Macroeconomic Relationships a cheat sheet (Note: .: = therefore) AP Macroeconomics Macroeconomic Relationships a cheat sheet (Note: .: = therefore)

Key to Macroeconomic Symbols GDPR – Real GDP (Output) C – Consumption IG – Gross Private Investment G – Government Spending XN – Net Exports (Exports – Imports) w- wages (primary cost of production) T – taxes DI – disposable income X – Exports M – Imports AD – aggregate demand SRAS – short-run aggregate supply LRAS – long-run aggregate supply PL – Price Level SRPC – short-run Phillips curve LRPC – long-run Phillips curve u% - unemployment rate π% - inflation rate SLF – Supply of loanable funds DLF – Demand for loanable funds r% - real interest rate MS – Money Supply MD – Money Demand ER – Excess Reserves i% - nominal interest rate DR – discount rate RR – reserve ratio OMO – open market operations (buying and selling gov’t bonds) FOREX – foreign exchange market D$ - demand for dollars in FOREX S$ - supply of dollars in FOREX $ - value of dollar in FOREX ↑ - increase ↓ - decrease → - shift right (increase) ← - shift left (decrease) .: - therefore Δ - change

Self-correcting economy: below full-employment (recession) Assume recessionary gap with flexible wages (w) u% ↑.: w↓ .: SRAS→.: GDPR↑ & PL↓.: u%↓ & π%↓ = SRPC← Self-correcting economy: above full-employment (inflation) Assume inflationary gap with flexible wages (w) u%↓ .: w↑ .: SRAS←.: GDPR↓ & PL ↑.: u%↑ & π%↑ = SRPC→ Expansionary fiscal policy on economy below full-employment (recession) Assume recessionary gap with sticky wages (note: DI = disposable income) T↓.: DI↑.: C↑.: AD→.: GDPR↑ & PL↑.: u%↓ & π%↑ = move up/left along SRPC OR G↑.: AD→.: GDPR↑ & PL↑.: u%↓ & π%↑ = move up/left along SRPC Contractionary fiscal policy on economy above full-employment (inflation) Assume inflationary gap T↑ .: DI↓.: C↓ .: AD← .: GDPR↓ & PL↓ .: u%↑ & π%↓ = move down\right along SRPC G↓ .: AD← .: GDPR↓ & PL↓ .: u%↑ & π%↓ = move down\right along SRPC Expansionary monetary policy on economy below full-employment (recession) Assume recessionary gap with sticky wages Fed buys bonds, DR↓, and/or RR↓ .: ER↑ .: MS→ .: i%↓ .: IG↑ .: AD→.: GDPR↑ & PL↑.: u%↓ & π%↑ = move up/left along SRPC Contractionary monetary policy on economy above full-employment (inflation) Fed sells bonds, DR↑, and/or RR↑ .: ER↓ .: MS ← .: i%↑ .: IG ↓ .: AD← .: GDPR↓ & PL↓ .: u%↑ & π%↓ = move down\right along SRPC

‘Crowding In’ of Gross Private Investment (effect of budget surplus) ‘Crowding Out’ of Gross Private Investment (effect of deficit spending) Assume Expansionary Fiscal Policy (G↑ and/or T↓ .: government budget moves toward deficit) deficit spending .: DLF → or SLF ← .: r%↑ .: IG ↓ (partially or completely offsets intended increase in AD) ‘Crowding In’ of Gross Private Investment (effect of budget surplus) Assume Contractionary Fiscal Policy (G↓ and/or T ↑ .: government budget moves toward surplus) budget surplus .: DLF ← or SLF→ .: r% ↓ .: IG↑ (partially or completely offsets intended decrease in AD) Expansionary Fiscal Policy Net Export Effect (counters policy) deficit spending .: DLF → or SLF ← .: r%↑ .: D$ → .: $↑ .: U.S. goods/services relatively expensive and foreign goods/services are relatively cheap .: X↓ and/or M↑ .: XN ↓ Contractionary Fiscal Policy Net Export Effect (counters policy) budget surplus .: DLF ← or SLF→ .: r% ↓ .: S$ → .: $↓ .: U.S. goods/services relatively cheap and foreign goods/services are relatively expensive .: X↑ and/or M↓ .: XN↑ Expansionary Monetary Policy Net Export Effect (reinforces policy) Fed buys bonds, DR↓, and/or RR↓ .: ER↑ .: MS → .: i%↓ .: S$ → .: $↓ .: U.S. goods/services relatively cheap and foreign goods/services are relatively expensive .: X↑ and/or M↓ .: XN↑ Contractionary Monetary Policy Net Export Effect (reinforces policy) Fed sells bonds, DR↑, and/or RR↑ .: ER↓ .: MS↓ .: i%↑ .: D$ → .: $↑ .: U.S. goods/services relatively expensive and foreign goods/services are relatively cheap .: X↓ and/or M↑ .: XN ↓