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

Key to Macroeconomic Symbols GDP R – Real GDP (Output) C – Consumption I G – Gross Private Investment G – Government Spending X N – Net Exports (Exports – Imports) w- wages (primary cost of production) T – taxes DI – disposable income X – Exports M – Imports AD – aggregate demand AE – aggregate expenditure 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 S LF – Supply of loanable funds D LF – 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→.: GDP R ↑ & PL↓.: u%↓ & π%↓ = SRPC← Self-correcting economy: above full-employment (inflation) – Assume inflationary gap with flexible wages (w) u%↓.: w↑.: SRAS←.: GDP R ↓ & 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→.: GDP R ↑ & PL↑.: u%↓ & π%↑ = move up/left along SRPC OR G↑.: AD→.: GDP R ↑ & PL↑.: u%↓ & π%↑ = move up/left along SRPC Contractionary fiscal policy on economy above full-employment (inflation) – Assume inflationary gap T↑.: DI↓.: C↓.: AD←.: GDP R ↓ & PL↓.: u%↑ & π%↓ = move down\right along SRPC OR G↓.: AD←.: GDP R ↓ & 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%↓.: I G ↑.: AD→.: GDP R ↑ & PL↑.: u%↓ & π%↑ = move up/left along SRPC Contractionary monetary policy on economy above full-employment (inflation) – Assume inflationary gap Fed sells bonds, DR↑, and/or RR↑.: ER↓.: MS ←.: i%↑.: I G ↓.: AD←.: GDP R ↓ & PL↓.: u%↑ & π%↓ = move down\right along SRPC

‘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.: D LF → or S LF ←.: r%↑.: I G ↓ (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.: D LF ← or S LF →.: r% ↓.: I G ↑ (partially or completely offsets intended decrease in AD) Expansionary Fiscal Policy Net Export Effect (counters policy) – Assume Expansionary Fiscal Policy (G↑ and/or T↓.: government budget moves toward deficit) deficit spending.: D LF → or S LF ←.: r%↑.: D $ →.: $↑.: U.S. goods/services relatively expensive and foreign goods/services are relatively cheap.: X↓ and/or M↑.: X N ↓ Contractionary Fiscal Policy Net Export Effect (counters policy) – Assume Contractionary Fiscal Policy (G↓ and/or T ↑.: government budget moves toward surplus) budget surplus.: D LF ← or S LF →.: r% ↓.: S $ →.: $↓.: U.S. goods/services relatively cheap and foreign goods/services are relatively expensive.: X↑ and/or M↓.: X N ↑ 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↓.: X N ↑ 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↑.: X N ↓