Graphs and Formulas

 Determinants (Shifters) of PPC permanent change in land, labor, capital, entrepreneurial ability

 Determinants (Shifters) of Demand: Number of Consumers Consumer Tastes and Preferences Consumer Income/Wealth Price of Substitute Goods Price of Complementary Goods Consumer Expectations  Determinants (Shifters) of Supply: Number of Producers Input Costs Price of Alternative Goods Producer Expectations

 Review Formulas: D ↑ → P ↑, Q ↑ D ↓ → P ↓, Q ↓ S ↑ → P ↓, Q ↑ S ↓ → P ↑, Q ↓

 Expenditures Approach: C + I + G + Xn Income Approach: Wages + Rent + Interest + Profit Nominal GDP = Real GDP x GDP Deflator (price index) Real GDP = (Nominal GDP / GDP Deflator) x 100 GDP Deflator = (Nominal GDP / Real GDP) x 100 GDP Growth Rate = [(GDPnew - GDPold) / GDPold] x 100 GDP per Capita = Real GDP / population

 Consumer Price Index (CPI) = (current price / base price) x 100 Inflation Rate = [(CPInew - CPIold) / CPIold] x 100

 Unemployment Rate = (# of unemployed / # in the labor force) x 100 Labor Force Participation Rate = (# in the labor force / population) x 100

 MARGINAL PROPENSITY TO CONSUMER (MPC) ∆C/∆DI MARGINAL PROPENSITY TO SAVE (MPS) ∆S/∆DI MPC + MPS = 1  SPENDING MULTIPLIER 1/MPS ∆GDP/∆Spending TAX MULTIPLER -MPC/MPS ∆GDP/∆Taxes  BALANCED-BUDGET MULTIPLIER = 1

 C + I + G + Xn Consumption/Consumer Spending (C) - consumer income/wealth - consumer confidence - income taxes - interest rates Investment Spending (I) - acquisition, maintenance, operating costs - business taxes - technology - inventory - interest rates  Government Spending (G) - Expansionary Fiscal Policy - Contractionary Fiscal Policy Net Exports (Xn)/Exports - Imports (X-M) - relative income - exchange rates - foreign consumer tastes and preferences - protectionism (tariffs, quotas)

 Short-Run Aggregate Supply Input Costs Wages Productivity Producer Expectations Government Subsidies Business Taxes Government Regulations  Long-Run Aggregate Supply Permanent change in... Land Labor Capital Entrepreneurial Ability

 Consumption (C) and Saving (S) Consumer Wealth ↑ → C ↑, S ↓ Consumer Wealth ↓ → C ↓, S ↑ Consumer Expectations ↑ → C ↑, S ↓ Consumer Expectations ↓ → C ↓, S ↑ Consumer Debt ↑ → C ↓, S ↑ Consumer Debt ↓ → C ↑, S ↓ Income Taxes ↑ → C ↓, S ↓ Income Taxes ↓ → C ↑, S ↑ Transfer Payments ↑ → C ↑, S ↑ Transfer Payments ↓ → C ↓, S ↓  Investment Spending/Demand (I) Acquisition/Maintenance/Ope rating Costs ↑ → I ↓ Acquisition/Maintenance/Ope rating Costs ↓ → I ↑ Business Taxes ↑ → I ↓ Business Taxes ↓ → I ↑ Technology ↑ → I ↑ Technology ↓ → I ↓ Inventory ↑ → I ↓ Inventory ↓ → I ↑ Market Expectations ↑ → I ↑ Market Expectations ↓ → I ↓

 Fiscal Policy Expansionary Fiscal Policy (increase government spending, decrease taxes) → AD ↑ → PL ↑, Y ↑ Contractionary Fiscal Policy (decrease government spending, increase taxes) → AD ↓ → PL ↓, Y ↓  Net Exports (Xn)/Exports - Imports (X-M) Foreign Consumer Tastes and Preferences ↑ → Xn ↑ Foreign Consumer Tastes and Preferences ↓ → Xn ↓ Foreign Income ↑ → Xn ↑ Foreign Income ↓ → Xn ↓ Appreciation of Dollar ($ ↑ ) → Xn ↓ Depreciation of Dollar ($ ↓ ) → Xn ↑ Tariffs ↑ → M ↓ → Xn ↑ Tariffs ↓ → M ↑ → Xn ↓

 Aggregate Demand (AD) C ↑, I ↑, G ↑, Xn ↑ → AD ↑ → PL ↑, Y ↑ (Demand-Pull Inflation) C ↓, I ↓, G ↓, Xn ↓ → AD ↑ → PL ↓, Y ↓  Short-Run Aggregate Supply (SRAS) SRAS ↑ → PL ↓, Y ↑ SRAS ↓ → PL ↑, Y ↓ (Cost-Push Inflation aka Stagflation)  Long-Run Aggregate Supply (LRAS) Land ↑, Labor ↑, Capital ↑, Entrepreneurial Ability ↑ → LRAS ↑ Land ↓, Labor ↓, Capital ↓, Entrepreneurial Ability ↓ → LRAS ↓

 Determinants of Demand for Loanable Funds: Consumer Borrowing Investment Spending Government Deficit Spending* Determinants of Supply of Loanable Funds: Savings Money Supply Government Deficit Spending*  Review Formulas: Demand for Loanable Funds (borrowing ↑ ; deficit spending ↑ ) → Dlf ↑ → r% ↑, Qlf ↑ (borrowing ↓ ; deficit spending ↓ ) → Dlf ↓ → r% ↓, Qlf ↓ Supply of Loanable Funds (savings ↑ ; money supply ↑ ) → Slf ↑ → r% ↓, Qlf ↑ (savings ↓ ; money supply ↓ ) → Slf ↓ → r% ↑, Qlf ↓ * Deficit spending can be applied to either the Supply of Loanable Funds or the Demand of Loanable Funds. Either way is correct as both result in the increase of real interest rates. In my course, I instruct you to apply deficit spending to the Demand of Loanable Funds. KEY IDEA: Increased deficit spending results in Crowding Out.

 Review Formulas AD ↑ → moving along SRPC right to left AD ↓ → moving along SRPC left to right SRAS ↑ → SRPC ↓ SRAS ↓ → SRPC ↑ LRAS ↑ → LRPC ↓ LRAS ↓ → LRPC ↑

 rr = Reserve Requirement/Ratio Money Multiplier = 1/rr  TIME VALUE OF MONEY/PURCHASING POWER OF MONEY r = real interest rate Future Value (FV) = Present Value (PV) x (1 + r) Present Value (PV) = Future Value / (1+r) EQUATION OF EXCHANGE M = Money Supply V = Velocity of Money P = Price Level Y = Real GDP MV = PY

 1. Open-Market Operations Buy Bonds → MS ↑ (targets lower federal funds rate) Sell Bonds → MS ↓ (targets higher federal funds rate) 2. Discount Rate Discount Rate ↓ → MS ↑ Discount Rate ↑ → MS ↓ 3. Required Reserve Ratio/Reserve Requirement Reserve Requirement ↓ → MS ↑ Reserve Requirement ↑ → MS ↓

 Determinants of Money Demand: Price Level Real GDP/real income Determinants of Money Supply: Federal Reserve's Expansionary Monetary Policy (buy bonds, decrease the discount rate, and/or decrease the reserve requirement) Federal Reserve's Contractionary Monetary Policy (sell bonds, increase the discount rate, and/or increase the reserve requirement)

 Money Demand (MD) PL ↑ → MD ↑ → i% ↑, Q ↑ PL ↓ → MD ↓ → i% ↓, Q ↓ Y ↑ → MD ↑ → i% ↑, Q ↑ Y ↓ → MD ↓ → i% ↓, Q ↓ Money Supply (MS) Expansionary Monetary Policy (buy bonds, decrease the discount rate, and/or decrease the reserve requirement) → MS ↑ → i% ↓, Q ↑ Contractionary Monetary Policy (sell bonds, increase the discount rate, and/or increase the reserve requirement) → MS ↓ → i% ↑, Q ↓

 CURRENT ACCOUNT Net Exports (Balance of Trade) Exports (goods/services) - inflow (+) Imports (goods/services) - outflow (-) Net Investment Income Profits/Wages/Interest/Dividends Earned on Foreign Investments - inflow (+) Profits/Wages/Interest/Dividends Paid to Foreign Firms - outflow (-) Net Transfers Foreign Public/Private Transfers to Domestic - inflow (+) Domestic Public/Private Transfers to Foreign - outflow (-)  FINANCIAL (CAPITAL) ACCOUNT Direct Investment Foreign Purchase of Domestic Real Assets - inflow (+) Domestic Purchase of Foreign Real Assets - outflow (-) Foreign Purchase of Domestic Financial Assets - inflow (+) Domestic Purchase of Foreign Financial Assets - outflow (-) Other Investment Foreign Interest-Earning Account in Domestic Bank - inflow (+) Domestic Interest Earning Account in Foreign Bank - outflow (-) Foreign Loan to Domestic Borrower - inflow (+) Domestic Loan to Foreign Borrower - outflow (-) CURRENT ACCOUNT + FINANCIAL (CAPITAL) ACCOUNT = 0 OFFICIAL RESERVES Federal Reserve (central bank) steps in if... Balance of Payment Deficit Balance of Payment Surplus

 T - tastes and preferences I - relative income P - relative price level S - speculation I - relative interest rates  Y ↑ → S$ ↑, D$ ↓ → $ ↓ (U.S. Dollar depreciates) Y ↓ → S$ ↓, D$ ↑ → $ ↑ (U.S. Dollar appreciates) PL ↑ → S$ ↑, D$ ↓ → $ ↓ (U.S. Dollar depreciates) PL ↓ → S$ ↓, D$ ↑ → $ ↑ (U.S. Dollar appreciates) i% ↑ → S$ ↓, D$ ↑ → $ ↑ (U.S. Dollar appreciates) i% ↓ → S$ ↑, D$ ↓ → $ ↓ (U.S. Dollar depreciates)