AP Exam Macro

Input Question

Other goes under

Output Question

Other goes over

GDP

C+I+G+Xnet

Net Exports

Exports - Imports

Real GDP

GDP using base year prices (adjusted for inflation)

GDP limitations

* Household production
* Illegal Transactions
* Environmental protection
* leisure time/quality of life

Income Approach for GDP

R+W+I+Pr

R: Rent

W:wages

I: interest

Pr: proft

Inflation on Borrowers

Helps

Inflation on Lenders, Savers, and people with fixed incomes

Hurts

Cost Push

Production cost increase, negative supply shock/ supply shifts rightD

Demand Pull

Demand increases, positive demand shock/demand shift right

Consumer Price Index

Value of Market Basket in the Given Year/

Value of Market Basket in the Base Year. times 100

GDP Deflator

Nominal GDP/

Real GDP. x100

Cyclical Unemployment

Insufficient demand of good or services. Connected to the state of the economy.

Trough

Lowest point on the business cycle

Expansion

Coming up from a trough

Peak

Highest point on the business cycle

Contraction

Coming down from a peak

Growth Trend

Economy is getting better from a troughAct

Actual Growth

Economy is growing above full employment

Wealth Effect

Price level decrease means money in bank can purchase more so feel wealthier and spend more.

Interest Rate Effect

Higher aggregate price means household need more money to cover expenses leading to increase demand for loans which increases interest rate and a fall in investment spending and consumer spending because consumers and businesses are less likely to borrow money.

Foreign Trade Effect

When US prices increase, foreign buyers purchase fewer US goods, Americans buy more imports

Shifter of Aggregate Demand

Anything in the GDP equation

Shifters of SRAS

1. Input Prices
2. Productivity
3. Government Action (taxes and subsidies)
4. Expectations of Future Expectations

LRAS

Vertical because no fixed inputs. Represents full employment and potential output.

Fiscal Policy

Congress and Government Action

Discretionary Fiscal Policy

Spending in response to recession.

Non-Discretionary

Automatic systems

Expansionary Fiscal Policy

Increase government spending, decrease taxes

Contractionary Fiscal Policy

Decrease Government Spending, Increase Taxes

Marginal Propensity To Consume

Change in Consumption/

Change in Disposable Income

Marginal Propensity to Save

Change in Saving/

Change in Disposable Income

Multipler Effect

1/1-MPC

1/MPS

Expenditure Multiplier

How much the GDP will change in response to a change in aggregate spending.

Tax Multipler

MPC/MPS, smaller because a portion of the tax cut is saved.

Dual Mandate of the FED

maximize employment, maintain price stability

Reserve Requriment

Banks have a required amount of money to keep on hand or with the FED

Increase Reserve Requirement

Economy slows

Decrease reserve requirement

Economy grows

Discount Rate

Interest rate FED charges commercial bank for loan

Open Market Operations

Buying and selling bondsPurch

Buying bonds

Increase the money supply

Selling bonds

decrease money supply

Increased bank lending

expanding money supply

Money Multiplier

1/RR

Money

Anything generally accepted as payment for goods/services

Medium of Exchange

Facilitates purchases

Unit of Account

establishes the value of goods/services

store of value

saving money stores wealth for future.

Liquidity

The ease with which an asset can be converted to cash.

Money Supply

Total amount of money in circulation at the time

M1

Currency+ checkable/demand deposits

M2

M1+saving deposits, money market accounts, small scale times deposits

Money Base

Currency in circulation plus bank reserves

T-Account

Summarize a bank’s financial position by summarizing assets and liabilities.

Assets

What it owns, required reserves, loans, excess reserves

Liabilities

What it owes, deposits

Real Interest Rate Equation

Nominal Interest Rate- Inflation

Money Market Graph

Inverse relationship between nominal interest rate and quantity of money demanded.

Shifters of Demand of Money

1. Change in Price Level (Higher prices, more demand)
2. Change in GDP (more goods, more things to buy)
3. Change in technology (credit card easier to use, need less cash)

Shifters of Money Supply

Fed Policies

Demand for Loans

Borrow money when interest rate is low

Supply of Loanable Funds

Comes from the savings of its customers. Savings increase when interest rate is higher.

Long Run Phillips Curve

Vertical, no trade off between inflation and unemployment. Vertical at the natural rate of unemployment rate.

Shifts in SRPC

Shifts in Aggregate Demand and Aggregate Supply

Velocity of Money

Rate at which money is exchanged in an economy.

Quantity Theory of Money

MxV=PxY

P=Aggregate price

Y= Aggregate output

Increased velocity

Economy is expandingF

Decreased Velocity

Economy is contracting

Budget Balance

Difference between government spending and revenue

Budget Balance Equation

Tax Revenue- Government Purchases - Transfer Payments

National Debt

Total amount owed (in past years too)

Positives for a Deficit

Allows for expansionary fiscal policy during recession

Crowding Out

Government is a big player in the economy and borrows large sums of money its increases interest rates.

Output Exceeds LRAS in Short Run

Resources are used more intensively

LRAS Shifters

Better resources or technology

Economic Growth

Increasing productive capacity at full employment

Productivity

Key to economic growth. Measured by the quantity of goods and services produced from each unit of labor.

Long-Run Productive Capacity Can Increase If

1. human capital increase (education)
2. natural resources increase
3. capital goods increase (equipment)
4. technology

Real GDP per capita

Used to measure living standards

Balance of Payments

An accounting of a country’s international transactions by individuals, firms and government agencies for a period.

Current Account

Goods, services, interest, and dividend income and one-way transfers.

Financial Account

Financial Assets, Financial Capital Transfers

Current Account Equation

Exports compared to imports

Net Capital Outflow

Outflow-Inflow

Money in

Credit

Money Out

Debit

Demand for Currency

Inverse relationship between exchange rate and quantity demanded.

Demand for Exports Increase Currency demand…

increases, appreciates

Demand for exports decreases currency demand….

decreases, depreciates

if interest rates are high then demand for currency

increases, appreciates

if people expect higher rates in future, demand

increases

Supply of currency

Upward sloping, positive relationship between exchange rate and quantity of currency supplied.

More imports, currency….

depreciates

Interest rates decrease

US investors purchase more financial assets, more dollars in exchange market

Increase in Capital Inflow, loanable funds…

increase

Capital outflow increases, loanable funds

decreases

Higher interest rates, foreign investors….

increase