

Country’s interest rate ↑

More foreigners want to invest, currency appreciates

Currency appreciates

Exports decrease, imports increase

Currency depreciates

Exports increase, imports decrease

Stronger currency

trade deficit, basically a country is spending more on foreign goods than its making

Weaker Currency

Trade Surplus, a country’s exports are worth more than its imports

AD ↑

PL and GDP increase, Unemployment decreases

AS ↓

GDP decreases, Price Level and Unemployment increases

Interest rate ↑

Investment and Aggregate Demand Decrease

Inflation ↑

Real Wages and Real Interest Rate Decrease

Government deficit ↑

Demand for Loanable Funds increases and real interest rate increases

Real Wages

Real Wages- (Real Wages * Inflation Rate)