Macro Ex. 3 Cards

Increase in Expected Profitability of Capital

Leads to higher demand for loanable funds as firms anticipate better returns on investments.

Lower Business Taxes

Encourages borrowing by increasing net income, leading to higher demand for loanable funds.

Decrease in Expected Profitability of Capital

Reduces demand for loanable funds as firms become less confident in investment returns

Higher Business Taxes

Decreases demand for loanable funds by reducing available profits and making loans less attractive.

Rightward Shift in Demand for Loanable Funds

Increases equilibrium real interest rate and equilibrium quantity of loanable funds.

Leftward Shift in Demand for Loanable Funds

Decreases equilibrium real interest rate and equilibrium quantity of loanable funds

Increase in Wealth

More assets available to lend increases the supply of loanable funds, lowering the equilibrium real interest rate and increasing equilibrium quantity.

Decrease in Risk

Reduced risk for lenders encourages more loans, increasing the supply of loanable funds, decreasing equilibrium real interest rate and increasing equilibrium quantity.

Increase in Liquidity

More liquid assets available allow lenders to offer more loans, increasing supply, raising equilibrium quantity and lowering equilibrium real interest rate.

Decrease in Information Costs

Lower costs for obtaining borrower information enhance trust, increasing supply of loanable funds, raising equilibrium quantity and lowering equilibrium real interest rate.

Rule of 70

A formula to estimate years required for a quantity to double given a fixed annual growth rate: Years to Double = 70 / Annual Growth Rate (%)

Risk

The possibility of loss or uncertainty associated with an investment or financial decision, where higher potential returns are typically associated with higher risk.

Liquidity

The ease with which an asset can be converted into cash without significantly affecting its price; highly liquid assets can be quickly sold with little price impact.

Information Costs

The expenses incurred in obtaining, processing, and analyzing information about investments or borrowers, influencing the supply of loanable funds.

Expansion

A phase characterized by increasing economic activity, growth in GDP, and rising employment levels, with increased consumer spending and business investments.

Peak

The highest point of economic activity in the business cycle, where GDP growth rates and employment levels are at their maximum, often leading to inflation.

Recession

A period of declining economic activity defined by two consecutive quarters of negative GDP growth, with rising unemployment and decreasing consumer spending.

Trough

The lowest point of the business cycle, characterized by minimal economic activity, high unemployment, and low consumer confidence, followed by recovery.

Inflation during Expansion

Typically increases due to higher demand for goods and services, leading to upward pressure on prices.

Unemployment during Expansion

Generally decreases as businesses hire more workers to meet rising demand, leading to lower unemployment levels.

Inflation during Recession

Usually decreases or may lead to deflation due to falling demand for goods and services, resulting in downward pressure on prices.

Unemployment during Recession

Typically increases as businesses cut back on hiring or lay off employees due to reduced demand, causing higher unemployment levels.

Purpose of Financial Intermediaries

To facilitate the flow of funds between savers and borrowers, channeling savings to investments.

Risk Management

Financial intermediaries spread risk among a larger pool by diversifying investments

Lowering Transaction Costs

They reduce costs and complexities of transactions between savers and borrowers, offering financial services.

Providing Liquidity

They ensure that savers can access their money on demand while providing long-term loans to borrowers.

Access to Financial Products

Financial intermediaries offer financial products that are otherwise inaccessible to individual investors.

Impact of Disposable Income on Consumption

Higher disposable income increases consumption; lower disposable income decreases consumption, shifting the aggregate expenditure line downwards.

Impact of Wealth on Consumption

Increased household wealth leads to higher consumption; decreased wealth restricts consumption, shifting the aggregate expenditure line down.

Impact of Expected Future Income on Consumption

Positive future income expectations boost current consumption; negative expectations decrease it, shifting the aggregate expenditure line downward.

Impact of Price Level on Consumption

Decreased price levels encourage higher spending, shifting the aggregate expenditure line up; increased price levels restrict consumption, shifting it down.

Impact of Interest Rates on Consumption

Lower interest rates promote consumption by reducing borrowing costs; higher interest rates deter consumption, shifting the aggregate expenditure line down.

Expected Profitability

Increased expectations for profitability lead to higher planned investment; decreases result in lower investment.

Interest Rates

Higher interest rates increase borrowing costs and decrease planned investment; lower rates have the opposite effect.

Taxes

Lower business taxes support higher planned investment; higher taxes reduce potential profits and investment.

Cash Flow

Higher cash flow allows more investment, increasing planned investment; lower cash flow restricts it.

Aggregate Expenditure (AE) Curve

The AE curve shifts with changes in planned investment, impacting overall economic output.

Domestic vs. Foreign Price Levels

Lower domestic inflation makes U.S. goods cheaper for foreign buyers, increasing exports and net exports; higher prices have the opposite effect.

GDP Growth Rates

Faster GDP growth in the U.S. can lead to higher imports (lower net exports); slower growth may reduce imports (potentially increasing net exports).

Exchange Rates

A stronger U.S. dollar makes exports more expensive, decreasing net exports; a weaker dollar lowers import costs and increases exports, improving net exports.

Aggregate Demand (AD)

The total demand for all goods and services in an economy at a given overall price level and in a given period.

Positive Expectations

When households and firms anticipate future income increases, leading them to spend and invest more, shifting AD right.

Negative Expectations

When households and firms fear future income decreases, leading to reduced spending and investment, shifting AD left.

Net Exports

The difference between a country's exports and imports; decreasing net exports shift the Aggregate Demand curve left.

Value of the Dollar

The strength of a currency; a stronger dollar can lead to decreased exports and increased imports, negatively affecting net exports and shifting AD left.

Labor Force Changes

An increase in the labor force shifts the Short-Run Aggregate Supply (SRAS) curve to the right, enhancing production capacity. In the Long-Run Aggregate Supply (LRAS), a larger labor force can lead to potential economic growth

Capital Stock Changes

Increasing capital stock, such as machinery and infrastructure, shifts both SRAS and LRAS to the right due to enhanced productive capacity. Depletion leads to leftward shifts, indicating reduced capabilities.

Technological Change

Positive advancements shift the SRAS curve right due to lower production costs and higher efficiency. Continuous progress can shift LRAS right, representing increased economic growth.

Short-Run Aggregate Supply (SRAS)

The aggregate supply curve that shows the positive relationship between the price level and the quantity of goods produced in the short run.

Expected Future Price Level

The anticipated level of prices in the future, influencing both wages and prices, thereby affecting the supply curve.

Shift to the Left (SRAS)

Occurs when firms anticipate higher future prices, leading to increased wages and production costs.

Shift to the Right (SRAS)

Occurs when firms expect lower future inflation, allowing for lower prices and wages.

Inflation Expectation

A prediction of future inflation which affects output and wage decisions in the short run.

Stagflation

An economic condition characterized by stagnant economic growth, high unemployment, and high inflation occurring simultaneously.

Causes of Stagflation

Can include supply shocks, poor government policies, or external factors affecting inflation and economic activity.

Inflation

A general increase in prices and fall in the purchasing value of money.

Unemployment

The situation when individuals who are capable of working are unable to find a job.

Economic Growth

The increase in the production of goods and services in an economy over time.

Long-Run Aggregate Supply (LRAS) Curve

A vertical curve representing the relationship between the price level and the quantity of goods supplied in the long run, unaffected by price level changes.

Impact of Price Level on LRAS

Changes in the price level do not affect the LRAS; output is determined by resources, technology, and labor.

Full Employment Output

The level of output where all resources are fully utilized; LRAS reflects this level of output.

Short-Run Aggregate Supply (SRAS) Curve

An upward sloping curve indicating the positive relationship between the price level and quantity of goods supplied in the short run.

Economic Equilibrium

The point where the LRAS, SRAS, and Aggregate Demand (AD) curves intersect, determining the overall price level and output.

Increases in aggregate demand cause an ___________ in the short run.

expansion

Decreases in aggregate demand cause a _________ in the short run

recession

Decreases in short-run aggregate supply cause -______ in the short run.

stagflation