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WHAT’S IMPORTANT IN…
Macroeconomics
Mankiw 4TH Edi.
This is your instructor’s outline of what is important in each Chapter. There are 2 -5 major topics in each
chapter. Sub-topics include related concepts and formulas. Please use the text for relevant definitions (“key
concepts” at the end of each chapter and in the margin).
Chapter 1: Ten Principles of Economics
1.
Definition: Economics
a.
Scarcity
b.
Wants
c.
Resources
2.
Ten Principles
1.
People Face Tradeoffs (Ch. 2, 3, 12)
2.
The Cost of Something Is What You Give Up to Get It (Ch. 2, 3)
3.
Rational People Think at the Margin (Ch. 4)
4.
People Respond to Incentives (Ch. 12, 15, 23)
5.
Trade Can Make Everyone Better Off (Ch. 3)
6.
Markets Are Usually a Good Way to Organize Economic Activity (Ch. 4)
7.
Governments Can Sometimes Improve Market Outcomes (Micro)
8.
A Country’s Standard of Living Depends on Its Ability to Produce Goods and Services (Ch. 10,
12, 23)
9.
Prices Rise When the Government Prints Too Much Money
(Ch. 2, 11, 16, 17, 23)
10.
Society Faces a Short-Run Tradeoff Between Inflation and Unemployment
(Ch. 16, 20, 21, 23)
This course has a lot of Percent Increase questions. Contact me if you do not know how to do them.
What is the Percent Increase in NGDP?
The formula to use is: (NGDP (from later year) - NGDP (from earlier year)) divided by NGDP from earlier year times
100. (NGDP (from year 2002) – NGDP (from year 2000)) ÷ NGDP (year 2000) x 100 =
Percent Increase =
Example Problem:
Assume NGDP in 2000 is $9,718
Assume NGDP in 2002 is $10,428
($10,428 - $9718) ÷ $9,718 =
$710 ÷ $9718 = .073
.073 x 100 = 7.3% increase
6 formulas that may help:
For any given year:
1. GDP Deflator = (NGDP ÷ RGDP) x 100 =
NGDP divided by RGDP, times 100
2. RGDP = (NDGP ÷ GDP Deflator) x 100 =
NGDP divided by GDP deflator, times 100
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3. NGDP = (GDP Deflator ÷ 100) x RGDP =
GDP Deflator divided by 100, times RGDP
The percent change from 1 year to another:
4. Percent change in RGDP: (RGDP (later year) – RGDP (earlier year)) ÷ RGDP (earlier year) x 100 =
5. Percent change in NGDP: (NGDP (later year) – NGDP (earlier year)) ÷ NGDP (earlier year) x 100 =
(Like in example above)
6. Percent change in GDP Deflator: (GDP Deflator (later year) – GDP Deflator (earlier year)) ÷ NGDP (earlier year) x
100 =
Chapter 2: Thinking Like an Economist
1.
2.
3.
4.
5.
1.
2.
1.
2.
3.
Economics as a Science
a.
Lab experiments
b.
Role of assumptions
Production Possibilities Frontier (PPF)
a.
Opportunity costs
b.
Applications to the real world
Microeconomics vs. Macroeconomics
Normative Vs. Positive
Why Economists Disagree
Chapter 3: Interdependence and the Gains from Trade
Comparative Advantage
a.
Rule: Each person should produce the item for which (s)he has the lowest opportunity cost; and
trade for the rest.
b.
Absolute advantage
c.
Relationships to opportunity costs
d.
Trade
Application to International Trade
Chapter 4: The Market Forces of Supply and Demand
Markets
Demand
a.
Law of Demand
b.
Determinants of demand
i.
Depiction on graph
ii.
Specifics
a) Income
b) Prices of related goods and services
1. Substitutes
2. Compliments
c) Tastes
d) Expectations for future
1. Increase in price
2. Decrease in price
e) Number of buyers
Supply
a.
Law of Supply
b.
Determinants of supply
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i.
ii.
4.
5.
1.
2.
3.
1.
2.
3.
Depiction on graph
Specifics
1. Input prices
2. Technology
3. Expectations for future
1. Increase in price
2. Decrease in price
4. Number of sellers
Equilibrium
a.
Surpluses
b.
Shortages
Changes in equilibrium
a.
Change in demand
b.
Change in supply
c.
Change in both supply and demand
Chapter 10: Measuring a Nation’s Income
Two Methods of Measuring GDP
a.
Income
b.
Expenditure
Definition of GDP is:
a.
“Market Value”
b.
“of All”
c.
“Final”
d.
“Goods & Services”
e.
“Produced”
f.
Within a country”
g.
“in a given period of time”
Real vs. Nominal GDP
a.
Definition of RGDP
b.
Uses of RGDP
1.Measure of economic growth
2.Compare GDP form county to country
c.
Computation of
1.RGDP
2.NGDP
3.GDP deflator
d.
Limits of GDP and an indicator of well being
Chapter 11: Measuring the Cost of Living
Inflation: Concept
Calculating the Consumer Price Index and using it
a.
Step one: Fix the market basket
b.
Step two: Find the prices
c.
Step three: Compute the basket’s cost
d.
Step four: Choose a base year and compute the index
CPI yr n = ($MB yr n ÷ $MB yr Base) × 100
e.
Step five: Compute the inflation rate
Inflation rate yr 1 to yr 2 = (CPI yr 2 – CPI yr 1 ÷ CPI yr 1) × 100
Problem’s with CPI
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a.
b.
c.
d.
4.
Substitution bias
New goods
Unmeasured quality goods
Compare GDP deflator
i. CPI measures imports but GDP deflator measures only domestic
ii. CPI is fixed weight but GDP deflator is not
iii. Practical difference
Uses of CPI on other indices
a.
Comparison of wages or prices over time
Salary yr 2 = Salary yr 1 × (CPI yr 2 ÷ CPI yr 1)
b.
Indexation
c.
Real and nominal interest rates Real = Nominal – Inflation
Chapter 11 Macro Formulas
1. The cost of the Market Basket in dollars for any given year is:
$MB = SUM of P*Q (for all products Q in the Market Basket)
Example: The goods in the Market Basket are 5 items of A and 3 of B. The Price of A is $4 and the
Price of B is $6.
A = 5 items @ $4.00 each and B = 3 items @ $6.00 each.
So (4*5) + (6*3) = 20 + 18 = $38.00
The cost of the Market Basket = $MB = ($4*5) + ($6*3) = $38
2. The CPI for any year is:
CPI of any given year = $MB of any given year ÷ $MB base year*100
(CPI of any given year = Market Basket Price of any given year divided by Market Basket Price of base
year times 100)
Example: The cost of the Market Basket in the base year is $38; in 2002, it is $42. What is the CPI for
2002?
($MB 2002 ÷ $MB base year)*100 =
($42 ÷ $38)*100 = 1.105*100 = 110.5
CPI for 2002 = 110.5
3. The Inflation Rate for any time period is:
Inflation rate (in %) = CPI (later year) – CPI (earlier year) ÷ CPI (earlier year) x 100 = ______%
Example: The CPI in 2002 is 110.5 and in 2000 it was 101.2. What is the inflation rate?
Inflation rate (in %) = CPI (2002) – CPI (2000) ÷ CPI (2000) x 100 =
((110.5-101.2) ÷ 101.2) x100 =
(9.3/101.2) *100 =.92*100
= 9.2% for 2000 to 2002 (or 4.6% per yr)
4. To compare a value, like salary or price, in one year to another year:
V new = (V old*CPI new) ÷ CPI old
Example: Salary is $50,000 in 1996 when CPI was 100. CPI now is 200. How much must my salary
increase for me to keep up with inflation
V2008 = (V 1996*CPI 2008) ÷ CPI 1996 =
($50,000*200) ÷ 100 =
$50,000*2 = $100,000
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Chapter 12: Production and Growth
1.
2.
3.
4.
What’s in a Number: Why small annual changes mean big long run differences.
Productivity: Key to growth
a.
Definition (output per hour worked)
b.
Income = Output (Expenditures)
c.
Determinants
i. Physical capital
ii. Human capital
iii. Natural resources
iv. Technology
Public Policies to Promote Growth
a.
Savings and investment
i. Catch-up effect
ii. Investment from abroad
1. Private
2. World Bank and IMF
b.
Education
c.
Property rights and stability
d.
Free trade
e.
R & D (Remember the #1 cause of economic growth is technology)
Population and Economic Growth
a.
Impacts on natural resources
b.
Impacts on physical capital
c.
Impacts on technology
Chapter 12 Macro Formulas
Rule of 70:
70 ÷ % = year to double original value
The rule of 70 can apply to
a) Economic growth rates:
Example: The U.S. growth rate is 2% a year. How many years will it take to double the
standard of living?
Answer: 70 ÷ 2% = 35 Years
b) Finance and savings:
Example: You inherit $10,000. You save it at 7%. How long does it take to double your
savings?
Answer: 70 ÷ 2% = 10 Years
Economic Growth Rate:
Equals % change in Standard of Living (SOL)
Equals % change in Per Capital Income
Per Capital Income for any year = RGDP ÷ Population for any given year
Recognize that economic growth is computed as a percent change. So it is similar to Chapter 10, percent
change in RGDP or NGDP and to Chapter 11, percent change in CPI.
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Here is the detailed formula:
Economic growth rate =
% change in Per Capita RGDP = % change in Standard of Living =
((RGDP ÷ Population) in the later year – (RGDP ÷ Population) in the earlier year)) ÷ (RGDP ÷
Population) in the earlier year) x100
Example: Compute the Economic Growth rate for:
Population in 2005 is 100; and RGDP is 800
Population in 2006 is 120; and RGDP is 1200
((1200 ÷ 120) – (800 ÷ 100)) ÷ (800 ÷ 100) x 100
((10 – 8) ÷ 8) x 100
(2 ÷ 8) x 100
.25 x 100 = 25%
Chapter 15: Unemployment and Its Natural Rate
1.
2.
3.
Measuring Unemployment
a.
U R = (U ÷ Labor Force) × 100
b.
LFP R = (Labor Force ÷ Adult Population) × 100
Concerns
c.
Discouraged workers
d.
Duration
National Fictional & Structural Unemployment
a.
Job search (frictional unemployment)
b.
Minimum Wage, Efficiency Wage and Unions (Structural unemployment)
Chapter 15 Macro Formulas
There are 10 equations which relate the categories of the adult population:
1) CNP = NLF + CLF
2) NLF = CNP - CLF
3) CLF = CNP - NLF
4) CNP = NLF = U + E
5) NLF = CNP - U - E
6) U = CNP - NLF - E
7) E = CNP - NLF - U
8) CLF = U + E
9) U = CLF - E
10) E = CLF - U
These equations compute 3 key rates: Unemployment, Employment, Labor Force Participation Rate,
The 1st equation is the basic form:
a. UR = (U ÷ CLF) x 100
UR = (U ÷ (U + E)) x 100
UR = (U ÷ (CNP – NLF)) x 100
b. ER = (E ÷ CNP) x 100
ER = (E ÷ (NFL+CLF)) x100
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ER = (E ÷ (NLF+E+U)) x100
ER = ((CLF-U) ÷ (NLF+CLF)) x100
ER = ((CLF-U) ÷ (NLF+E+U)) x100
ER = ((CNP-NLF-U) ÷ (NLF+CLF)) x100
ER = ((CNP-NLF-U) ÷ (NLF+E+U)) x100
c. LFPR = (CLF ÷ CNP) x 100
LFPR = (CLF ÷ (NLF + CLF)) x 100
LFPR = (CLF ÷ (NLF + E + U)) x 100
LFPR = ((U + E) ÷ CNP) x 100
LFPR = ((U + E) ÷ (NLF + CLF)) x 100
LFPR = ((U + E) ÷ (NLF + E+ U)) x 100
LFPR = ((CNP - NLF) ÷ CNP) x 100
LFPR = ((CNP - NLF) ÷ (NLF + CLF)) x 100
LFPR = ((CNP - NLF) ÷ (NLF + CE +U)) x 100
Example: NLF = 50, E = 60, U = 5, CLF = 65, (CNP = CLF +NLF)
What is ER, UR, LFPR
ER = (E ÷ CNP) x 100 = (60 ÷ (CLF + NLF)) x 100 = (60 ÷ (65 + 50)) x 100 = (60 ÷ 115) x 100 = 52%
UR = (U ÷ CLF) x 100 = (5 ÷ 65) x 100 = 7.7%
LFPR = (CLF ÷ CNP) x 100 = (65 ÷ (CLF + NLF)) x 100 = (65 ÷ (65 + 50)) x 100 = 56.5%
The following equations help explain long term versus short term unemployment
a. NR = FR + SR
Natural Rate of Unemployment = Long Term Unemployment Rate = Frictional Rate of unemployment +
Structural Rate of Unemployment
FR = NR - SR SR = NR - FR
Cyclical rate of Unemployment = Actual UR measured by BLS minus the Natural Unemployment Rate.
CR = UR - NR
UR = CR + NR
NR = UR - CR
Example: UR is 5.5% CR is 1.5%
1.
SR is 2.0%
What is FR?
Answer: First solve for NR. (NR = UR - CR) = (5.5 – 1.5 = 4.0)
Now solve for FR.
(FR = NR - SR) = (4.0 - 2%) = 2%
Chapter 16: The Monetary System
Money – Concept
a.
Definition
i. Contrast barter
ii. Double coincidence of wants
b.
Functions
iii. Medium of Exchange
iv. Unit of Accounting
v. Store of Value
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c.
d.
2.
3.
4.
Liquidity
Types
vi. Fiat
vii. Commodity
Money – Measurement
a.
M–1
b.
M–2
The FED (Federal Reserve Bank)
a.
Organization
b.
Role in money supply
Banks and Money Supply
a.
Fractional Reserve Banking
i. Actual Reserves (AR)
ii. Required Reserves (RR) = Demand Deposits × Required Reserve Ratio
iii. Excess Reserves = Actual Reserves – Required Reserves = Loanable Funds
b.
Money multiplier
i. Formula: m = 1 ÷ RRR
ii. Maximum increase in money supply = initial increase × m
iii. Leakage
5.
Tools of the FED
a.
Open market operations
b.
Reserve requirement
c.
Discount rate
Chapter 16 Macro Formulas
i.
Money = M.S = M1 = Demand Deposit + Cash in hands of public
ii.
Actual Reserves = $AR = Vault Cash + Deposits by commercial banks with the FED
iii. Required Reserves = $RR = $Demand Deposits multiplied by r (r in decimal form, r is required reserve
ratio, which is set by FED)
iv.
Excess Reserve = Funds a bank can lend = $ER = $AR-$RR
v.
Maximum money multiplier = 1÷ r (r is in decimal form)
vi.
Maximum change in Money Supply = initial change in MS multiplied by 1÷ r
Note: Initial change in M.S is often the amount of US Government Bonds bought (or sold) by the FED
Chapter 17: Money Growth & Inflation
1.
Quantity Theory of Money (Classical Theory)
a.
Concept: Long run impact of money growth is inflation
b.
Equation: MV = PY
i. V is constant
ii. Y is not impacted by M or V
iii. Therefore, percent change in M = percent change in P
c.
Price level and value of money are reciprocal
i. As $ needed to buy M Basket rises, we ↑ price level
ii. As the number of M Baskets a dollar can purchase falls, we ↓ the value of money.
d.
Implication of “Monetary Injection”
i. As FED increases MS, inflation occurs
e.
Implication of increase in MS on real values in long run = zero
i. Classical Dichotomy
ii. Monetary Neutrality
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2.
Inflation “Tax”
a.
Gov’t can raise money 3 ways
i. Raise revenues / taxes
ii. Borrow
iii. Print money
b.
The result of printing money is like a Tax on everyone who holds money
3.
Fisher Effect: Nominal interest rate adjusts to expected inflation
a.
Impact of “monetary neutrality” on interest rates
b.
Real interest rate = Nominal interest rate – Inflation
c.
Nominal interest rate = Real interest rate + Inflation
i. Real rate determined by supply and demand in the market for loanable funds
ii. Inflation is determined by rate of MS growth determined by the FED
4.
Costs of Inflation
a.
Impact of anticipated inflation on real variables
i. Shoeleather Costs
ii. Menu Costs
iii. Resource misallocation
iv. Tax distortions
v. Confusion
b.
Impact of unexpected inflation on real variables
i. Wealth redistribution
Chapter 17 Macro formulas
Quantity Theory of Money
MV=PY
Chapter 20: Aggregate Demand & Aggregate Supply
1.
Economic Fluctuations: General
a.
Characteristics
i. Irregular
ii. RGDP and other output indicators increase together
iii. RGDP and U vary inversely
b.
Short run vs. Long run
Aggregate Demand (AD)
a.
Shape
i. Real balances effect
ii. Interest rate effect
iii. Exchange rate effect
b.
Shifts (determinants)
Aggregate Supply
a.
Long run shape (LRAS)
b.
Short run shape (SRAS)
i. Misperceptions
ii. Sticky wages and prices
c.
Shifts (determinants)
i. Both LRAS / SRAS
ii. Only SRAS: change in expected price level
Equilibrium AD / AS
a.
Explaining economic Fluctuations as shifts in AD / AS
2.
3.
4.
Page 9
b.
Case studies (fair game for exam)
Chapter 21: The Influence of Monetary & Fiscal Policy on Aggregate Demand
1.
Monetary Policy
a.
The theory of liquidity preference (the market for money)
b.
Impact on the shape of the AD curve (interest rate effect)
c.
Impact of theory on shifting AD
i. MS ↑, i ↓, C & I ↑, AD↑
ii. MS ↓, i ↑, C&I ↓, AD ↓
2.
Fiscal Policy
a.
Definition
b.
↑ G (or ↓ T), leading to ↑ C & I
i. Multiplier effect
1. Change in equilibrium RGDP = change in G (or ↑C/↑I) × m
ii. Crowding out
3.
Pro’s & Con’s of Stabilization policy (see also Debate # 1, Ch. 23)
a.
LAG’s
i. Fiscal
ii. Monetary policy
b.
Imprecision of economic forecasts
c.
Politics and the FED
4.
Automatic Stabilizers
a.
Balanced Budget Amendment
5.
Supply Side Economics (See debate #4, Ch 23)
Chapter 21 Macro formulas
Four Formulas to Compute Government Spending Need to Close Recessionary Gap
1.
2.
3.
4.
1.
2.
3.
4.
5.
MPC=Change in Consumption ÷ Change in Income
Multiplier = m = 1 ÷ 1- MPC
Change in equilibrium RGDP = Change in Government Spending times multiplier = Change in G x “m”
Change in G = Amount of Recessionary Gap ÷ m
Chapter 23: Five Debates over Macroeconomic Policy
Should Policymakers Try to Stabilize the Economy?
Should Monetary Policy Be Made by Rule or Discretion?
a.
Monetary Rule: example is M ↑ as RGDP ↑
b.
The Political Business Cycle
c.
Time inconsistency of policy
d.
Flexibility
Should the Central Bank Aim for Zero Inflation
a.
Inflation fallacy
Should the Government Balance Its Budget?
Should the Tax Laws Be Refined to Encourage Savings
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