Formulas to Know for Macro Economics Resources Key L Land N Labor K Capital e Entrepreneurship Return on Resources Key R Rent W Wages i Interest Profit Inflation Key Inflation o Expected Inflation Happened Inflation NGDP Nominal Gross Domestic Profit RGDP Real Gross Domestic Profit CPI Consumer Price Index Formulas To measure inflation Y QP If Q increases good If P increases bad NGDP RGDP o Anticipated inflation Inflation rate Current CPI Last Years CPI Last years CPI x 100 Interest Rates Key ir Interest Rates Rir Real Interest Rates Nir Nominal Interests Rates Formulas 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 Income Key Y Income RGDP Income 1 RGDP Real Gross Domestic Product Inflation taken out AD Income AD Aggregate Demand Formulas Y GDP AD C I G X M See GDP section blow for the other method to calculate RGDP GDP Key C Consumers I Suppliers G Government X Exports M Import C I Private Sector G Public Sector X M Net Exports SA SA CPI Consumer Price Index R Rent W Wages i Interest Profit Formulas 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 Income Cost approach to calculate GDP Y R W i SA RGDP Nominal GDP CPI x 100 Growth Rate of RGDP Change in RGDP time slope of Business Cycle Graph Money Supply Things to know When the Fed buys bonds the money supply is getting bigger When the Fed sells bonds the money supply is getting smaller The U S Treasury sells bonds to the Fed and this has no effect on the money supply Fiscal Policy Key T Tax Revenues G Government Formulas Fiscal Policy Change in G and change in T G T means a balanced budget G T means a surplus 2 G T means a deficit Fiscal Policy Multiplier Note This is an example of crowding out Key MPS Marginal Propensity Spending MPC Marginal Propensity Consumption Y Income C Consumption S Spending T Taxes Formulas 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 Deposit Expansion Multiplier Monetary Policy Key DEM Deposit Expansion Multiplier Res R Reserve Rate Formulas DEM 1 Res R Res R required reserve excess reserve Labor Force Key LF Labor Force U Unemployed E Employed Formulas LF 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 Real Purchasing Power Has inflation taken out Nominal Number of dollars Includes inflation Equation of Exchange Key 3 M Nominal Supply of Money of U S dollars in circulation V Velocity of Money On average how many times a dollar is spent in a year MV Total Spending P APL Average Price Level Measure of inflation Q RGDP of things produced minus inflation PQ Nominal GDP PQ Total Revenue Equation MV PQ Situations Total Spent MV Total Revenue PQ MV Total Spent PQ Total Revenue NEVER MV Total Spent PQ Total Revenue NEVER Quantity Theory of Money Key M Nominal Supply of Money of U S dollars in circulation V Constant Velocity of Money On average how many times a dollar is spent in a year MV Total Spending P APL Average Price Level Measure of inflation Q Constant RGDP of things produced minus inflation PQ Nominal GDP PQ Total Revenue Equation MV V is constant PQ Q is constant M P In this version the variables represent absolute values or numbers and you will use multiplication to calculate it change in M change in V change in P change in Q change in M change in P In this version the variables represent a percent of change and you will use addition Situation If M Money Supply increases P Inflation will increase If M increases by 10 P will increase by 10 If P increases by 10 M will only increase if the Fed wants to and it will increase by whatever the Fed increases it by 4 Major Tools of the Fed Expansionary Monetary Policy means easier for the banks to loan out money Contractionary Monetary Policy means harder for the banks to loan out money o Lower reserve requirement o Lower discount rate o Fed will be buying more bonds o Lower interest on reserves o Higher reserve requirement o Higher discount rate 4 o Fed will sell more bonds o Higher interest on reserves 1 Minor tool of the Fed Decreasing the margin requirement is expansionary policy Increasing the margin requirement contractionary policy Supply and Demand If question asks about price and quantity sold think about this graph Key Q Quantity P Price S Supply D Demand Supply and Demand Calculations Key TR Total Revenue CS Consumer Surplus PS Producer Surplus Formulas TR Base x Height PS Base x Height CS Base x Height Market price Goods and Services If question asks about APL Average Price Level think about this graph Key LRAS Long Run Aggregate Supply SRAS Short Run Aggregate Supply AD Aggregate Demand Y Income RGDP YFE Y Full Employment YPOT Y Potential YNRU Y Natural Rate of Unemployment APL Average Price Level G S Goods and Services TR Total Revenue PQ of goods services sold TC Total Cost pq of intermediate products and parts used to make the end result L Land N Labor K Capital e Entrepreneurship R Rent W Wages i Interest Profit P Price 5 Q Quantity Formulas Profit TR TC Where Profit 0 TR P x Q TC LNKe x RWi 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 Situations A point to the left of LRAS is in a busting economy i e High unemployment low inflation A point to the right of LRAS is in a booming economy i e high inflation low unemployment A point at equilibrium with LRAS is at full employment and at natural rate of unemployment If you shift LRAS you must also shift SRAS Label new equilibrium Y actual when SRAS or AD shift Label new equilibrium Y FE2 POT2 NRU2 when LRAS And SRAS shift Loanable Funds If question asks about interest rates think about this graph Key Q Quantity ir Interest Rates in this case it is the Real Interest Rate LF Loanable Funds S Supply Savers Lenders D Demand Borrowers Situations Supply and demand depends on the interest rate Production Possibilities If question asks about investment vs Consumer good think about
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