Formulas to know for Macro Economics:Key:Land=L Labor=N Capital=K Entrepreneurship=eRent=R Wages=W Interest=i Profit= ΠInflation= Π Expected= Π^o Happened= ΠIncome=GDP=Y Consumers=C Suppliers=I Government=G Exports=X Imports=MPrivate Sector=C+I (Consumers and Suppliers) Public Sector= G (Government)Statistical Adjustment=SA Quantity=Q Price=PLabor Force= LF= U+E Unemployed=U Employed=ETax Revenues= T Interest Rate=irMarginal Propensity Spending=MPS Marginal Propensity Consumption=MPCFormulas:Total Revenue= Base x Height on Supply and Demand CurveProducer Surplus= ½ Base x Height on Supply and Demand CurveConsumer Surplus= ½ Base x (Height- Market price) on Supply and Demand CurveGDP Per Capita= (GDP/Population) x 100Expenditures approach to calculate GDP= Y= C+I+G+(X-M)If X>M; Exporting moreIf X<M; Importing moreNet exports= X-MIncome/Cost approach to calculate GDP= Y=R+W+i+ Π+ SATo measure inflation Y=QPIf Q increases= goodIf P increases= badReal GDP= (Nominal/CPI) x 100Inflation rate= (Current CPI-Last Years CPI)/(Last years CPI) x 100Growth Rate of RGDP= Change in RGDP/time= slope of Business Cycle GraphCivilian Labor Force= U+EUnemployment Rate= (# of U)/(U+E) x 100Labor Force Participation Rate= (U+E)/Population x 100Employment to Population Rate= E/population x 100Anticipated inflationNominal GDP= RGDP + Inflation ExpectedNGDP=RGDP+ Π^oFiscal Policy= Change in G and change in TG=T means a balanced budgetG<T means a surplusG>T means a deficitProfit= Total Revenue-Total CostΠ = TR-TCWhere Profit>0Total Revenue= Price x QuantityP x QTotal Cost= (LNKe) x (RWi Π)p x qAverage Price Level= APL= Price of Goods and Services + Price of ResourcesShort Term= APL increases, Profits increase, Producers produce moreLong Term= APL increases, Total Revenue increases, Profits have no changeReal interest rates= opportunity cost of $ + risk of default premiumNominal interest rates= real interest rate + inflation premiumEx ante nominal interest rates= real interest rate + Π^oEx post real interest rate= nominal – inflation premiumMPC= change in Consumption/change in income= change in C/Change in YMPS= change in Spending/change in income= change in S/change in YMPC+MPS=1 OR MPC+MPS=100% of disposable incomeDisposable income=income after taxes= Y-TMultiplier=1/MPS OR Multiplier= (1/(1-MPC))Graphing Key Words:Interest Rates= Loanable Funds Graph (Relationship between Q and ir)S= Savers/LendersD= BorrowersRent, Profit, Wages, Interest=Equilibrium in 4 Major Markets Graph (Land, or Entrepreneurship,or Labor, or Capital)Average Price Level= Goods and Services GraphLabel new equilibrium Y actual when SRAS or AD shiftLabel new equilibrium Y FE2, POT2, NRU2 when LRAS And SRAS shiftEverything to the left of LRAS is a weak economyEverything to the right of LRAS is a strong economyPrice= Supply and Demand GraphTax Rates= Laffer Curve Graph (Bends back due to tax avoidance and low work incentives)Real GDP Over Time= Business Cycle GraphInvestment VS. Consumer Goods= Productions Possibilities CurveChapter 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 Grapho What happens to Market Price and Quantity? Draw a Supply and Demand Grapho What happens to ONE GOOD OR SERVICE? Draw a Supply and Demand Graph Need to know:o How each shift affects all the types of graphs Production Possibilities curve Business Cycle Etc. o A shift in Short Run Aggregate Supply does NOT always change Long Run Aggregate Supplyo A shift in Long Run Aggregate Supply ALWAYS changes Short Run Aggregate Supply- Factors that shift the aggregate demand curve:o 1. Wealth 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 increaseso Aggregate demand shifts to the righto APL increaseso Y potential increaseso GDP increaseso Unemployment decreaseso 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 fallso Wealth decreaseso Aggregate Demand shifts to the lefto Unemployment increaseso The actual rate of unemployment is higher than the natural rate of unemploymento 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 decreaseso Aggregate demand decreaseso It is a bad time to borrowo Investment increaseso 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 economyo If outlook is poor, you start saving more and Aggregate Demand will decreaseo Expectations cause things to happenso 4. Changes in the expected rate of Inflation If we expect prices to be higher, it is a good time to buy because the pricesare currently cheap. - If we expect inflation to rise:o APL will riseo We are at our above our potential on the business cycleo We are outside the graph on the production possibilities curveo Unemployment is lowo Employment is higho We are at a short run equilibrium and a long run disequilibriumo 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 recessiono 2. Supply Shock Anything unexpected that affects supply- Ex. Prices change- Ex. Weather causes a disaster- Things that cause changes in Long Run Supply Curveo 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
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