AP Macro Graphs

Loanable Funds Market

Has a Demand and Supply, y axis is the real interest rate and x axis is the quantity of loanable funds

Determinants of Loanable Funds Demand

Economic Outlook/More buisness confidence, investment tax credits, corporate tax credits, productivity of new capital, real GDP

Determinants of Loanable Funds Supply

Disposable income, national savings rate, economic outlook, foreign investment, political/economic stability

Crowding Out

Too much expansionary fiscal policy increases national debt, decreasing investment spending from firms

Inflow

Financial capital and money entering an economy from other countries

Outflows

Financial capital and money leaving a country to go to another country

Supply Curves are always..

positive slope

Demand Curves are always….

Negative slope

Foreign Exchange Market Graph

y axis is price of currency a in terms of currency b (aka exchange rate), x axis is quantity of currency a

Determinants of Foreign Exchange Market Demand

Demand for exports, relative interest rate changes, future exchange rate predictions

Determinants of Foreign Exchange Market Supply

Demand for imports, relative interest rate, future exchange rate predictions

Money Market Graph

Nominal Interest rate on y axis, Quantity of money on x axis

Money Demand

Comprised of transaction demand and asset demand

Money Supply

Vertical because its controlled by the central bank in monetary policy

Determinanats of Money Supply

Central bank uses monetary policy to change supply, changes in lending

Lower Interest rates….

Lead to more investment, then more capital, then more economic growth

Equilibrium Interest Rate

shortage if nominal interest rate> equilibrium, surplus if less than

Shoe Leather Costs

Cost of inflation, the time and effort it takes to minimize the effect the effect of inflation

Menu Costs

Cost of inflation, the cost of having to change prices on social media, menus, etc

Relative Price Distribution

Cost of inflation, the prices of items can change at different rates

Income Redistribution

Wealth shifts from lenders to borrowers

Inflation on international trade

exports increase imports decrease

Inflation on economic growth

inflation causes uncertainty, more uncertainty reduces the chance people will invest therefore reducing economic growth

Calculate Investment Reduction

Inflation Rate*Planned Investment

Output Gap

Actual Output-Potential Output, if negative then recessionary gap, if positive then inflationary gap

Consumption Formula

C= Autonomous Consumption+ (MPC*Disposable Income)

Autonomous Consumption

The amount of consumer spending regardless of disposable income such as paying bills and basic needs

Wealth Effect

As prices fall, people feel wealthier because their money is worth more so they spend more and AD increases

Foreign Price Effect

Lower prices make domestic goods cheaper and therefore more people will buy them, reducing imports and increasing exports

Income Taxes

Affect the purchasing power of an individual, direct taxes

Corporate Taxes

Affects buisness investment, direct taxes

Sales Tax

Influences consumer purchases, indirect taxes

Contractionary Fiscal Policy

More taxes and less government spending, reduces AD,inflation, and debt

Expansionary Fiscal Policy

Less taxes and more government spending, increases AD, stimulates economic growth, increases job opportunities

Spending Multiplier

1/(1-MPC), Measures how much GDP increases for every dollar the government spends, always more than 1, can also be calculated doing change in GDP/Change in spending

Tax Multiplier

-MPC/(1-MPC), Measures how much GDP changes for every dollar of tax cuts, always negative, has smaller impact than spending multiplier

Functions of Money

Medium of Exchange, Storage of Value, Unit of Account

Capital Gains

If the price of your stock increases you can sell it for more than what it was worth. Selling Price-Purchase Price

Dividends

Companies choose to pay out some of their profits to shareholders. Dividend Yield= Dividend per share/ price per share *100

Bonds

Debt security used by governments and companies to borrow money from investors

Face Value

The amount that will be paid back to you at the end of the bonds term

Coupon Rate

the annual interest rate paid on the face value

Maturity Date

The date when the face value will be repaid

Future Value

The value of an investment or good at a specific time in the future, Future Value= Present Value* (1+interest rate)^time

Simple Interest

Interest that is constant over time, Present Value (1+ (interest rate* years)

Transaction Demand

For everyday purchases

Precautionary Demand

For unexpected expenses/purchases

Speculative Demands

To buy assets when prices drop

M1

Currency and Demand Deposits, like the cash you carry in your checking account

M2

M1 + Savings deposit and money market mutual funds

M3

M2+ Large time deposits

Tools of Monetary Policy

Reserve Requirement- the amount of money commercial banks keep in cash or deposits, Discount Rate-the interest rate in which banks can borrow from central bank, Open Market Operations-buying or selling government bonds

Treasury Bills

Key componenet of money market, short term debt securities issued by the gov

Commercial Paper

Key component of money market, short term unsecured debt issued by corporations

Federal Funds

Key component of money market, overnight loans between banks to meet reserve requirements

Certificate of Deposits (CDs)

Key component of money market, Savings account that hold a fixed amount for a fixed period

Federal Funds Rate

The interest rate at which banks and credit unions lend and borrow money from each other

Bank Lending Channel

Part of the Credit Channel, affects the ability of banks to lend based on monetary policy, and expands credit supply when policy eases

Balance Sheet Channel

Part of the credit channel, Enhances creditworthness of borrowers through improved bank sheets, increases borrowing capacity of firms

Asset Price Channel

How changes in monetary policy affect the prices of things like stocks, bonds and real estate

Exchange Rate Channel

Explains how changes in interest rates affect currency values, influencing exports and imports

Nominal Interest Rate

The rate of interest before adjusting for inflation

Real Interest Rate

Interest rate accounted for inflation and shows the true purchasing power, Real= Nominal-Inflation

Supply Side Economists

The belief that economic growth is increased by increasing aggregate supply

Effectiveness of Policy Mix

Change in GDP/ Change in Spending+ Change in Money Supply

Phillips Curve

Y axis is inflation rate, x axis is unemployment. Has a downward sloping short run and a vertical long run curve

SRPC Shifters

Positive SRAS shocks shift the SRPC to the left, Negative SRAS shocks shift the SRPC to the right

LRPC

Shows that in the long run there’s no relationship between inflation and unemployment, can be shifted by changes in the natural unemployment rate

LRPC and SRPC equilibrium

Called the natural rate of inflation, if inflation rate is lower then its a recessionary gap, if inflation rate is higher its an inflationary gap

AD-AS Model

Y is price level, X is quantity, AD slopes downward, AS slope upwards

Combining Expansionary Fiscal and Expansionary Monetary

Use when in a recession, increases GDP and reduces unemployment

Combining Contractionary Fiscal and Contractionary Monetary

Use when suffering increasing inflation, combats inflation

Expansionary Fiscal and Contractionary Monetary

Use to fix moderate growth and increasing inflation, increases GDP and reduces inflation

Contractionary Fiscal and Expansionary Monetary

Use when you want to reduce debts but increase investments, Debt reduces and investment increases

Deficit

Annual, short-term imbalance, Government Spending-Tax Revenue

Types of Debt

Government Bonds, Treasurey Bills (short term debt securities issued by the gov), Loans, Foreign Debt

Current Account

Tracks income and expenditures from trade, income, and transfers, deals with shorter term activities

Capital Account

Focuses on foreign direct investment, portfolio investment, and other investment, deals with longer term activities

Foreign Direct Investment

Companies setting up abroad

Portfolio Investment

Stocks and bonds purchases

Other Investments

Loans and other financial transactions