1. Macro Final Topic Review
Savings & Leakage
Economic Schools of Thought

2. DEMAND FOR MONEY Money Market MS MD
You usually do not have to shift MD
The Fed. Controls MS and that moves
with monetary policy
HOWEVER- sometimes they shift MD on the exam
For example:
1) If the stock market crashes—people hold more
Money (precautionary demand) and MD shifts right
2) If the price level ↑, then MD shifts right
Money Market
Nominal
Interest
Rate MS
Demand for Money:
Transactions Demand
Precautionary Demand
Speculative Demand MD
Qty $
Price Level changes shifts Demand Curve for Money
↑ Px level shifts MD right
↓Px level shifts MD left

3. Injections & Leakages
Injections - income of firms which does not normally arise from the expenditure of households
changes in investment, government spending or exports.
Leakages - Income not passed on by consumers in the circular flow
savings, taxation or imports

4. GDP Leakage GDP = Y = C + I + G + (X – M) Leakage to GDP: S + T + M
(S = Savings T= taxes M = Imports)
Injections to GDP: I + G + X
(Investment, Gov’t, Exports)
In equilibrium: Leakage = Injections
S + T + M = I + G + X
Savings must end up as
Investment

5. Leakage
Injections

6. Tariffs & Quotas Revenue Tariff - designed to raise revenue
Protective Tariff – designed to protect domestic market
Quotas- limit # of goods imported
Price S
World Price: when above domestic price we export P
World Price: when below domestic price we import D US
Market
(Wheat)

7. Tariffs & Quotas:
will always produce deadweight loss and lower consumer surplus
lead to higher prices & protect inefficient producers
Price
Sdomestic
STariff
SWorld P D
World Qty
(Wheat

8. Phillips Curve Short & Long Run
(b) The Phillips Curve
The Phillips Curve
Inflation
Rate
Inflation
Long-run Phillips
(percent
Phillips curve
Rate
curve
per year)
and
increases the
inflation rate . . .
(output is
8,000) B 4 6 B
(output is
7,500) A 7 2 A
Unemployment
Rate (percent)
Natural rate of
Unemployment
unemployment
Rate
You may have to draw a Phillips Curve
Remember—Unemployment on x-axis

9. If real interest rates rise in the USA, then the dollar appreciates
a) Europeans supply Euros and demand dollars
If the price level rises in the USA, then the dollar depreciates
a) European goods look “cheap” => supply dollars demand Euros

10. Economic Schools of Thought
Classical View
Markets are naturally self regulating (No Gov’t intervention)
Recessions are temporary, Wages & Prices are flexible
Keynesian View
Economy is inherently unstable, Not self regulating
Wages & prices are sticky (Gov’t intervention needed)
Monetarist View
Money matters!----do not regulate economy—control inflation
Supply Side View
Incentives matter! Create incentives to increase LRAS