Nawal's AP Macroeconomics Blog

Uses of money Medium of Exchange (barter/trade) Unit of Account (economic value/money’s worth) Store of Value (what is the money’s value over time/where is it?) Types of money Commodity Money (gold/silver: a product) Representative Money (IOU) Fiat Money (Government money) Characteristics of money Durability Portability Divisability Uniformity Scarctiy Acceptability Money Supply Determined by Fed because of monopoly over money supply (vertical curve) Also vertical because it is independent of the interest rate M1 Cash, coins, currency, traveler's checks, and demand or checkable deposits(largest component) 75% of transactions in the economy M2 M1 + Savings Account M3 M2 + Money Market Account + CD's (Certificate of Deposit) Liquidity Easy to convert to cash M2 & M3 (M1, major component, not included) Balance sheet: T account, t-chart. Summarizes the financial position of a bank, at a certain time. Asset(own)-...

Fiscal Policy Changes in the expenditures or tax revenue of the federal government  2 tools of fiscal policy Taxes- government can increase or decrease taxes Spending- government can increase or decrease spending Fiscal policy is enacted to promote or nations economic goals: full employment, price stability, economic growth.  Deficits, Surpluses, and debt Balanced budget Revenues= expenditures Budget deficit Revenues<expenditures Budget surplus Revenues>expenditures Government debt Sum of all deficits-sum of all surpluses Government must borrow money when it runs a budget deficit. Government borrows from Individuals  Corporations Financial institutions  Foreign entities or foreign governments  Fiscal Policy 2 Options Discretionary Fiscal Policy(action) Expansionary fiscal policy-think deficit Contractionary fiscal policy-think surplus Non-discretionary fiscal policy(no action) Discretionary v. Automatic Fiscal P...

The spending multiplier effect An initial change in spending (C,Ig, G, Xn) causes a larger change in aggregate spending, or Aggregate demand (AD). Multiplier=Change in AD/Change in spending  Multiplier= change in AD/ change in C, Ig, G, OR Xn Why does it happen? Expenditures and income flow continuously which sets off on spending increases in the economy. Calculating the spending multiplier: The spending multiplier can be calculated from the MPC or the MPS. Multiplier = 1/1-mpc or 1/MPS Multipliers are positive when there is an increase in spending and negative where there is a decrease.  Calculating the tax multiplier: When the government taxes, the multiplier works in reverse Why? Because now money is leaving the circular flow Tax multiplier (note its negative) -MPC/1-MPC or -MPC/MPS If there is a tax cut then the multiplier is + because there is now more money in the circular flow. 

Disposable income Income after taxes or net income DI= Gross income-Taxes 2 choices With disposable income, households can either  Consume(spend money on goods and services) Save(not spend money on goods and services) Consumption Household spending The ability to consume is constrained by The amount of disposable income  The propensity to save Do households consume if DI=0? Autonomous consumption Dissaving Savings Households not spending  The ability to save is constrained by The amount of disposable income The propensity to consume Do households save if DI is 0? No APC and APS (average propensity to consume save) APC+APS=1 1-APC=APS 1-APS=APC APC>1=Dissaving  APS=dissaving  MPC and MPS Mariginal propensity to consume Change in C/ change in DI The fraction of any change in disposable income that is consumed %OF EVERY EXTRA DOLLAR EARNED THAT IS SPENT Marginal propensity to save  Cha...

What is investments? Money spent or expenditures on:  New plants (Factories) Capital equipment (machinery) Technology (hardware)  New homes Inventories (goods sold by producers)  Expected rates of return: How does business make investment decisions? cost / Benefit analysis How does business determine the benefits? Expected rate of returns  How does business count the cost? Interest costs How does business determine the amount of investment they undertake? Compare expected rate of return to interest cost If expected return is greater than interest cost, then invest If expected return is less than interest cost, then do not invest Real Interest Rate (r%) vs. Nominal Interest Rate (i%) What then determine the cost of an investment decisions?   The real interest rate (r%) Investment demand curve (ID) What is the shape of the investment demand curve? Downward sloping  Why? When interest rates are high, f...

The AS/AD Model The equilibrium of AS & AD determines current output (GDPR) and the price level (PL) Full Employment Equilibrium exists where AD intersects SRAS & LRAS at the same point  Recessionary Gap Exists when equilibrium occurs below full employment output Inflationary Gap When equilibrium occurs beyond full employment output ▲in AD:  ▲Consumption (C) C↑ ∴ AD → ∴ GDPR↑ and PL↑ ∴ u%↓ and π%↑ C↓ ∴ AD ← ∴ GDPR↓ and PL↓ ∴ u%↑ and π%↓ ▲ Gross Private Investment (Ig) Ig↑ ∴ AD → ∴ GDPR↑ and PL↑ ∴ u%↓ and π%↑ Ig↓ ∴ AD ← ∴ GDPR↓ and PL ↓ ∴ u%↑ and π%↓ ▲Government Spending (G) G↑ ∴ AD→ ∴ GDPR↑ and PL↑ ∴ u%↓ and π%↑ G↓ ∴ AD← ∴ GDPR↓ and PL↓ ∴ u%↑ and π%↓ ▲ Net Exports (Xn) Xn↑ ∴ AD→ ∴ GDPR↑ and PL↑ ∴ u%↓ and π%↑ Xn↓ ∴ AD← ∴ GDPR↓ and PL↓ ∴ u%↑ and π%↓ Increase in AD C↑, Ig↑, G↑, and/or Xn↑ ∴ AD→ ∴ GDPR↑ and PL↑ ∴ u%↓ and π%↑ Decrease in AD ▲ in SRAS: ▲ Input Prices Input Prices↓ ∴ SRAS→ ∴ GDPR↑ and PL↓ ∴ u%...

Aggregate supply: The level of Real GDP(GDPr) that firms will produce at each price level(PL) Long run V short run Long run:  Period of time where input prices are completely flexible and adjust to changes in the price level In the long run, the level of Real GDP supplied is independent of the price level.  Short run:  Period of time where input prices are sticky and do not adjust to changes in the price level. In the short run, the level of Real GDP supplied is directly related to the price level.  Long run Aggregate supply (LRAS) The long run aggregate supply or LRAS marks the level of full employment in the economy. (Analogous to PPC) Short run aggregate supply (SRAS) Because input prices are sticky in the short run, the SRAS is upward sloping.  ▲in Short run SRAS: An increase in SRAS is seen as a shift to the right. SRAS to the right. A decrease in SRAS is seen as a shift to the left. SRAS  to the left.  The ...

Aggregate demand(AD): Shows the amount of Real GDP that the private, public and foreign sector collectively desire to purchase at each possible price level.  The relationship between the price level and the level of Real GDP is inverse.  Why aggregate demand is downward sloping: Wealth effect:   higher prices reduce purchasing power of money. This decreases the quantity of expenditures Lower price levels increase purchasing power and increase expenditures Example: If the balance in your bank was $50,000, but inflation erodes your purchasing power, you will likely reduce your spending.  Interest-rate effect:   As price level increases, lenders need to charge higher interest rates to get a REAL return on their loans.  Higher interest rates discourage consumer spending and business investment.  Example: Increase in prices leads to an increase in the interest rate from 5% to 25%. You are less likely to take out loans to imp...