Macro + micro

Monetary base: money in reserves + circulation

Monetary supply: money in circulation and checkable accounts

12.Explain why the aggregate demand curve is downwardsloping.Higher prices cause spending todecrease. This is demonstrated by the real wealtheffect, the interest rate effect, and the exchangerate effect.

13.Explain why the aggregate supply curve is upward sloping.In the short-run, businesses have anincentive to produce more output when prices increase.When there is inflation, businesses can earn moreprofit in theshort-run before the price of labor and resourcesincrease.

11.Explain why a recessionary gap, or negative outputgap, is not the same as a recession.An officialrecession is when real GDP is decreasing. A recessionarygap is when the actual real GDP is less than thepotential(or full employment) real GDP even if real GDP canbe increasing.

21.Explain why a tax cut by a certain amount has lessof an impact on the economy than an increase in governmentspending by the same amount.A tax cut has less ofan impact on the economybecause people save a portion of a tax cut so notall the cut is added to the economy. The entire amountofgovernment spending is added to the economy so ithas a greater impact.

22.Explain why progresive income taxes are an exampleof an automatic stabilizer.Progressive taxeswork countercyclically, slowing down or speeding upthe economy automatically. When there is a recessionarygap,income taxes automatically fall as people fall intolower tax brackets.

24.Explain why an increase in unexpected inflation causesa decrease in the real interest rate.Thenominal interest rate a lender earns can be erodedif there is unexpected inflation. Example, if inflationis 5%, anominal interest rate of 6% earns only 1% in purchasingpower due to inflation.

26.Explain how money serves as a medium of exchange,a store of value, and a unit of account.Money is used to buy and sell goods and services (mediumof exchange), save purchasing power for a later date(store of value), and measure the value of differentgoods and services (unit of account).

28.Explain why the demand for money is downward sloping.When the interest rate is high, peopleprefer to hold less money in cash or in checking accountsand, instead, purchase assets that can earn themthesehigher interest rates such as bonds

39.Explain why an increase in the money supply will increasenominal GDP, but not real GDP.Thequantity theory of money states that an increase inthe money supply doesn’t increase the amount of goods/servicesthat can be made. Without more investment, more moneyonly causes more inflation.

42.Explain why crowding out results in less economicgrowth in the long-run.Crowding out causeshigher interest rates which decreases investment.Less investment results in less capital stocks andless growth overtime

Labor force participation rate formula: (ppl in labor force/working age population)*100

Unemployment rate: (unemployed people/labor force)*100

% change in GDP: ((new-old)/old)100

CPI: (market basket in given year/market basket in base year)*100

market basket: Price * Quantity

GDP deflator: (nominal/real)*100

Expenditure Approach: C + I + G + Xn

Income approach: Wages + rent + interest + profit

MPS: 1-MPC & % change in saved/change in expendable income

MPC: 1-MPS & change in consumption/change in expendable income

Spending multiplier: 1/MPS

Tax multiplier: (-MPC/MPS)

Money Multiplier: (1/RR)

Real Interest Rate = NIR-inflation rate

Quantity theory of Money MV=PY

Real GDP: (new output)(old prices)

Nominal GDP: (current output)(current price)

Utility maximizing rule: MU/P=MU/P

Percent change: ((new-old)/old)*100

Elasticity Demand/Supply: % change in Q/ % change in P

Cross Price elasticity: % change Q good 1/% change P good 2

Consumer/producer surplus: 1/2bh

Marginal product: change in total product/change in inputs

Marginal cost: change in total cost/change in output

Total cost: VC + FC

ATC: TC/Q

AVC: VC/Q

AFC: FC/Q

TR: P*Q

Profit: TR-TC

Profit maximizing rule: MR = MC

Least Cost rule: MP/resource cost = MP/resource cost

Marginal Revenue Product: change in revenue/change in inputs

Marginal Factor Cost: change in TC/change in inputs