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ECON 2105 Principles of Macroeconomics
Study Guide Outline
Chapter 7: The Price Level and Inflation
 Price level
 Consumer Price Index (CPI)
o Calculate inflation rate (from period X to period Y)
𝐶𝑃𝐼𝑌 − 𝐶𝑃𝐼𝑋
 𝑖𝑛𝑓𝑙𝑎𝑡𝑖𝑜𝑛 𝑟𝑎𝑡𝑒 =
× 100
𝐶𝑃𝐼
o
o
𝑋
Index payments
Translate from nominal to real variables
 i.e. wages





𝑅𝑒𝑎𝑙 𝑤𝑎𝑔𝑒𝑡 =
𝑁𝑜𝑚𝑖𝑛𝑎𝑙 𝑊𝑎𝑔𝑒𝑡
𝐶𝑃𝐼𝑡
× 100
Costs of Inflation
o Redistributive costs
 %∆Real = %∆Nominal - %∆Price Level
 Real Interest rate = nominal interest rate – 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
 Critical Assumption: All Markets Clear
 Total Employment
o Labor Market
o Full Employment
 Total output
o Aggregate Production Function
o Potential GDP
 Total Spending = Total Output
o Says Law
o Leakages/Injections
 Loanable Funds Market
o Equilibrium
o Says Law
 Fiscal policy (increase G or decrease T)
o Crowding out effect
o No demand-side effects on output or employment
 Classical Model in an Open Economy (appendix)
Chapter 9: Economic Growth
 Average Standard of Living = real GDP per capita
 Rule of 70: a variable growing at X% will double in approximately 70/X years
 Determinants of real GDP
 Growth Equation:
o %∆Real GDP per Capita = %∆ Productivity + %∆ Avg Hrs + %∆ EPR
o EPR
 Policies to increase employment (Increase LD or LS)
 Limits to growth from EPR
o Productivity
 Policies that will increase Capital Stock by increasing Investment
 Targeting Businesses
 Targeting Households
 Targeting Government
 Limits to growth from more Capital
 Technological Change
 Catch-up vs. Discovery-based growth
 Costs of Economic Growth
o Budgetary Costs
o Consumption Costs
o Other Social Goals
Chapter 10: Economic Fluctuations
 Classical model cannot explain the fluctuations in output around potential GDP and employment
around full employment
Chapter 11: Short Run Macro Model
 Spending is dependent on Income and Income is dependent on Spending
 Consumption Spending
o Key influences
 Disposable Income
 Wealth
 Interest rate
 Expectations
o Autonomous Consumption Spending
o Marginal Propensity to Consume (MPC)
∆𝐶𝑜𝑛𝑠𝑢𝑚𝑝𝑡𝑖𝑜𝑛
 𝑀𝑃𝐶 = ∆𝐷𝑖𝑠𝑝𝑜𝑠𝑎𝑏𝑙𝑒 𝐼𝑛𝑐𝑜𝑚𝑒


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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 𝐸𝑥𝑝𝑒𝑛𝑑𝑖𝑡𝑢𝑟𝑒 𝑀𝑢𝑙𝑡𝑖𝑝𝑙𝑖𝑒𝑟 = 1−𝑀𝑃𝐶
o
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
∆𝐺𝐷𝑃 =
1
1−𝑀𝑃𝐶
Automatic Stabilizers
Automatic De-stabilizers
× ∆𝐼 𝑃 (Or ∆G, ∆NX, or ∆a)
Chapter 13: Money, Banks and Federal Reserve
 Functions of Money
o Means of payment
o Unit of Account
o Store of Value
 M1 and M2
 Fiat money vs. Commodity money
 Money Creation
o Money Multiplier
 Structure of Federal Reserve System (FED)
o Board of Governors
o Regional Federal Reserve Banks
o Federal Open Market Committee (FOMC)
 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
 Money Supply
o Fixed (determined by the Fed)
 Money Demand
o Influential factors
 Price Level
 Real Income (real GDP)
 Interest Rate
 Equilibrium
 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