AP Macro Cram Review!!

Should have main topics-ish but it is mainly formulas

% change in GDP

(New GDP - Old GDP)/Old GDP * 100

((C)OMG)

((Current) Market Basket of Goods) items * prices

CPI

(Consumer Price Index) COMG(Current Year)/COMG(basket year) * 100

Inflation Rate/% Change in GDP

New - Old/Old * 100

Labor Force Participation Rate

people in labor force/working age population * 100

Unemployment Rate

number of people unemployed/number of people in labor force * 100

Expenditures Approach

C + I + G + (X-M)

Income Added Approach

(Add up all income earned from selling all final goods and services in a given year) Wages + Rent + Intrest + Profit

Value Added Approach

Add all dollar value at each stage of a production process

GDP Deflator

GDP(N)/GDP(R) * 100

Nominal GDP

Deflator * GDP(R)/100

Real GDP

GDP(N)/Deflator * 100

Real Wage Rate

Nominal Wage(Current)/CPI(Current) * 100

Interest Rate

The cost of borrowing money, usually expressed as a percentage

Inflation Rate

percentage increase in prices for goods and services over a period of time, typically measured annually

Real IR

Nominal IR - (Expected) Inflation Rate

Nominal IR

Real IR + (expected) Inflation Rate

Reserve Ratio

Required Reserves/Demand Deposits

Money Multiplier

1/Reserve Ratio

Disposable Income

amount of money a person has available to spend or save after paying taxes

MPS

(Marginal Propensity to Save) change in savings/change in disposable income or 1 - MPC

MPC

(Marginal Propensity to Consume) change in consumption/change in disposable income

Spending Multiplier

1/MPS or 1/(1-MPC)

Tax Multiplier

MPC/MPS or Spending Multiplier - 1

Maximum(Total) change in GDP

Initial Change in Spending * tax/spending multiplier

Gov has 3 choices

Employ Monetary Policy, Fiscal Policy or No Policy

Monetary Policy

tools a nations bank uses → mainly deals with Business I

Close Recessionary Gap: RR/DR/Buying Bonds → MS increase → IR down → I/AD increases

Close Inflationary Gap: RR/DR/Selling Bonds → MS decrease → IR up → I/AD decreases

Fiscal Policy

tools the gov uses → mainly deals with C or G spending

Close Recessionary Gap: Gov Spending increase → AD increase or Taxes decrease → Disposable Income increases → C or I increases → AD increase

Close Inflationary Gap: Gov Spending decrease → AD decrease or Taxes increase → Disposable Income decrease → C or I decrease → AD decrease

No Policy

Close Recessionary Gap: Wages down → Costs down → AS increase

Close Inflationary Gap: Wages up → costs up → AS decrease

PPC + Axis

(Production Possibilities Curve) x → capital goods/y → consumer goods

PPC Shifters

change in resource quantity or quality, technology, trade

Demand And Supply Graph Shifters

Demand: Market size, Expectations, Related prices, Income, Tastes and preferences

Supply: Technology, Inputs, Number of sellers, Gov. actions, Expectations of future profit

Demand And Supply Graph Axis

x → Quantity

y → Price

AD-AS Graph Shifters

AD: C, I, G, X, M

SRAS: Resource Prices, Actions of Gov, Productivity

LRAS: Change in resource quantity or quality, technology, trade

AD-AS Graph Axis

x → GDP(R)

y → Price Level(PL)

Equilibirum on x-axis labeled: Yf

Economic Growth

Occurs when LRAS shifts to the right

Money Market Graph Shifters

MD: Change in PL, Income, Technology

MS: Change in Reserve Ratio, Discount Rate, Open Market Operations

Money Market Graph Axis

x → Quantity of Money

y → Nominal IR

Loanable Funds Market Graph Shifters

Demand: Change in Borrowing Habits(Consumers, Business, Gov)

Supply: Change in Lending, Private/Public Savings behavior, foreign investment

Loanable Funds Market Graph Axis

x → Quantity of Loans

y → Real IR

Loanable Funds Market Graph Axis

x → Quantity of Loans

y → Real IR

Reserve Market Model Axis

x → Quantity of Reserves

y → Federal Funds Rate

Comparative Advantage

Country that makes goods at a lower opportunity cost than another country

Absolute Advantage

Country thats “better” at producing one(+) goods

Frictional Unemployment

Temporary unemployment that occurs when individuals are transitioning between jobs or entering the workforce for the first time

Seasonal Unemployment

Sub-category of Frictional Unemployment ~ Occurs during specific times of the year

Structural Unemployment

Occurs when there is a mismatch between the skills workers have and the skills required for available jobs leading to long-term unemployment

Technological Unemployment

Sub-category of Structural Unemployment ~ Occurs when automation and technology replace human workers leading to job loss

Cyclical Unemployment

Occurs due to fluctuations in the business cycle, causing job losses during economic recessions

Full Employment

Frictional + Structural Unemployment

Long Run Self Adjustment

SRAS will shift if Gov takes absolutely no action

Monetary Policy

Change MS to affect IR

Crowding Out

Deficit Spending leads to IR increase and less investment/growth

Automatic stabilizers

Examples: progressive taxation system, unemployment benefits

Quantity Theory of Money Formula

MV=PY

M - Quantity of Money

V- Velocity of Money(Typically Constant)

P - Price Level

Y - Real GDP

PY - Nominal GDP