Labor N Capital K Wages W Interest i Formulas to know for Macro Economics Key Land L Rent R Inflation Expected o Income GDP Y Consumers C Suppliers I Government G Exports X Imports M Private Sector C I Consumers and Suppliers Statistical Adjustment SA Quantity Q Price P Labor Force LF U E Tax Revenues T Interest Rate ir Marginal Propensity Spending MPS Entrepreneurship e Profit Marginal Propensity Consumption MPC Public Sector G Government Unemployed U Happened Employed E Formulas Total Revenue Base x Height on Supply and Demand Curve Producer Surplus Base x Height on Supply and Demand Curve Consumer Surplus Base x Height Market price on Supply and Demand Curve GDP Per Capita GDP Population x 100 Expenditures approach to calculate GDP Y C I G X M If X M Exporting more If X M Importing more Net exports X M Income Cost approach to calculate GDP Y R W i SA To measure inflation Y QP If Q increases good If P increases bad Real GDP Nominal CPI x 100 Inflation rate Current CPI Last Years CPI Last years CPI x 100 Growth Rate of RGDP Change in RGDP time slope of Business Cycle Graph Civilian Labor Force U E Unemployment Rate of U U E x 100 Labor Force Participation Rate U E Population x 100 Employment to Population Rate E population x 100 Anticipated inflation Nominal GDP RGDP Inflation Expected NGDP RGDP o Fiscal Policy Change in G and change in T G T means a balanced budget G T means a surplus G T means a deficit Profit Total Revenue Total Cost TR TC Where Profit 0 Total Revenue Price x Quantity Total Cost LNKe x RWi P x Q p x q Average Price Level APL Price of Goods and Services Price of Resources Short Term APL increases Profits increase Producers produce more Long Term APL increases Total Revenue increases Profits have no change Real interest rates opportunity cost of risk of default premium Nominal interest rates real interest rate inflation premium Ex ante nominal interest rates real interest rate o Ex post real interest rate nominal inflation premium MPC change in Consumption change in income change in C Change in Y MPS change in Spending change in income change in S change in Y MPC MPS 1 Disposable income income after taxes Y T Multiplier 1 MPS Multiplier 1 1 MPC MPC MPS 100 of disposable income OR OR Graphing Key Words Interest Rates Loanable Funds Graph Relationship between Q and ir S Savers Lenders D Borrowers Rent Profit Wages Interest Equilibrium in 4 Major Markets Graph Land or Entrepreneurship or Labor or Capital Average Price Level Goods and Services Graph Label new equilibrium Y actual when SRAS or AD shift Label new equilibrium Y FE2 POT2 NRU2 when LRAS And SRAS shift Everything to the left of LRAS is a weak economy Everything to the right of LRAS is a strong economy Price Supply and Demand Graph Tax Rates Laffer Curve Graph Bends back due to tax avoidance and low work incentives Real GDP Over Time Business Cycle Graph Investment VS Consumer Goods Productions Possibilities Curve Chapter 10 What Causes the Aggregate Demand Curve to Shift If asked on the test o What happens to APL and Real Output Draw a Goods and Services Graph o What happens to Market Price and Quantity Draw a Supply and Demand Graph o What happens to ONE GOOD OR SERVICE Draw a Supply and Demand Graph o How each shift affects all the types of graphs Production Possibilities curve Business Cycle Etc Need to know o A shift in Short Run Aggregate Supply does NOT always change Long Run o A shift in Long Run Aggregate Supply ALWAYS changes Short Run Aggregate Aggregate Supply Supply o 1 Wealth Factors that shift the aggregate demand curve Wealth is a stock concept It describes things that you have accumulated with your income Ex Your house car etc In a booming economy o Wealth increases o Aggregate demand shifts to the right o APL increases o Y potential increases o GDP increases o Unemployment decreases o Natural rate of unemployment is higher than the actual rate of unemployment If the stock market crashes and we go into a recession o GDP falls o Wealth decreases o Aggregate Demand shifts to the left o Unemployment increases o The actual rate of unemployment is higher than the natural rate of unemployment o 2 Real Interest Rate Inverse relationship between real interest rates and aggregate demand If interest rates increase aggregate demand decreases If they decrease aggregate demand increases If interest rates increase it is a good time to save If saving more o Consumption decreases o Aggregate demand decreases o It is a bad time to borrow o Investment increases o 3 Expectations about the Economy Consumer Sentiment Index CSI If CSI is near 100 glass is half full meaning there is an optimistic outlook on the economy If CSI is near 0 glass is half empty meaning there is a pessimistic outlook on the economy o If outlook is poor you start saving more and Aggregate Demand will decrease o Expectations cause things to happens o 4 Changes in the expected rate of Inflation If we expect prices to be higher it is a good time to buy because the prices are currently cheap If we expect inflation to rise o APL will rise o We are at our above our potential on the business cycle o We are outside the graph on the production possibilities curve o Unemployment is low o Employment is high o We are at a short run equilibrium and a long run disequilibrium o 5 Changes in Income Abroad Aggregate Demand RGDP Y C I G X M If other countries get wealthier exports will increase and therefore aggregate demand will increase as well If other countries get poorer exports will decrease and so will aggregate demand Things that cause Short Run Aggregate Demand Supply Curve to shift o 1 Cost of Production Cost of Resources Ex Steel is in short supply Price increases APL increases Real GDP decreases High unemployment Low employment In a recession o 2 Supply Shock Anything unexpected that affects supply Ex Prices change Ex Weather causes a disaster Things that cause changes in Long Run Supply Curve o 1 Technology New technology leads to Production increasing Point is outside the production possibilities curve Changes both Long and Sort Run Still is at a Long Run Equilibrium meaning where all three lines intersect Full employment stays the same Natural Rate of Unemployment stays the same Economy is at equilibrium and doing fine not booming nor busting o 2 of Resources Same graph as technology Chapter 11 Fiscal Policy This is only part of this section The rest will be taught in class on Tuesday November 12th 2013 You will have to illustrate and
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