I reviewed this entire page on 2/26

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Look at my Macroeconomics playlist on Youtube

One 30 minute video refresher of Macro:

https://www.youtube.com/watch?v=MKO1icFVtDc&t=242s

Try freeclepprep.com CLEP test

Things mentioned on instacert to study:

AS/AD - reviewed 2/24

Keynesian cross, autonomous vs induced expenditure reviewed 2/25
Phillips Curve - long run and short run - reviewed 2/24
Fiscal Policy - reviewed 2/18
Monetary Policy - including buying and selling bonds
Money market - demand for money and interest rates reviewed 2/23
MPC - reviewed 2/23
Forex - reviewed 2/24
Interest rates - reviewed 2/24
Balance of Trade - reviewed 2/24
GDP deflator - reviewed 2/24
Bonds
Labor market - reviewed 2/25
Factor Market for Capital p. 149 -
Production function - reviewed 2/25
3 ranges of supply curve (Keynesian, Intermediate, Classical) p. 168

The AS/AD model is general to all economic theory.

The Keynesian model uses AE instead of AD
(see chart on page 165)

A change in aggregate demand shifts the entire AD curve.

A decrease in aggregate demand causes the price level and GDP to drop.
(this is not the same as a change in price level and GDP along the AD curve).
Government spending causes a rightward shift in ___, This causes a _____ in the price level
and GDP.

AD. Increase
--------------------
If interest rates go down, there will be a ____ in aggregate demand.

Increase. It will cheaper to borrow money for capital investment. Also, people are likely to
consume more.
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GDP = C + I + G + Xn

Where C = consumption I = investment G = government spending Xn = net imports.

Shifters of aggregate demand : income (C), income taxes (C), government spending (G),
interest rates (I), appreciation on foreign exchange (Xn)

Shifters of aggregate supply: resource prices (like oil and inflationary expectations) , taxes,
subsidies, regulations, technology.

GDP is the market value of all final goods and services produced within a country in a given
period of time (usually a year). It’s the market value, not the value of sold units. And it must be
produced within the country. Intermediate goods are not counted unless they are unsold and
counted as inventory.

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The MPC = change in _____ / change in disposable income

consumption / change in disposable income

-----------------
multiplier = __ / MPS (applies to government spending or investment)
1 / MPS . The MPS = 1 - MPC
----------------
If spending is $1 million and the multiplier is 20, the change to GDP will be _____ .

$20 Million
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Tax multiplier = (-) ____ / MPS

MPC. The tax multiplier multiplied by the change in taxes equals the change in GDP.
-------------
If the tax multiplier is -3 , and the taxes go up by $1 million, the change in GDP will be ___ .

- 3 million (decrease of 3 million dollars)

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The consumption function is the propensity to consume more as income increases. The
consumption function is basically a formula graphed on a chart. Disposable income on the X
Axis and Consumption expenditure on the Y axis.

Formula for consumption function may look like this, but can vary:

C = autonomous consumption + marginal propensity to consume * disposable income

C = a + b YD

The slope of the consumption function is the MPC.

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The Phillips Curve charts inflation and [unemployment].

As ______ goes down, _____ tends to go up.

unemployment, inflation
https://www.youtube.com/watch?v=zatnIhwmu1c
Unemployment on the Phillips curve has an inverse relationship with [GDP ] on the bottom axis
of the AS/AD chart. An increase in one causes a decrease in the other.

If the AD curve shifts on the AD/AS chart, there will be also be movement along the phillips
curve chart. See video above.

If the AS curve shifts, the phillips curve will shift (because this is the only way to move
inflation and employment in one direction at the same time. E.g. if inflation and unemployment
increase, there must be shift of the curve.)

The Phillips curve is similar to the AS curve.

AS curve: as GDP increases the price level increases along the AS curve
Phillips curve: as unemployment decreases (GDP increase) inflation increases (price level
increase)

If there is a supply shock (such as 1970s high oil prices) then the AS curve shifts left, causing
an increase in the price level and a decrease in GDP (which is stagflation) on the AS/AD chart
and the Phillips curve shifted right because the inflation increased along with unemployment
(which is an unusual point off the normal curve).

Long Run Phillips Curve - represents the natural rate of unemployment in the long run. It is
when inflation equals the expected inflation rate. Natural rate of employment is considered the
realistic level of full employment (although true full employment is a theoretical 100% of the
labor force).
---------
The GDP deflator = nominal GDP / real GDP

https://www.youtube.com/watch?v=L-0LuSw2bTM

Practice
https://www.youtube.com/watch?v=gqm--7s0Ks4

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Keynesian Equilibrium p.161-162 in book

This is the model that uses Aggregate Expenditure instead of AD/AS. The multiplier,
central to Keynesian theory, is used in this model.

The "Rule of 72" is a simplified way to determine how long an investment (or GDP) will
take to double, given a fixed annual rate of interest. By dividing 72 by the annual rate of
return, investors can get a rough estimate of how many years it will take for the initial
investment to duplicate itself.

For example, if GDP grows at 10%, then it will take about 7 years to doube ( 72/10).
---------

Primary market for bonds is when they are initially issued, by sealed bid. Like and IPO
Secondary market for bonds is when they are resold, like the stock market.
The Federal reserve dominates the secondary market because they are the
largest owner of US treasury bonds.
https://thismatter.com/money/bonds/types/government/treasury-markets.htm

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Say’s law : supply creates demand. Because workers get paid for production and then
spend their income, creating demand. Classical Economic Theory.

--------------
Monetarism: says that inflation caused by printing too much money. A steady or gently
increasing money supply (correlated to steady increase in production output) is the best
way to have a stable economy.
------------
Classical Models, Match

1.Classical
2.Neoclassical
3.Monetarist theory
4.New Classical theory

A. Rational expectations model, policy ineffectiveness theorem. Governments should

provide a stable environment by strictly adhering to long term moderate policies.
B. Quantity of money is main source of economic fluctuations and inflation. Apply fixed
rule of passivity in all economic conditions (p. 204m)
C. Did not develop a theory of the business cycle. A classical monetary rule would be to
do nothing regardless of events.
D. Cycles are temporary, price mechanism will restore economy to full employment.

Answers
1C
2. D
3. B
4. A
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Match
1.Neoclassical growth theory
2.New growth theory

A.Growth is only driven by technology. (exogenous / international technology change)

B.Technological change and growth occur because people pursuit profit. (endogenous / internal
policy driven)

------------------
Match

1. Frictional unemployment
2. Structural
3. Seasonal
4. cyclical
A. Caused by changes in technology, skills needed, locations of jobs, foreign competition etc.
B. Caused by recession
C. Normal turnover from people entering job market, businesses downsizing, etc.
D. Happens during certain times of the year (winter layoffs of farm workers, construction,
tourism).

Full employment occurs when there is no [cyclical ] unemployment.

--------------------------
Chapter 6: The money market consists of the MD curve (money demand), interest rates, and
the quantity of (real) money. When interest rates rise, people are less likely to hold onto money
in physical form or in non-interest bearing accounts; so there is less demand for money. If the
interest rate goes down, there is more demand for money because it’s cheap to borrow money.

------------
When interest rates rise, investment goes _____ (up or down).

down. Because money is more expensive to borrow. Also, the return on savings becomes more
attractive.
------------
The federal funds rate is:
A. the rate the federal reserve charges banks
B. the rate that banks charge each other for overnight loans

Answer: [B. The discount rate is what the fed charges banks directly]
------------

The interest rate market is like any other good, there is an AD and AS curve
For interest rate is on the Y Axis, and the quantity of money borrowed in a year is on the x axis.

------------------

Balance of Trade
https://www.youtube.com/watch?v=dirBYVjDk7A

Match:
A. Current Account
B. Capital Account
C. Official settlement

1. imports, exports, net interest, and net transfers.

2. shows changes in US official reserves, the government holdings of foreign currency.
3. foreign investment in the US and US investment abroad. This is the change in assets

Answers:
A. 1
B. 3
C. 2
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Forex (foreign exchange)
In the AD/AS chart for a currency , the Quantity of the base currency is on the [x] axis, and the
price in a foreign currency is on the [y] axis.
https://www.youtube.com/watch?v=9DVYVfI81R8
-------------
Americans ____ dollars on the foreign exchange market.
Foreigners _____ dollars on the foreign exchange market.

Americans supply, foreigners demand.

-----------
4 shifters of Forex market ?
taste/preferences, income, price level/inflation interest rates,
-----------
A recession is the period of two or more consecutive quarters (6 months) of economic decline.
When the economy starts improving it’s not a recession, it’s a recovery/expansion.

---------
An increase in the money supply will lower interest rates, causing an increase in investment
(borrowing, not saving) and an increase in the GDP.

----------------
Leakages in the circular flow include taxes, savings, imports. (p.65)
Injections include government spending , business and investment spending, and foreign
investment and exports.

The bathtub theorem states that an economy grows when injections are greater than leakages,
and an economy shrinks if leakages are greater than injections.
------------

Discount rate or bank rate = rate that the federal reserve charges banks.
Federal funds rate = rate banks charge each other overnight
----------------
The labor market can be graphed similar to an AD/AS chart.
Instead you have LD and LS (Labor demand and supply)
On the x axis is labor amount , often listed in millions of hours
On the y axis is real wage rate in dollars

https://www.youtube.com/watch?v=j0c2vmFGbtk

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The production function charts the relationship between Labor input and GDP output. Basically
the more labor input you have, you get incrementally less GDP output per unit of labor
(diminishing returns). You get less marginal product of labor
p.146

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Comparative advantage between two countries.
Whoever has the lowest opportunity cost per unit has the comparative advantage in that
product.

If a country can produce 20 planes and 2 ships

They can produce 1 plane or 2/20 ships = 1/10 ship is the opportunity cost of making planes
They can produce 1 ship or 20/2 planes = 10 planes is the opportunity cost of making ships
One country will have a comparative advantage in exactly one product out of the two. But a
country can have an absolute advantage in both products (can produce more total).

Whatever you divide the first product by to get 1 unit, divide the second product by the same
number to get the opportunity cost.

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The labor force is the total of [employed] and [unemployed] people.
Students are excluded from/in the labor force.

The unemployment rate = number of unemployed / [labor force]

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The interest rate is the price (or cost) to rent money.
In the money market , the interest rate is similar to the price level in the AD/AS chart.
The money market consists of interest rate on the Y axis and real money on the x axis.

Practice drawing the money market chart. Include MD and MS (may or may not be diagnol
lines)
Draw the phillips curve chart.

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p.150 The capital market

Saving Supply (SS) and Investment Demand (ID) can be gaphed. There is an equilbrium point,
which is the interest rate.