AP Macro Full Review A

2 parts of administered interest rates

interest on reserves and discount rate

3 problems with using CPI to measure inflation

1. substitution bias ( market basket doesn't account for consumers substituting towards cheaper goods)
2. introduction of new goods ( doesn't account for change in purchasing power caused by new goods)
3. unmeasured quality changes ( the quality of the good can change, meaning that the value of the dollar changes, even if the price remains the same)

3 tools of monetary policy

reserve requirement ratio, discount rate, open market opperations

absolute advantage

produce greater output

AD/AS - business taxes ↑

S decreases

AD/AS - capital stock (growth) ↑

LRAS increases

AD/AS - consumption ↑

D increases

AD/AS - gov spending ↑

D increases

AD/AS - input prices ↑

S decreases

AD/AS - investment ↑

D increases

AD/AS - net exports ↑

D increases

AD/AS - productivity (growth) ↑

LRAS increases

AD/AS - productivity ↑

S increases

AD/AS - resources available ↑

S increases

AD/AS - technology (causes growth) ↑

LRAS increases

AD/AS - wages ↑

S decreases

APC (average propensity to consume)

consumption/disposable income

appreciation

increase in the value of a currency

APS (average propensity to save)

savings/disposable income

automatic stabilizer

fiscal policies that stabilize the economy and occur without special government action. ex. progressive income tax, unemployment insurance, medicaid.

balance of payments

the difference between the flow of money into and out of a country

CA + CFA =

0

calculating inflation rate using CPI

new CPI - old CPI / old CPI

calculating RGDP using GDP deflator

RGDP = NGDP / GDP deflator X100

capital and financial account (CFA)

balance of payments on the sale of assets to foreigners vs. the purchase of assets from foreigners

comparative advantage

make the same amount with a lesser opportunity cost

contractionary fiscal policy

decrease AD -> decrease government spending, increase taxes, or decrease government transfers

contractionary monetary policy

selling bonds, increasing required required reserve ratio and the discount rate

cost push inflation

inflation that is caused by a significant increase in the price of an input with economy-wide importance (leftward shift/decrease of SRAS)

CPI (consumer price index)

a measure of the average change over time in prices paid by consumers for a fixed "market basket" of goods and services. used to measure inflation rate and purchasing power

CPI calculation

market basket in current year / market basket in base year X100

crowding out

a decrease in investment that results from government borrowing (increase in demand for loanable funds leads to an increase in RIR, investment decreases)

• causes a decrease in capital stock and a decrease in the growth rate in the long run

current account (CA)

balance of payments on primarily goods and services, and net investment income, foreign factor income, and net transfers

cyclical unemployment

loss in jobs due to a downturn in the business cycle

demand pull inflation

inflation that is caused by an increase in aggregate demand

depreciation

decrease in the value of a currency

determinants of economic growth

capital stock and technology

discount rate

the minimum interest rate set by the federal reserve for lending to other banks

discretionary spending

spending from legislation or policies that are not mandatory

effect on AD when a currency appreciates

net exports decrease, AD decreases

effect on AD when a currency depreciates

net exports increase, AD increases

elasticity of supply

a measure of how producers react to a change in price (elastic, producer has a big response. inelastic, producer has a small response)

equation of change

MV=PY
(money supply)(velocity of money =
(price level)(real output)

PY = nominal GDP

exchange rate (net export) effect

a decrease in domestic price levels will lead to an increase in exports and therefore an increase in total output

expansionary fiscal policy

increase AD -> increase government spending, decrease taxes, or increase government transfers

expansionary monetary policy

buying bonds, decreasing required required reserve ratio and the discount rate

factor (resource) market

factors of production (land, labor, capital) are offered for hire and employed. households supply resources, firms demand

federal funds rate

the interest rate banks charge other banks to borrow money

fiat money

money that has value because the government has ordered that it is an acceptable means to pay debts

flow of money going into each market is equal to

flow of money going out

forex graph - income/RGDP in another country ↑

D increases, S decreases

forex graph - interest rates in another country ↑

S decreases

forex graph - interest rates in the US ↑

D increases

forex graph - price level in the US ↑

D decreases, S increases

forex graph - tastes/preferences for foreign goods ↑

S increases

forex graph - tastes/preferences for US goods ↑

D increases

frictional unemployment

those who are searching for/waiting to take a job (there is a job available for them)

GDP deflator

is an index number that measures all prices and is used to convert nominal GDP into real GDP.

GDP Deflector= nominal GDP / real GDP X100

new-old / old

GDP expenditures approach

GDP = C + Ig + G + Xn
consumer spending + investment + government purchases + net exports

GDP

total market value of all final goods and services produced within a country in one year.

government budget balance

difference between tax revenue and government spending (surplus means tax revenue is more, deficit means that gov. spending is more)

interest on reserves

interest rate commercial banks earn on funds in their reserve balance accounts with the fed

interest rates effect on AD

decrease in interest rates means an increase in interest-sensitive spending (consumption, investment, or net exports) and therefore an increase in AD

interest rates effect

a decline in price level means lower interest rates which can increase certain types of spending

labor force participation rate

labor force / population aged 16+

labor force

employed + unemployed

liquidity

the ease with which an asset can be converted into cash. cash is most liquid, followed by checkable deposits, then saving deposits. the more liquid, the lower the rate of return.

loanable funds - business opportunities ↑

D increases

loanable funds - capital inflow ↑

S increases

loanable funds - deficit spending ↑

D increases

loanable funds - government borrowing ↑

D increases

loanable funds - private savings ↑

S increases

M0 (monetary base)

all currency in circulation and bank reserves

M1 (money supply)

currency in circulation, checkable bank deposits, savings accounts and travelers' checks

M2

includes all of M1 money supply, and most savings accounts, money market accounts, and certificates of deposit (short term savings)

marginal product of labor

the change in output from hiring one additional unit of labor (increasing or diminishing marginal returns)

medium of exchange

used to obtain goods/services

money market - atm fees ↑

D increases

money market - contractionary policy

S decreases

money market - expansionary policy

S increases

money market - feds change required reserve rate ↑

S decreases

money market - feds used open market operations and buy bonds

S increases

money market - feds used open market operations and sell bonds

S decreases

money market - interest rates on banks ↑

D decreases

money market - price levels ↑

D increases

money market - RGDP ↑

D increases

money market - taxes on interest income ↑

D increases

money market - technology advances

D decreases

money market - technology disruptions

D increases

money multiplier (MM)

the amount the money supply expands with each dollar increase in reserves. MM = 1/RR.

MPC (marginal propensity to consume)

change in consumption/change in disposable income
MPC = 1-MPS

MPS (marginal propensity to save)

change in savings/change in disposable income
1-MPC

natural rate of unemployment

frictional + structural unemployment

near monies

asserts that can be fairly easily converted to cash, pay interest (bonds, CDs, ect)

negative output gap

actual output is less than potential

opportunity cost formula

A = B/A

parts of the business cycle

peak, recession, trough, expansion

philip's curve - AD ↑

point on SRPC shifts left (AD shifts right)

philip's curve - economic growth

LRPC shifts left

philip's curve - SRAS ↑

SRPC graph shifts to the left (SRAS shifts to the right)