Macro in Econ 1

Nominal GDP

current year price

Real GDP

Y

GDP Deflator

Nominal GDP/ Real GDP * 100

• how price changed since base year

Inflation Rate using Deflator

deflator (year 2) - deflator (year 1)/ * 100

deflator (year 1)

CPI

cost of basket now/ cost of basket base year

Unemployment Rate

unemployed/ labor force

labor force - employed and unemployed but looking for job

LFPR (labor force participation rate)

labor force/ working age population

r (real interest rate)

i - pi

i = nominal interest

pi = inflation rate

Aggregate Demand, also known as AE (Aggregate Expenditure)

C + I + G + (X - M)

C

consumption

I

investment

G

government spending

X

exports

M

imports

N

net exports (X-M)

Yd

Disposable income

Yd = Y - TA + TR

TA, TR

TA = taxes

TR = transfer payments

C0

autonomous consumption: household spending even if disposable income = 0

MPC

• change in consumption/ change in income

Marginal Propensity to Consume

MPC + MPS = 1

MPS

Marginal Propensity to Save

MPC + MPS = 1

t

tax rate

MS

money supply

MD

money demand

M1

highly liquid - how quick asset becomes cash without losing value (cash/checking)

M2

M1 + savings acct + other deposits

IORB

interest on reserve balances

floor for interest rated feds pays banks on reserves

Trade Balance (N)

X-M

PPP

purchasing power party

• exchange rate equalizes the prices of internationally traded goods

Government budget balance

T - G

tax revenue - govt spending

T = tax per unit * q

multiplier

1/(1-mpc)

demand pull inflation

AD to the right → pretty good cuz gdp and price increase → more production and employment

Cost push inflation

SRAS Left (reaaaally bad) → stagflation

Change in Y

initial spending * multiplier

Trade Deficit

(X-M) = I - S - (T - G)← govt budget

Current Account Balance (NOT BALANCE OF TRADE)

(X + income receipts + transfer payments received) - (M + income payments + transfer payments sent)

Current account + Financial account =

0