Econ AP review

Productions Possibilities

Product A, Product B

Market Equilibrium

Price, Quantity

AD AS Graph

Price level, Real GDP

Loanable Funds Market

Real interest rate, Amount of funds

Money Market Graph

Nominal interest rate, Quantity of money

Reserve Market Graph

Policy rate, Amount of reserves

Long Run ADAS

Price level, Real GDP

Short Run Philips Curve

Inflation, unemployment

Long Run Philips Curve

Inflation, unemployment

Dollar Market

Pound price per dollar, Quantity of dollars

Price index

price of market basket of goods/servs in certain year/

price of basket in beginning year x100

Real GDP

nominal GDP/

price index x100

Unemployment rate

# of unemployed/

labor force x100

Labor force participation rate

labor force/

working age population x100

Rate of inflation

(price index ending year-price index beginning year)/

price index beginning year x100

Number of years to double (rule of 70)

70/% change (growth rate)

Real income

nominal income/

price index x100

% change in real income

% change nominal income - % change price level

MPC

change in consumption/

change in income

MPS

change in saving/

change in income

multiplier

1/MPS *use when there’s a change in C,Ig,G,Xn

Overall change in spending (not taxes)

initial change in spending * multiplier

Overall change in spending (taxes)

1. tax * MPC=initial change in spending

2. initial change in spending * multiplier

Leaks and injections balance to GDP

S+M+T=Ig+X+G

Monetary multiplier (m)

1/

reserve ratio

Max potential money creation (first deposit already existed)

first excess reserves * monetary multiplier

Max potential money creation (first deposit from fed/didn’t exist before)

initial deposit * monetary multiplier

Equation of exchange

M * V = P * Q

• M=$ supply

• P=price level

• V=velocity of $

• Q=Amount of goods/servs produced

• P * Q = nominal GDP

Circular flow model

Households get income from businesses for resources, then use that income to buy things from businesses

AD

C, Ig, G, Xn and affected by changes in those factors

AS

Total supply of econ; affected by changes in input prices, productivity, and legal environment (regulations, taxes, subsidies)

Long Run

Nominal wages (and nominal input prices) remain fully responsive to changes in price level

Short run

Nominal wages (and nominal input prices) remain fixed as price level changes

Expansionary

Cut taxes, increase spending; →deficit

Contractionary

Increase taxes, gov spending doesn’t change; →surplus

Fiscal policy

Changes in taxes and gov spending

M1

Liquid $; currency, checkable deposits, savings deposits

M2

Near monies; can’t touch it

Monetary policy with limited

• Open market operations

• Reserve ratio

• Discount rate

Monetary policy with ample

• Interest on reserve balances

• Discount rate

Easy $

Recession

Tight $

Inflation