Macro econ equations Unit 3+4

MM

1/rr

Expenditure multiplier

1/mps or 1/1-mpc

Tax multiplier

-mpc/mps

Real interest rate eq

NIR-expected inflation or NIR-actual interest rate

Change in money supply 

(excess reserves)(mm)

Change in Demand Deposits

(Excess reserves) (mm)

Max increase in loans

(excess reserves)(MM)

Change in GDP

(Multiplier)(amount of spending or taxes)

Real GDP

(Nominal GDP/CPI)(100)

Bond Price Relationship w interest rates

Inverse: When intrest rates rise, bond prices fall, vice versa

Demand money graph and interest rate relationship

Inverse: as interest rates increase, demand for money decreases

Money supply relationship with money graph

Inverse: If money supply increases then interest rates decrease

Open market operations

If you buy bonds then money supply increases and interest rates decrease causing aggregate demand to increase. If you sell bonds money supply decreases and interest rates increase causing aggregate demand to decrease.

Reserve ratio and money supply relationship

If you decrease reserve ratio, money supply will increase and vice versa 

Discount rate

If you decrease discount rate, borrowing will increase and money supply will increase, if you increase discount rate, borrowing decreases and money supply decreases.

Price Level and RGDP relationship

Inverse

Interest rate and bond prices relationship

Inverse 

Inflation and unemployment relationship

Inverse

M0

Physical currency in circulation

M1

Current money in circulation+ demand deposits + travelers checks

M2

M1+saving accounts+ CD’s+ money market funds

Shifters of SRAS

R- resource price, A- actions of the government (taxes, subsidies, regulations), P- changes in productivity

Shifters of LRAS

Changes in resources, changes in technology, changes in education/quality of labor 

Money Demand shifters

P-Price level, I-Income, F- Fiscal policy, T-technology

Money Supply shifters

Only the Federal Reserve can shift money supply via monetray policy

Loanable Funds demand shifters (motives) 

speculatory motive, gov borrowing (deficits), consumer borrowing

Loanable funds supply shifters

Changes private savings, capital inflows, changes in public savings

Crowding out

When government borrowing increases interest rates, decreasing private investment.

Budget deficit

When the government spends more than it collects in taxes so it must borrow by selling bonds. This decreases the money supply, shifts demand right and increases interest rates, which may cause crowding out.

Budget surplus

When the government collects more in taxes than it spends, supply of loanble funds shifts left, interest rates fall, and private investment increases