AP Macro Review

Production possibilities curve (PPC)

Shows the idea of scarcity, opportunity cost, and trade offs

PPC x axis

consumer goods

PPC y axis

capital goods

Where is an iniffiecient level of production located on the PPC?

Inside the curve

Inefficient levle of porduction

not maximizing possible resources, could be producing more, increases unemployment

Where is an efficient level of production located on the PPC?

On the curve

Efficient level of porduction

Maximizing scarce resources, dealing with scarcity in the best way possible, not wasting as much as A

Where is over extension located on the PPC?

Slightly outside the curve

Over extended level of production

Pushing production/use of resources past a sustainable level (WWII)

What is needed for a not yet attainable level of production?

New or more technology needed

Absolute advantage

Who can make/produce the most of a good or service. Total production capabilities

Comparative advantage

If you have a lower opportunity cost in producing a good/service compared to another producer/business/county

Opportunity cost

What you give up to get what you want

Determinates of demand

income, price of related goods (compliments and substitutes), tastes, expectations, number of buyers

Supply and demand graph equilibrium

Where supply and demand intersect, market clearing price/goal of the market, number of buyers=number of sellers

Quantity demand and quantity supply relation in a surplus (price floor)

QD<QS

Effect of surplus

unemployment

Quantity demand and quantity supply relation in a shortage(Price ceiling)

QD>QS

Effect of shortage

Government force on price floor

minimum wage, food/ ranching subsidies, creates surplus

Government force o price ceiling

rent control, creates shortage

Circular flow diagram

simplified depiction of the whole economy

Households

consumers/buyers, sell factors of production, pay taxes, receive transfers(house/food assistance) form government

Market for goods and services

Where households buy, firms sell, government buys here too

Firms

Producers, sellers, businesses, sell goods and services, buy factors of production, pay taxes, receive transfers(subsidies) from government

Market factors of production

Households sell, firms and government buys

Government in circular flow diagram

receives taxes from households and firms, sends transfer payments to houses and firms, buys goods and services and factors of production

Leakage

money that is removed form the circular flow diagram

Injection

Money that is moved into the circular flow diagram

Examples of leakage

government taxes, savings, imports, US loaning money to other countries

Examples of injection

government spending, transfers, loans, exports, lending to the US from other countries

Expenditure: C

Personal consumption in the economy

Expenditure: Ig

Gross Private business investments

Personal consumption in the economy

The purchase of finished goods and services except for houses

Gross private business investment

Factory equipment maintenance, new factory equipment, construction of housing, unsold inventory of products built in a year

Expenditure: G

Government spending

Government spending

government purchases of products and services

Expenditure: Xn

Net Foreign Factor Trade: Exports minus imports

Net Foreign Factor Trade: Exports minus imports

Export = dollars in, imports = dollars out

Does not count in GDP

Used goods, gifts, stock, unreported business activities (cash), illegal activities, loans, intermediate goods (no double counting), volunteer or family work

GDP expenditures approach

C(personal consumption) + Ig (Gross private business) + G (government spending) + Xn (Net foreign factors of trade)

GDP Income approach

W(wages) + R (rent) + I (interest) + P (profit) + SA (statistical adjustment

Statistical adjustment for GDP income approach

Depreciation, Business taxes (sales tax), Net foreign income

Nominal GDP

current input and output not adjusted for inflation

Nominal GDP formula (N)

(A_$+A_Q) + (B_$+B_Q) = GDP

Real GDP r

Adjusted for inflation, sets inflation as a constant to show change in quantity only

Real GDP formula

(A_{base year $} + A_Q) + (A_{base year $} + A_Q) = GDP

Deflator

removes balloon of inflation, shows output (change in quantity), allows for true/better assessment of GDP

Deflator formula

(N/r)100

Civilian, non-institutional adult population

People 16 and older who are not institutionalized or in the armed forces

Civilian labor force

All people 16 and older who are not retired, homemakers, full time students, or not looking for a job

Labor force participation rate

Percentage of civilian non-institutional population that are in the labor force

Frictional unemployment

Unemployment in a transition from one job to another

Structural unemployment

long lasting unemployment when there is a fundamental change in the economy causing a job to no longer be needed

Cyclical unemployment

Recession unemployment

Natural rate of unemployment

A healthy amount of unemployment, 4% for US

CPI

Consumer price index, monthly change in price for a figurative basket of goods and services

CPI formula

(current year basket/base year basket)100

When is it a change along the curve on an AD model?

If price level changes first

When to shift the curve on an AD model?

When price level is not the first to shift

Short run aggregate supply (SRAS)

a condition where wages and/or input cost have not adjusted to the price level

Long run aggregate supply (LRAS)

wages and price levels eventually catch up and adjust to the price level, represents full unemployment/natural rate of unemployment

What is the movement on an SRAS model when price level changes first?

movement along SRAS curve

What is the movement on an SRAS model when something other than price level changes first?

Shift curve

Fiscal policy

Actions taken by the government (congress and federal reserve) to correct the economy (when there is too much inflation or too much unemployment)

Fiscal policy goal

Speed up or slow down economy

Congress fiscal policy

Taxation and government spending

What is congress good at fixing

unemployment, not inflation

Expansionary fiscal policy

actions by congress to expand GDP, counteracts recession

Contractionary fiscal policy

Actions by congress to decrease GDP, counteract excessive inflation

Fiscal policy for the recession

Unemployment insurance and temporary assistance

Excessive inflation fiscal policy

Increase taxes

Disposable income formula (DI)

DI = C (consumption spending) + S (savings, invested or held in cash)

Spending multiplier formula

1/1 - MPC or 1/MPS

New DI formula

New DI = MPC + MPS

Taxation multiplier formula

-MPC/MPS

Money multiplier

Used to determine maximum changes in banking system when deposits or withdrawals are made, based on reserve requirements

Money multiplier formula

1/rr

Nominal interest rate

current price of money

Expansionary monetary policy

to fix excessive unemployment, central bank decreases interest rates, lower ir=less expensive to borrow = more borrowing

When to shift money demand

Change in price level, real GDP/national income increase, and technology

Shifts of money supply

comes from changes in fed and monetary policy

Contractionary monetary policy

to fix excessive inflation, central bank increases nominal interest rates, higher ir = more expensive to borrow = less borrowing

Limited reserves

reserves are not overly abundant, rr is greater than 10, commercial banks hold required reserves and possibly more, monetary policy works by changing supply excess reserves, in turn the money supply making it easier or harder to lend

Tools of limited reserves

change in rr, change in discount rate, OMO action

Required reserves ratio (rr/% of demand deposits)

amount FED requires banks to hold

rr ratio decrease =

MS increase, NIR decrease, AD increase

rr ratio increase =

MS decrease, NIR increase, AD decrease

Discount rate

banks cost of borrowing money directly from FED, usually for emergencies

discount rate decrease =

MS increase, NIR decrease, AD increase

Discount rate increases =

MS decrease, NIR increase, AD decrease

Open market operations

FED buying and selling government bonds,

OMO purchase =

reserve increase, MS increase, NIR decrease, AD increase

OMO sale =

reserve decreases, MS decrease, NIR increase, AD decrease

Ample reserves

reserves are abundant, reserve requirement is zero, changing MS does not change NIR, money market graph not used

tools for ample reserve monetary policy

interest on reserves rate, discount rate

Interest on reserves

interest rate commercial banks earn with money they deposit with the FED, FED has all the reserves, increase or decrease to change lower bound of reserves market graph

IOR decreases =

decrease in policy rate, nominal rate decrease, AD increase,

IOR increases =

increase in policy rate, nominal rate increase, AD decrease