1. Macroeconomics: Study Guide Tom Porter, 2014

2. Supply and Demand Start with supply and demand –For macroeconomics the starting point is aggregate supply and aggregate demand –Know the 3 equations for this graph: AD = C + I + G + NX LRAS = the production function, Y N = A F(L,K,H,N) SRAS = Y N + a (P – P e ) –One or another of these lines will change given a shock (or other change) to one of the variables in these equations. Copyright © 2014 Dr. Tom Porter 2

3. FIGURE 14.8: The Long-Run Equilibrium Copyright © 2014 by Nelson Education Limited

4. Interest Rates Interest Rates are determined by supply and demand There are 2 interest rates: 1.Real interest rates are determined by the supply and demand for loanable funds Supply for loanable funds are from Savings Demand for loanable funds are from Investment The difference between this rate and the world real interest rate determines Net Capital Outflow. The Real Exchange Rate, then adjusts to balance Net Capital Outflow with Net Exports. See Following Slide 2.Nominal interest rates – to be continued after next slide. Copyright © 2014 Dr. Tom Porter 4

5. FIGURE 13.3: The Real Equilibrium in a Small Open Economy Copyright © 2014 by Nelson Education Ltd.13-5

6. Interest Rates (continued) Interest Rates are determined by supply and demand There are 2 interest rates: 1.Real interest rates – see previous slides 2.Nominal interest rates are determined by the supply and demand for money. The price level also adjusts based on the supply and demand for money. See the next two slides. –Nominal interest rates are tied to changes in the price level. Percentage changes in the price level is inflation, so the relationship between interest rates and prices is: R = π + r Copyright © 2014 Dr. Tom Porter 6

7. FIGURE 11.1: How the Supply and Demand for Money Determine the Equilibrium Price Level Copyright © 2014 by Nelson Education Ltd.11-7

8. FIGURE 15.4: Equilibrium in the Money Market Copyright © 2014 by Nelson Education Ltd. 15-8

9. Two money equations represent long-run and short-run dynamics. 1. Long-run forces adjust so that: M x V = P x Y 2. Investment decisions are determined by: R = π + r where inflation, π, is expected inflation. Copyright © 2014 Dr. Tom Porter 9 Monetary Policy and Markets