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Transcript
AP Macro: The Very Basics to Know The Production Possibilities Model • A point inside the frontier is an inefficient/recessionary economy • A point on the frontier is an efficient economy • A point outside the frontier is unattainable, for now • The frontier will move outward with new factors of production in the future Supply and demand problems • If price changes first in a market, this is a quantity change. • Floors are created to help producers and will cause greater surpluses. • Ceilings are created to help consumers and will cause greater shortages. • All other factors of change are either demand or supply changes and will change EP/EQ. Currency exchanges • Know the determinants that change supply and demand of currencies. • Know the rules of changes on currency graphs. • Connect depreciation and appreciation of currencies with exports. • Exports affect GDP in a positive way with money coming to a country. Circular Flow • Know the product market versus the factor market. • Know the impact of government: transfers for citizens, subsidies for businesses. • Know the impact of the international market with exports as a positive, imports as a negative Business Cycles • The ‘quarter’ system • Recessions lasting about 14 months naturally • Expansions should have extra inflation • Recessions have extra unemployment • Stagflation is a time of excess inflation and unemployment Gross Domestic Product Accounting • C + Ig +G + Xn • There is an income approach to GDP (but the counting varies) • The importance of “C” in the US economy • The difference between nominal and real • The “trick” that Ig is a component of AD • The items that don’t count… Employment and Unemployment • Part time employees are counted as employed, even if they aren’t pleased with that job. • Those no longer looking are “discouraged” and are not counted. Consumer Price Index and Inflation • How to adjust for inflation over time • Index years must always be 100. • Nominal versus Real • How to apply the Rule of 70 • Why the CPI measures a smaller part of the economy than the GDP deflator Spending/Consumption Multiplier Effect • The consumption multiplier is used when the public gets unexpected disposable income, usually through a tax cut • DI will always contain either spending or savings. • The spending formula for marginal propensities is 1/MPS or 1/1-MPC Aggregate Model: AD/SRAS/LRAS • (Know the graph completely) • Equilibrium is inside FE: the economy is inefficient and usually called a recession • Equilibrium is on the LRAS: the economy is efficient • Equilibrium is outside FE: the economy is overextended • The determinants that change AD (especially factors of Ig) • The determinants that change SRAS • The things needed to move LRAS Fiscal Policies • Only Congress conducts fiscal policies (not “government”) • Congress has 2 tools • Congress targets AD • All of this is supported by Keynesians • The Money Market and the Loanable Funds Market are affected negatively by expansionary policies (Crowding Out Effect) • Keynesians believe that gains in C and G out-weigh any potential losses in Ig • Domestically, we borrow and pay interest. Therefore, low interest is good, high is bad. • Internationally, we invest and earn interest. Therefore, high interest is good, low is bad. Monetary Policies • Only the Fed conducts Monetary Policies (not “government”) • The Fed policies target interest rates and Ig • Monetary policies have now crowding out flaw • Recessions: Buy Bonds • Inflation: Sell Bonds • Be able to graph policies on the AD/SRAS, Money Market, Loanable Funds • Know the manipulation the 3 other major Fed tools Banking T accounts and the Money Multiplier • Bank assets versus liabilities • The Money Multiplier (1/rr) • Initial changes versus changes in the entire banking system • Changes in Demand Deposits • Changes in the Money Supply • Public actions, Fed Open Market Actions, Fed Banking Actions Returning to Full Employment • Assumptions of self-correcting markets in Neo-Classical approaches • Two changes in AD, Two changes in SRAS • Stagflation and Supply Shocks Phillips Curves • Inflation versus unemployment in inverse relationships • Movements along the SRPC during the business cycle • Changing the SRPC due to supply shocks, stagflation, productivity changes • Moving the LRPC if a nation changes the way the NRU occurs • The way the Phillips connects to the AD/SRAS model Monetarism and Growth • Monetarism is NOT the same thing as Monetary Policy from the Fed • Quantity Theory of Money (M x V = P x Y) or M x V = P x Q (Money, Velocity, Price, GDP Output, Quantity) • Monetarist’s belief that Money Velocity is Stable in the Short Run Balances of Payments: BOP Accounts • BOP assets/credits • BOP liabilities/debits • BOP Current Account items • BOP Financial Account items • Current Accounts will equal Financial Accounts • Assets are demand for a currency • Liabilities are supply of a currency Comparative Advantages in International Trade • Absolute advantages if two countries have similar resources • Output comparative advantages • Input comparative advantages • Lowest opportunity costs for outputs • Least effort needed to create one output for input problems • Least effort needed to create one output for input problems • Trade options will be an improvement over domestic opportunity costs