ECON TEST 3 formulas and meanings

AD (Aggregate Demand)

The total demand for goods and services in an economy (AD = C + I + G + NX)

C (Consumption)

Household spending on goods and services

I (Investment)

Business spending on capital (factories, machinery, etc.)

G (Government Spending)

All government expenditures on final goods and services

NX (Net Exports)

Exports minus imports (X

Y (GDP/National Income)

Total income or output in an economy

T (Taxes)

Government revenue collected from individuals and businesses

MPC (Marginal Propensity to Consume)

The fraction of extra income that is spent on consumption

S (Saving)

Income not spent on consumption

S_private

Private saving by households and businesses (Y

S_public

Public saving by the government (T

NCI (Net Capital Inflow)

The net inflow of funds from foreign savers

Reserve Ratio

The percentage of deposits a bank must hold in reserve

Money Multiplier

The amount of money the banking system generates per dollar of reserves (1 / Reserve Ratio)

M (Money Supply)

The total amount of money in circulation

V (Velocity of Money)

The number of times money changes hands in a year

P (Price Level)

The average of current prices across the economy

r_nominal

Nominal interest rate, not adjusted for inflation

r_real

Real interest rate, adjusted for inflation

π (pi)

The inflation rate

Federal Funds Rate

The interest rate banks charge each other for overnight loans

Discount Rate

The interest rate the Fed charges banks for emergency loans

Open Market Operations

Fed buying or selling government bonds to affect the money supply

Interest on Reserves

Interest the Fed pays banks for holding excess reserves

AD Formula

AD = C + I + G + NX

Private Saving

S_private = Y

Public Saving

S_public = T

National Saving (closed economy)

S = I

National Saving (open economy)

S + NCI = I

Spending Multiplier

1 / (1

Tax Multiplier

Budget Deficit

Budget Deficit = Outlays

Budget Surplus

Budget Surplus = Receipts

Money Multiplier

1 / Reserve Ratio

Real Interest Rate

rreal = rnominal

Quantity Theory of Money

M × V = P × Y