Christiana's AP Macroeconomics Blog

Uses of Money *medium of exchange *unit of account (economic value) *store of value Types of Money *Commodity Money (ex: gold, silver) *Representative Money (IOU) *Fiat Money -money b/c gov't said so Characteristics of Money *Durability - money is able to withstand physical wear and tear (more quality than paper) *Portability- money is easily transferable *Divisibility- money can easily broken down *Uniformity - standardized currency *Scarcity - only available in limited qualities *Acceptability - money is exchange for goods and services Money Supply * M1 money (75%) -cash, coins, currency, travelers' check, demand or checkable deposits (CD, major component of M1 money) * M2 money -M1 money + savings account * M3 money -M2 money + money market accts + CD's (certificate of deposit) Liquidity - easy to convert to cash (M1 and M2) Balance Sheet -summarizes financial position of the bank at a certain time (T account - T chart) Assets (own) ...

Reserve Requirement - banks must hold a % of all private deposits in the volt, this can not be used for loans, raising the RR , forces banks to reduce loans. Lowering the RR allows banks to create more loans Discount Rate - FDIC member banks and other eligible institutions may burrow short-term loans directly from the Fed >considered to the bank's last resort -banks do NOT like to burrow from the bank Federal Fund Rate- FDIC member banks loan each other overnight funds (like burrowing from brother or home-girl - friendly loan) burrowing bet. banks Prime Rate - the interest rate that banks charge their most credit-worthy customers Open Market Operations (OMO): Fed can either buy or sell bonds                                           * Sell bonds - Fe...

Fiscal Policy -changes in the expenditures or tax revenues of the fed. gov't 2 tools >> Taxes - gov't can increase or decrease taxes >>Spending - gov't can increase or decrease spending Inverse Relationship **enacted to promote our nation's economic goals: full employment, price stability, economic growth Deficits, Surpluses, and Debt * Balanced budget -Revenues = Expnditures *Budget deficit -Revenues < Expenditures *Budget surplus -Revenues > Expenditures *Gov't Debt - sum of all deficits - sum of all surpluses -Gov't must burrow money when it runs a budget deficit     *gov't burrows from: -Individuals -Corporations -Financial institution -foreign entities or foreign gov't Fiscal Policy Two Options * Discretionary Fiscal Policy (action) -Expansionary fiscal policy - think deficit -Contractionary - think surplus * Non-Discretionary -happens on its own without government input. Discretionary v. Auto...

The Spending Multiplier Effect * An initial  Δ in spending (C, Ig, G, Xn) causes a larger change in aggregate spending or demand (AD)        Ex. If the government increases defense spending by $1 Billion, then defense contractors will hire will and pay more workers, which increase aggregate spending by more than the original $1 Billion . Multiplier = Δ AD / Δ C, I, G, or Xn Why does this happen? -expenditures and income flow continuously which sets off a spending increase in the economy. *Calculating it -can be calculated from MPC or MPS       * Multiplier = 1/(1-MPC) or 1/MPS -(+) when there is an increase in spending, (-) when there is a decrease Calculating the Tax Multiplier -when gov't taxes, multiplier works in reverse -b/c now money is leaving the circular flow -ALWAYS negative = - MPC/1-MPC or -MPC/MPS -If there is a tax-cut , then the multiplier is +,b/c there is now money in the circular f...

Disposable Income (DI) *Income after taxes or net income DI = Gross income - Taxes 2 Options *w/ DI, households can either -consume (spending money on goods & services) -save (not spend money on goods & services)   Consumption *household spending *The ability to consume is constrained by -amount of DI -propensity to save *Do households consume if DI=0 ? -Autonomous consumption -Dissaving APC = C/DI = % DI that is spent Saving *Household NOT spending *The ability to save is constrained by -the amount of DI -prosperity to consume *Households can NOT save if DI=0 APS = S/DI = % DI that is not spent APC & APS *APC + APS = 1 *1- APC = APS *APC >1.:Dissaving *- APS .: Dissaving MPC & MPS *Marginal Propensity to Consume  (MPC) --The fraction of any change in DI that is consumed. ΔC/ΔDI -% of every extra dollar earned that is spent *Marginal Propensity to Save (MPS) --The fraction of any change in DI that is saved ΔS/...

Investment -Money spent or expenditures on:      New plants     Capital equipment (machinery)     Technology     New homes     Inventories (goods sold by producers) Expected Rates of Return *How does business investment decisions  -Cost/Benefit Analysis *How business determine benefits -Expected rate of return *How business count the cost -interest costs *How business determine the amount of investment they undertake -compare expected rate of return to interest cost     If expected return > interest cost, then invest      If expected return < interest cost, then do not invest Real (r%) v. Nominal (i%) Difference -Nominal is observable rate of interest. Real subtracts out inflation (pi%) and is only ex post facto How to compute the real IR *nominal interest rate - inflation rate  r% = i% - ( Π%) What determines the cost of ...

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 -exists when equilibrium occurs beyond full employment output Changes in AD u - unemployment Π- inflation ∆ in Consumption (C) *C ↑.: AD → .: GDPr ↑ & PL↑.: u% ↓ & Π% ↑ *C ↓ .: AD ← .: GDPr  ↓& PL ↓ .:u% ↑ & Π% ↓   ∆ in Gross Private Investment (Ig) *Ig ↑.: AD → .: GDPr ↑ & PL↑.: u% ↓ & Π% ↑ *Ig  ↓.: AD ← .: GDPr  ↓& PL ↓ .:u% ↑ & Π% ↓   ∆ in Gov't Spending (G) *G ↑.: AD → .: GDPr ↑ & PL↑.: u% ↓ & Π% ↑ *G ↓ .: AD ← .: GDPr  ↓& PL ↓ .:u% ↑ & Π% ↓ ∆ in Net Exports (Xn) *Xn ↑.: AD → .: GDPr ↑ & PL↑.: u% ↓ & Π% ↑ *Xn ↓ .: AD ← .: GDPr  ↓& PL ...

AD is the demand by consumers, businesses, gov't and foreign countries (C+Ig+G+Xn) *shows the amount of real GDP that the private, public and foreign sector collectively desire to purchase at each possibe price level *The relationship bet. price level and level of real GDP is inverse Aggregate Demand Curve x-axis: Real Domestic Output (GDPr) y-axis: Price level Changes in price level cause a move along the curve not a shift of the curve (shift only left or right, increase or decrease) Downward Sloping 1) Wealth Effect   -Higher prices reduce the pourchasing power of $   -This decreases the quantity of expenditures   -Lower price levels increase purchasing power and increase expenditures  - Ex: If the balance in your bank was $50,00, but inflation erodes your purchasing power, you will reduce your spending, so price level goes up, GDP demanded goes down. 2)  Interest-Rate Effect  -As price level increases, lenders need to ...

*The level of Real GDP (GDPr) that firms will produce at each Price Level (PL) * Long run (LRAS)  - Period of time where input prices are completely flexible and adjust to changes in the price-level -The level of Real GDP supplied is independent of the PL -Vertical and usually stationary * Short run - input prices are sticky and do not adjust to changes in PL -the level of real GDP supplied is directly related to the PL LRAS -marks the level of full employment in the economy (analogous to PPC) SRAS -b/c input prices are sticky in the short-run, the SRAS is upward sloping >>Changes in SRAS-an increase in SRAS = shift to the right | SRAS    → -A decrease in SRAS = shift to the left| SRAS ← *The key to understanding shifts in SRAS is per unit cost of Prod. *Per unit cost of prod. = total input cost/total output cost >>Determinants (affect unit prod. cost) *Input prices Domestic resource prices -wages (75% of all business costs) -cost of...