Determinants of Demand

1. Tastes/preferences
2. Number of consumers
3. Income (it’s effect on the demand for normal goods)
4. Income (it’s effect on the demand for inferior goods)
5. Price of substitute goods
6. Price of complementary goods
7. Consumer expectations of future prices
8. Consumer expectations of future income

Determinants of Supply
1. Technology
2. Resource costs
3. Price of production substitute
4. Seller’s expectations of future prices
5. Number of suppliers
6. Taxes and subsidies

Inflation is the percent change in CPI.

CPI = (Cost of basket in the current year/cost of the basket
in the base year) *100
REAL GDP = (Nominal/CPI)*100
CPI = (Nominal/Real)*100
Disinflation – a reduction in the rate of inflation. Prices rise
at a decreasing pace.
Deflation – a decline in the price level. Prices on average fall.
New salary = salary (original yr.) * (CPI year you want to convert/CPI you have)
Real interest rate=nominal interest rate – expected inflation rate
Labor Force = Employed + Unemployed
Labor Force Participation Rate = (LF)/(Adult Population)*100
Unemployment Rate = (unemployed)/(Labor Force)*100
Total unemployment = frictional + structural + cyclical
Natural Rate = Fricitonal + structural
AE=Auton. Spending +MPC(Y-T)+I+G+Nx Change in Income = Multiplier * change in Expenditures
AE Multiplier = 1/(1-MPC) Tax Multiplier = -1(AE Mult.-1)
# of years to double=70/annual growth rate C+S=Y-T
Time=(70/annual growth rate)*# of doublings r=(doublings/time)*70
Injections=Withdrawals -> I+G+X=S+T+M
Multiplier Money = 1/rr
New Money supply = Multiplier Money * Change in deposits

V=
(P*Q)/M -> %changeM + %changeV = %changeP + %changeQ
Federal Funds Target = Target inflation rate + Current inflation rate + .5(inflation gap) +.5(output gap)
CLASSICAL MODEL - Believe both monetary and fiscal policies are ineffective. The economy will always self-
adjust.
KEYNESIAN MODEL - When the Fed increases the money supply, interest rates should fall, and then this should
spur businesses/factories to replace equipment or invest in new equipment, and physical capital. This then should
give AD a boost and have a stimulating effect on the economy.
They believe fiscal policy is more effective during a downturn.
MONETARIST MODEL - Consumption depends on income and wealth: permanent income hypothesis. They
believe crowding out makes fiscal policy ineffective. An increase in money supply will increase spending in the
short run but leads only to inflation in the long run.

M1: the most liquid form

 Currency held outside of banks.
o Cash
o Coin
 Demand deposits at commercial banks.
o Checking accounts
 Other liquid deposits
o Savings, checking accounts at smaller banks.
M2: less liquid
 M1 – largest portion, around 95% of M2/if it’s in M1, it’s in M2
 Small-denomination Time Deposits
o Certificates of deposit under $100,000
o Retail Money Funds
 Deposits invested in short-term securities w/ limited check writing
capabilities.
Shifters for supply of loanable funds – Real interest rate does not shift.
1. Economic outlook
2. Incentives to save.
3. Income or asset prices
4. Government deficits

Shifters for the demand of loanable funds – interest rates do not shift.
1. Investment tax incentives
2. Technological advances
3. Regulations
4. Product demand
5. Business expectations.
Price of Bond = (Interest payment)/(Yield)