Macro Economics Review

What are the three shifters of the Production Possibility Curve (PPC)?

1. Change in resource quantity or quality, 2. Change in Technology, 3. Change in Trade.

What does Natural Rate of Unemployment (NRU) consist of?

Frictional unemployment and structural unemployment.

What is Full Employment Output (Y)?

The Real GDP created when there is no cyclical unemployment.

What is the Inflation Rate?

The percent change in prices from year to year.

What is the Consumer Price Index (CPI)?

Index number assigned to each year that shows how prices have changed relative to a specific base year.

What is the difference between nominal wage and real wage?

Nominal wage is measured by dollars, whereas real wage is adjusted for inflation.

What is the difference between Real GDP and Nominal GDP?

Nominal GDP is measured in current prices without adjusting for inflation, while Real GDP adjusts for inflation and is expressed in constant, unchanging dollars.

What does the GDP deflator measure?

The prices of all goods produced.

Who demands dollars in the economy?

Foreigners demand dollars.

Who supplies dollars in the economy?

Americans supply dollars.

What is the Discount Rate?

The interest rate set by the central bank for lending to commercial banks.

What does Interest on Reserves (IOR) refer to?

The interest paid by the central bank on reserves held by commercial banks.

What is the Federal Funds Rate?

The interest rate at which commercial banks lend reserve balances to other commercial banks for overnight loans.

What are Administered Rates?

Interest rates set by the FED rather than determined in a market, including the IOR and discount rate.

What are the components of Gross Domestic Product (GDP)?

Consumption, Investment, Government Spending, and Net Exports (Exports - Imports).

What is a recession?

A period of economic decline characterized by falling GDP and rising unemployment.

What is fiscal policy?

Government adjustments in spending and taxation to influence the economy.

What is monetary policy?

Central bank actions that manage the money supply and interest rates to influence economic activity.

What is the business cycle?

The fluctuation of economic activity over time, typically consisting of periods of expansion and contraction.

What causes inflation?

Demand-pull factors (increased demand) and cost-push factors (increased production costs) can lead to inflation.

What is stagflation?

A situation where the economy experiences stagnant growth, high unemployment, and high inflation simultaneously.

What is the balance of trade?

The difference between a country's exports and imports.

What is expansionary fiscal policy?

A policy used by the government to stimulate the economy through increased spending and/or tax cuts.

What is contractionary fiscal policy?

A policy aimed at reducing government spending and increasing taxes to decrease inflation.

What is expansionary monetary policy?

A strategy where the central bank increases the money supply and decreases interest rates to stimulate economic activity.

What is contractionary monetary policy?

A strategy used by the central bank to decrease the money supply and increase interest rates to combat inflation.

How do automatic stabilizers work in fiscal policy?

Automatic stabilizers are mechanisms that automatically increase or decrease government spending and taxes based on economic conditions.

What role does the central bank play in monetary policy?

The central bank regulates the money supply and interest rates to achieve economic objectives like stable prices and maximum employment.

What are the goals of fiscal policy?

The primary goals are to manage economic growth, reduce unemployment, and control inflation.

What tools are used in monetary policy?

Key tools include the discount rate, federal funds rate, and open market operations.

Inflation rate equation

(New # - Old #)/Old # x 100

CPI equation

(price of market basket/price of market basket in base year) x 100

GDP deflator equation

(Nominal GDP/real GDP) x 100

Nominal GDP equation

(GDP deflator x real GDP) / 100

MPC equation

change in consumption / change in disposable income

MPS equation

change in savings / change in disposable income

Spending multiplier equation

1/MPS or 1/(1-MPC)

Total change in GDP equation (spending)

Spending multiplier x initial change in spending

Tax multiplier equation

MPC/MPS or MPC x 1/MPS

total change in GDP equation (tax)

Tax multiplier x initial change in taxes

Present value of money equation

$x / (1 + IR)^{^N}

money multiplier equation

1/reserver requirement

Quantity theory of money Equation

M x V= P x Y

What do each componet of the quantity theory of money mean

• M= money supply

• V= velocity of money

• P= price level

• Y= quantity of output