Notes

MACROECONOMICS

The market cure for a surplus is a lower prices
The market cure for a shortage is higher prices
Increase in the money supply decreases interest rates, which shifts aggregate demand to the right
Second hand sales or underground economy transactions are not counted towards GDP
C+I+G+X measures aggregate spending (GDP) (aggregate income)
Investment spending is current spending in order to increase output or productivity later
Net exports: add any domestically produced goods purchased by foreign consumers (exports) and subtract any spending by our citizens on purchases of goods made in other nations (imports)

Labor (income = wages)
Land (income = rent)
Capital (income = interest)
Entrepreneurial talent (income = profits)

Find inflation rate = (CPI of year 2 - CPI of year 1) / (CPI of year 1)
Price index of 100 = no inflation (100 = base year)
Expansion is real GDP growing
Contraction is real GDP falling
CPI = (market basket in the year you're looking for) / (market basket in the base year) x 100

recessionary gap = high unemployment is greatest concern
inflationary gap = rising price level is greatest concern
demand-pull inflation is inflation that is the result of stronger consumption from all sectors of AD as it continues to increase in the upward-sloping range of SRAS. The price level begins to rise, and inflation is felt in the economy.

spending multiplier
the multiplier effect of an increase in AD is greater if there is no increase in the price level
the multiplier effect of an increase in AD is smaller if there is a larger increase in the price level
supply-side boom = when the SRAS curve shifts outward and the AD curve stays the same, the price level falls, real GDP increases and the unemployment rate falls

supply shock is something that affects the costs of firms, positively or negatively
positive supply shock = result of higher productivity or lower energy prices
negative supply shock = result of increase in input prices

AD increases causing Real GDP to increase, unemployment decreases and the price level increases
AD decreases causing Real GDP to decrease, unemployment rises and the price level decreases
SRAS increases causing Real GDP to increase, unemployment decreases and the price level decreases
SRAS decreases causing Real GDP to decrease, unemployment increases and the price level increases

if GDP goes up, price level goes up, unemployment goes down (for a shift in demand)
if GDP goes down, price level goes down, unemployment goes up (for a shift in demand)
so an increase in consumption spending (C+I+G+X) shifts the aggregate demand curve
stagflation is when AS shifts left and AD stays the same

rising real GDP creates jobs and lowers unemployment
a decrease in SRAS creates inflation, lowers real GDP, and increases the unemployment rate
stagflation most likely results from decreasing SRAS with AD that stays the same

Phillips Curve = inflation rate and unemployment rate
If AD rises, movement up the Phillips Curve (inflation rises)
If AD falls, movement down the Phillips Curve (inflation decreases)

the full effect of the spending multiplier is felt when there is no rise in price
the more you raise the price, the less effect the spending multiplier has
if people spend less (MPC is less) then the less effect the spending multiplier has
if you raise the price, people spend less

Aggregate supply is vertical in the long run because in the long run all resources are employed at full employment

interest rate effect: as the average price level rises, consumers and firms borrow more money for spending and capital investment which increases the interest rate

fiscal policy = government spending and tax collection (affects economic output, unemployment, and price level)
expansionary fiscal policy fixes a recession (government spending increases, or lower taxes)
contractionary fiscal policy fixes inflation (government spending decreases, or increase taxes)

fiat money is just the dollar bill (no intrinsic value)

budget deficit = government spending is more than revenue collected from taxes
budget surplus = goverment spending is less than revenue collected from taxes

a deficit increases the demand for loanable funds but, by raising the real interest rate, reduces the quantity of loanable funds available to the private borrowers and investors
crowding out
automatic stabilizers anything that increases a budget deficit during a recessionary period and increases a budget surplus during an inflationary period
automatic stabilizers examples are corporate and personal taxes and transfer payments like unemployment insurance and welfare

when interest rate increases, households and firms are "crowded out" of the market for loanable funds (causes a decrease in consumer spending and investment spending (C and I))
government budget deficit affects the market for loanable funds and crowds out private investment:

When the government has a budget deficit, the demand for loanable funds shifts to the right and the real interest rate rises. Private investment, the other source of the demand for loanable funds, decreases and is thus "crowded out."

another way to think about crowding out:
if the government has a budget deficit, public saving is negative and the supply of loanable funds shifts left
if the government has a budget surplus, public saving is positive and the supply of loanable funds shifts right
budget deficit causes leftward shift of the supply of loanable funds, increasing the interest rate in the
market for loanable funds and decreasing the quantity of loanable funds both invested and saved.

M1 money is the most liquid (cash, checking deposits, traveler's checks)
M2 is everything else, including M1 (savings deposits, time deposits, money market funds)c

If a nation's labor force can produce more output per worker from one year to the next, productivity has increased.
Determinants of Productivity:
natural resources
technology

UNIT 1:
Centrally Planned (command) economy
Free Markey (capitalism) economy -- invisible hand
Invisible Hand (the concept that society's goals will be met as individuals seek their own self-interest) (competition and self-interest)
Mixed Economy = free markets, but with government intervention
constant opportunity cost = straight line PPC
law of increasing opportunity cost = bowed out (concave) PPC
countries that produce more capital goods will have more growth in the future (shift PPC)
Quick and dirty
Output you want the most
Input you want the smallest
Terms of Trade:
Look at values calculated for per unit opportunity cost
Price ceiling is the maximum price a seller can charge for a product (shortage)
Price floor is the minimum price a seller can sell a product (surplus)

UNIT 2:
unemployment rate = (#unemployed) / (#in labor force) x 100
frictional unemployment (between jobs)
structural unemployment (skills are obsolete, robots have taken your job)
cyclical unemployment (unemployment caused from a recession)
inflation is rising general level of prices and it reduces the purchasing power of money
when inflation occurs, each dollar of income will buy fewer goods than before
LENDERS are hurt by inflation, also people with fixed incomes, also savers
BORROWERS are helped by inflation
real = adjusted for inflation
GDP Deflator = (Nominal GDP) / (Real GDP) x 100
Velocity of money = the average times a dollar is spent and re-spent in a year
Quantity Theory of Money Equation: M x V = P x Y
M = money supply
V = velocity
P = price level
Y = quantity of output
(P x Y) = Nominal GDP
demand-pull inflation leads to an inflationary gap
demand goes up for stuff
cost-push inflation (higher production costs increase prices)
supply decreases causing the price to rise

UNIT 3:
why is AD downward sloping?
wealth effect: when price level goes up, people buy less because they have less wealth
interest rate effect: when price level goes up, interest rates rise and people take out less loans (loans are investment spending (I))
foreign trade effect: when price level goes up, people buy less of your country's goods
AD shifters (C+I+G+Xn) ; AD = GDP
if your country's currency appreciates, that means it is more expensive for foreigners to get your currency, net exports will decrease and AD will fall
AS shifters
Change in resource prices
change in actions of the government (taxes, regulations)
change in productivity / technology
negative supply shock shifts AS to the left (stagflation, high unemployment, high inflation)
positive supply shock shifts AS to the right
short run phillips curve shifts in the opposite direction of a shift of AS
classical theory vs keynesian theory
fiscal policy = actions by government to stabilize the economy
monetary policy = actions by the federal reserve bank to stabilize the economy
contractionary fiscal policy (decrease government spending, increase taxes)
expansionary fiscal policy (increase government spending, decrease taxes)
autonomous consumption = consumers will spend a certain amount no matter what, regardless of their income
(this is usually to pay for necessities)
disposable income is just income after taxes
so if you increase taxes, you decrease disposable income
if you decrease taxes, you increase disposable income
THE MULTIPLIER EFFECT shows how spending is magnified in the economy
MPC = marginal propensity to consume: how much people consume rather than save when there is a change in income
MPC = (change in consumption) / (change in income)
MPS = marginal propensity to save: how much people save rather than consume when there is a change in income
MPS = (change in savings) / (change in income)
MPC + MPS = 1
Spending multiplier = 1 / MPS
example: MPS = .5 --> 1 / .5 = 2; the spending multiplier is 2. This means that an initial increase in spending
will result in double the amount of spending in the economy.
the less people spend, the less effect the spending multiplier has
THE TAX MULTIPLIER IS ALWAYS ONE LESS THAN THE SPENDING MULTIPLIER
Example: if MPC is .9, that means MPS is .1 and the spending multiplier is 1 / .1 = 10
spending multiplier = 10
tax multiplier = 9
If investment increases, AD, AS, and LRAS all shift to the right. It's a triple shift. PPC shifts outward since
producers can make more

UNIT 4:
assets are anything that is owned
liabilities are anything that is owed
a LOAN is an agreement between a lender and a borrower, usually at a fee called the interest rate
real interest rate = nominal interest rate - expected inflation
M1 money is money in circulation, also checking accounts and traveler's checks
M2 money is M1 money plus savings deposits, time deposits, and money market funds
when interest rates decrease, bond prices increase
when interest rates increase, bond prices decrease
required reserves are how much the bank must hold by law
excess reserves are how much the bank can loan out
demand deposit is money put in a bank in a checking account
balance sheet is a record a bank's assets, liabilities, and net worth
TOTAL ASSETS AND TOTAL LIABILITIES ARE ALWAYS EQUAL
Increase money supply -> Decrease interest rate -> Increase investment -> Increase AD
Decrease money supply -> Increase interest rate -> Decrease investment -> Decrease AD

Decrease in RR, Money supply increases
Increase in RR, Money supply decreases
Money Multiplier = 1 / RR

Discount rate is the interest rate that the FED charges banks
Decrease in discount rate, Money supply increases
Increase in discount rate, Money supply decreases

Open market operations = FED buy/sells bonds
Buy Bonds = Increase money supply
Sell Bonds = Decrease money supply

Federal funds rate is the interest rate banks charge each other
if government is borrowing, that increases the demand for loanable funds, causes crowding out
if increase in foreign investment, that increases the supply for loanable funds
Loanable funds shifters:
Demand shifters:
-changes in government borrowing (budget deficit/surplus)
-changes in perceived business opportunities
Supply shifters:
-changes in public savings
-changes in private savings
-changes in foreign investment

UNIT 5:
trade surplus = exporting more than is imported
trade deficit = exporting less than is imported
current account (one thing and it's over)
financial account (continues to earn money)
if current account has a deficit, financial account must have a surplus
credit = exports going up
debit = importing more
increase demand for currency causes that currency to appreciate
increase in demand for one currency causes an increase in supply for the other currency
high inflation / lower interest rates causes demand for that currency to decrease and people supply more so they can buy goods from other countries (since they want to avoid inflation) -> double shift (currency depreciates)
appreciation = decrease in net exports
depreciation = increase in net exports