Macro Exam 3

Exam 3

Aggregate Expenditure 

C + I + G + Nx

Economic Equilibrium

Occurs when AE = GDP

Component of AE - Consumption

Depends on income, wealth, expectations, price level, and interest rates

Components of AE - Planned Investment

Influenced with profitability, interest rates, taxes, and cash flow

Components of AE - Government Purchases

Spending on goods and services

Components on AE - Net Exports

Affected by price levels, foreign growth, and exchange points

Marginal Propensity to Consume (MPC)

Consumption/Aggregate Expenditure

Marginal Propensity to Save (MPS)

1 - MPC

45 Degree Line (Keynesian Cost)

Equilibrium that occurs where the AE line crosses 45 degree line

AE > GDP…

Inventories fall, Output increases

AE < GDP…

Inventories rise, Output decrease

Multiplier Effect

Small change in spending —> larger change in GDP

Multiplier Equation

1/(1-MPC)

Aggregate Demand

Y = C + I + G + Nx

AD curves slope downward due to

Wealth effect, interest rate, international rate

Wealth Effect

Increase price level, decrease real wealth, decrease consumption 

Interest Rate

Increase prices, increase interest rates, decrease investments

International Trade

Increase prices, decrease exports, increase imports, decrease net exports

Shift Right in Aggregate Demand

Expansion

Shift Left in Aggregate Demand

Recession

Aggregate Supply - LRAS

Vertical at potential GDP (Not affected by GDP)

Aggregate Supply - SRAS

Upward sloping because of sticky wages, slow wage adjustments, and menu costs

Shifts Right in Short Run

Increase productivity, increase labor/capital, decrease input costs

Shifts Left in Short Run

Increase expected prices, increase input costs, natural disasters/pandemics

Macroeconomic Equilibrium

AD = SRAS = LRAS = FullEemployment

Short Run can be above (_____) or below (_____)

Inflationary, Recessionary

Dynamic Model

LRAS, AD, and SRAS shift right overtime; inflation occurs when AD grows faster then LRAS

Functions of Money

1. Medium of Exchange

2. Unit of Account

3. Store of Value

4. Standard of Deferred Payment

Commodity Money

Has intrinsic value (gold, silver)

Fiat Money

Issue by government, not backed by commodities

M1 = 

currency + checking deposits 

M2 =

M1 + savings deposits + small time deposits + money market funds

Credit cards are NOT

Money

Fractional Reserve System

Banks keep only part of the deposits as reserves

Money Multiplier =

1 / Reserve Ratio

Banks create money by…

Lending out deposits

Federal Reserve System 

Established to prevent bank panics in 1913

12 District Banks and Board of Governors

7 members and 14 year terms

Chair

Jerome Powell

FOMC

12 members; conducts open market operations

Open Market Operations

Buy/sell treasury securities + adjust money supply

Discount Rate

Interest on loans to banks

Interest on Reserve Banks

Influence bank lending

Bank Run

Many depositors withdrawl at once

Bank Panic

Multiple bank runs

FDIC

Insures deposits up to banks during crises

Lender of Last Resort

Fed loans to banks during crises

Moral Hazard

Banks take more risk if they expect protection