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Macroeconomics Review 1
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Macroeconomics Review
Chapter 1 – Basic Economic Concepts
Module 1
o Market Economy
o Command Economy
o Self-Interest and Incentives
o Property Rights
o Marginal Analysis
o Four Factors of Production
o Scarcity
o Scarcity
o Microeconomics vs. Macroeconomics
o Positive vs. Normative Economics
o Opportunity Cost
Module 2
o Four Phases of the Business Cycle
o Capital Goods and Future Growth
o Economic Growth
Module 3
o Trade-Offs
o Straight vs. Bowed PPC
o Efficiency
o Efficient in Allocation
o Law of Increasing Opportunity Costs
o Shifters of the PPC
Module 4
o Absolute and Comparative Advantage
o Terms of Trade
o Output and Input Questions
Macroeconomics Review 2
o Gains from Trade
o Productivity
Chapter 2 – Supply and Demand
Module 5
o Product and Factor Markets
o Supply and Demand Model
o Law of Demand
o 5 Shifts of the Demand Curve
o Normal Goods vs. Inferior Goods
o Substitutes and Complements
Module 6
o Law of Supply
o 6 Shifters of Supply
o Equilibrium Price and Quantity
o Disequilibrium: Surplus and Shortage
Module 7
o Double Shift Rule
Module 8
o Price Floors and Ceilings
o Inefficient Allocations to Consumers
o Inefficient Allocations of Sales
Module 9
o Quota
o Wedge
o Deadweight Loss
Chapter 3 – Measurements of Economic Performance
Module 10
o Private and Public Sector
o Factor Payments
o Transfer Payments
o National Income Accounting
Macroeconomics Review 3
o Percent change in GDP and GDP per capita
o Investment
o Intermediate Goods
o Expenditure Approach (C+I+G+Xn)
o Household Production
o Income Approach and Factor Payments
o Disposable Income and Dissaving
o Maturity and Bond Prices
Module 11
o Nominal vs. Real GDP
Module 12
o Labor Force and Unemployment Rate
o Labor Force Participation Rate
o Marginally Attached Workers
o Underemployed Workers
o Discouraged Workers
Module 13
o Frictional Unemployment
o Structural Unemployment
o Cyclical Unemployment
o Natural Rate of Unemployment (NRU)
o Purchasing Power
Module 14
o Inflation, Deflation, and Disinflation
o Nominal vs. Real Interest Rates
Module 15
o Demand Pull and Cost Push
o Consumer Price Index (CPI)
o Producer Price Index (PPI)
o GDP Deflator
o Aggregates and Price Level
Macroeconomics Review 4
Chapter 4: National Income and Price Determination
Module 16
o Marginal Propensity to Consumer (MPC)
o Marginal Propensity to Save (MPS)
o The Money Multiplier
o Consumption Function
o Aggregate Consumption Spending
o Unplanned Inventory investment
o Autonomous Consumer Spending
Module 17
o Shifter of Aggregate Demand
o Wealth Effect
o Interest Rate Effect
o Fiscal vs. Monetary Policy
Module 18
o Shifter of Aggregate Supply
o Sticky Wages
o Long-Run Aggregate Supply (LRAS)
o Potential Output
Module 19
o Connect to AD/AS Model
o Graphing Recessionary and Inflationary Gaps
o Negative and Positive Supply Shocks
o Stagflation
o Recessionary Gap
o Inflationary Gap
Module 20
o John Maynard Keynes
o Expansionary vs. Contractionary Monetary Policy
Module 21
o Tax multiplier
o Discretionary vs. Non-Discretionary
Macroeconomics Review 5
Chapter 5: The Financial Sector
Module 22
o Spending-Investment Spending Identity
o Budget Surplus vs. Deficit
o National Savings
o Capital Inflow vs. Outflow
o Financial Sector, Assets, Liabilities
o Crowding Out and Investment
o Asset Demand and Transaction Demand
o Balance Sheets with Assets and Liabilities
o Net Capital Outflow
Module 23
o Currency in Circulation
o Barter System and Coincidence of Wants
o Commodity vs. Fiat Money
o Demand and Supply of Money
Module 24
o Exchange, Unit of Account, Store of Value
o Time Value of Money
Module 25
o Required Reserves and Excess Reserves
o Discount Rate and Open Market Operations
o Money Multiplier
Module 26
o The Role of the Central Bank
Module 27
o Federal Funds Rate
o Discount Rate
Module 28
o Liquidity
o Shifts of the Money Demand Curve
o Long-Term Interest Rates
Macroeconomics Review 6
o Equilibrium in the Money Market
Module 29
o Loanable Funds Shifters
o Rate of Return
o Loanable Funds
o Inflation and Interest Rates
o Interest Rate in the Long-Run
o Crowding Out
Chapter 6: Inflation, Unemployment, and Stabilization Policies
Module 30
o Deficit Spending and the National Debt
o Implicit Liabilities
Module 31
o Expansionary vs. Contractionary Monetary Policy
o Taylor Rule for Monetary Policy
o Inflation Targeting
o Graphing Monetary Policy
Module 32
o Money Neutrality
o Long-Run Determination of the Interest Rate
o Short-Run and Long-Run Effects of the Increase of the Money Supply
Module 33
o Classical Model of the Price Level
o Inflation Tax
o Cost-Push inflation and Demand-Pull inflation
o Inflation and Unemployment
Module 34
o Short-Run Philips Curve
o Long-Run Philips Curve
o Inflation Expectations
o Nonaccelerating Inflation Rate of Unemployment
o Disinflation vs. Deflation
Macroeconomics Review 7
Module 35
o Velocity of Money
o Quantity Theory of Money
Module 36
o Unconventional Monetary Policy
o Central Bank Targets
o Asset Prices
Chapter 7: Economic Growth and Productivity
Module 37
o Real GDP per capita
o Growth Rates
o Rule of 70
o Productivity
o Physical vs. Human Capital
Module 38
1. Diminishing returns to physical capital
2. Aggregate Production Function
3. Growth Accounting
Module 40
1.
Depreciation
Chapter 8: The Open Economy: International Trade and Finance
Module 41
4. Balance of Payment Accounts
5. Balance of Trade – Trade Surplus and Deficit
6. Current Account and Financial Account
Module 42
7. Foreign Exchange Market
8. Appreciation vs. Depreciation
9. Purchasing Power Parity
10. Foreign Direct Investment
11. Exchange Rates
Macroeconomics Review 8
Module 43
1.
Floating and Fixed Exchange Rates
2.
Shifters of Currency Demand and Supply
3.
Foreign Exchange Reserve
Module 44
1.
Devaluation and Revaluation
Module 45: Putting It All Together
Chapter 14: Market Failure and the Role of Government
Module 74
2.
Externalities
3.
Marginal Social Cost of Pollution
4.
Marginal Social Benefit of Pollution
5.
Socially Optimal Quantity of Pollution
6.
Internalize the Externalities
Module 75
1.
Environmental Standards
2.
Emissions Tax
3.
Pigouvian Tax
4.
Private vs. Social Benefits
5.
Private vs. Social Cost
6.
Network Externalities
Macroeconomics Review 9
Macroeconomic Graphs:
1.
Mod 4: Production Possibilities Curve (straight for comparison)
2.
Mod 6: Market Equilibrium
3.
Mod 7: Shifts of the Supply and Demand Curve
4.
Mod 8: Price Controls (Floors and Ceilings)
5.
Mod 16: Consumption Function (shifts)
6.
Mod 18: Shifts of the SRAS and LRAS
7.
Mod 19: Negative and Positive Supply and Demand Shocks
8.
Mod 20: Expansionary and Contractionary Monetary Policy (Inflationary and Recessionary
Gaps)
9.
Mod 28: Money Market
10.
Mod 29: Loanable Funds Market
11.
Mod 31: Setting the Federal Funds Rate
12.
Mod 34: Phillips Curves (Long-Run and Short-Run)
13.
Mod 41: International Capital Flows
14.
Mod 42: Foreign Exchange Market
Macroeconomics Review 10
Macroeconomic Formulas:
GDP
GDP = total value of all final goods and services produced by an economy in a given year
GDP = C + G + I + (X-M)
Not counted in GDP are illegal activities, government transfer payments (social security,
welfare, veterans benefits, etc.) sale of used goods, financial payments (bonds, stocks)
GDP is also referred to as Output, or Y
GDP per Capita = GDP/population
Real GDP (adjusted for inflation)
Nominal GDP = current dollars
Nominal – Inflation = Real
GDP Price index (deflator) = nominal GDP x 100
Real GDP
Real GDP = ________nominal __________
price index (deflator) in hundredths
Price index = market basket in a specific year x 100
Market basket in a base year
Consumer Price Index
CPI = Recent market basket in a specific year
Market basket in a base year
x 100
Rate of Inflation = Current CPI – Previous CPI
Previous CPI
x 100
Marginal Propensity to Consume and Save
MPC = ∆C/∆DI
MPS = ∆S/∆DI or 1-mpc
MPC + MPS = 1
APC = C/DI
APS = S/DI
Simple spending multiplier
1/1-mpc
or 1/mps
Government multiplier
1/1-mpc or 1/mps
Tax multiplier = -MPC/MPS or make it 1 less than the multiplier and negative
Macroeconomics Review 11
SPENDING MULTIPLIER
MPC
MULTIPLIER
.5
=
2X
.6
=
2.5 X
.75
=
4X
.8
=
5X
.9
=
10X
∆GDP = change in spending (C, I, or G) x the Multiplier
∆GDP = change in taxes (C, I, or G) x the Tax Multiplier (always negative)
An increase in taxes change is a positive number x negative multipiier = decrease in GDP
Shift in AE will be down.
A decrease in taxes = change is a negative number x negative multiplier = increase in GDP
Shift in AE will be up.
***Spending from a tax break is less then spending because we spend less of our tax break.
Money Multiplier
1/rr x ∆Fresh deposits of money = ∆Money supply
10% rr = 10x
5% rr = 20x
20% rr = 5x
15% rr = 6.67 x
What is money?
M1 = currency, checkable deposits, travelers checks
M2 = all of M1 and CDs lower than 100,000
M3 = all of M2 and CDs above 100,000
Velocity of Money
Velocity is number of times money is used in the economy
MV = P * Q
M = money supply
V = velocity of money
P = Overall price level
Q = Quantity or Real GDP
PL * Real GDP = Nominal GDP
Production
Total Product = Quantity (Q)
Average Product (AP) = Total Product (Q) / Labor (L)
Marginal Product (MP) = Change in Total Product / Change in Labor