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ECON 2105 Principles of Macroeconomics Study Guide Outline Chapter 7: The Price Level and Inflation ο· Price level ο· Consumer Price Index (CPI) o Calculate inflation rate (from period X to period Y) πΆππΌπ β πΆππΌπ ο§ ππππππ‘πππ πππ‘π = × 100 πΆππΌ o o π Index payments Translate from nominal to real variables ο§ i.e. wages ο§ ο· ο· ο· ο· π πππ π€ππππ‘ = πππππππ πππππ‘ πΆππΌπ‘ × 100 Costs of Inflation o Redistributive costs ο§ %βReal = %βNominal - %βPrice Level ο§ Real Interest rate = nominal interest rate β inflation rate o Resource costs Accuracy and Biases of CPI o Substitution Bias. o New Technologies o Changes in Quality o Growth in Discounting Consequences of CPI bias Alternative measures o Chained CPI o CPI-RS (research series) Chapter 8: Classical Long Run Model ο· Critical Assumption: All Markets Clear ο· Total Employment o Labor Market o Full Employment ο· Total output o Aggregate Production Function o Potential GDP ο· Total Spending = Total Output o Says Law o Leakages/Injections ο· Loanable Funds Market o Equilibrium o Says Law ο· Fiscal policy (increase G or decrease T) o Crowding out effect o No demand-side effects on output or employment ο· Classical Model in an Open Economy (appendix) Chapter 9: Economic Growth ο· Average Standard of Living = real GDP per capita ο· Rule of 70: a variable growing at X% will double in approximately 70/X years ο· Determinants of real GDP ο· Growth Equation: o %βReal GDP per Capita = %β Productivity + %β Avg Hrs + %β EPR o EPR ο§ Policies to increase employment (Increase LD or LS) ο§ Limits to growth from EPR o Productivity ο§ Policies that will increase Capital Stock by increasing Investment ο· Targeting Businesses ο· Targeting Households ο· Targeting Government ο§ Limits to growth from more Capital ο§ Technological Change ο· Catch-up vs. Discovery-based growth ο· Costs of Economic Growth o Budgetary Costs o Consumption Costs o Other Social Goals Chapter 10: Economic Fluctuations ο· Classical model cannot explain the fluctuations in output around potential GDP and employment around full employment Chapter 11: Short Run Macro Model ο· Spending is dependent on Income and Income is dependent on Spending ο· Consumption Spending o Key influences ο§ Disposable Income ο§ Wealth ο§ Interest rate ο§ Expectations o Autonomous Consumption Spending o Marginal Propensity to Consume (MPC) βπΆπππ π’πππ‘πππ ο§ πππΆ = βπ·ππ πππ ππππ πΌπππππ ο· ο· ο· o Consumption-Income Line Aggregate Expenditure: AE = C + IP +G +NX Equilibrium GDP o Inventories & Eqm GDP o Finding Eqm Graphically o Eqm GDP and level of employment Expenditure Multiplier 1 o πΈπ₯ππππππ‘π’ππ ππ’ππ‘ππππππ = 1βπππΆ o ο· ο· βπΊπ·π = 1 1βπππΆ Automatic Stabilizers Automatic De-stabilizers × βπΌ π (Or βG, βNX, or βa) Chapter 13: Money, Banks and Federal Reserve ο· Functions of Money o Means of payment o Unit of Account o Store of Value ο· M1 and M2 ο· Fiat money vs. Commodity money ο· Money Creation o Money Multiplier ο· Structure of Federal Reserve System (FED) o Board of Governors o Regional Federal Reserve Banks o Federal Open Market Committee (FOMC) ο· Policy Tools o Open Market Operations (OMO) o Discount Rate o Required Reserve Ratio (RRR) o Interest on Reserves (IOR) Chapter 14: The Money Market ο· Money Supply o Fixed (determined by the Fed) ο· Money Demand o Influential factors ο§ Price Level ο§ Real Income (real GDP) ο§ Interest Rate ο· Equilibrium ο· Monetary Policy o Impact of changing MS: IR changes, which in turns causes AE to change, and thus Eqm GDP changes o Target a specific value for Federal Funds Rate to avoid unnecessary fluctuations in AE