AP Economics

Mr. Crawford

 MacroEconomics Exam Review Guide

UNIT ONE
MACROECONOMIC INSTABILITY

BUSINESS CYCLES

  • SAYS' LAW:  Y = C

  • MARX: INHERENT INSTABILITY BECAUSE

    • Y = C + S

UNIT TWO
CLASSICAL THEORY
AGGREGATE DEMAND

Law of Aggregate Demand

CHANGE IN PL = CHANGE IN NATIONAL OUTPUT (GDP, EMPLOYMENT, NATIONAL INCOME)

INVERSE

  • FOREIGN PURCHASES EFFECT
  • WEALTH EFFECT
  • INTEREST RATE EFFECT

CHANGE IN NPD= CHANGE IN AD

  • TAXES ON INCOME
  • REAL WEALTH
  • EXPECTATIONS
  • DEBT

CHANGE IN AD= PLAQ

CHANGE IN AD= PLQLSHORT RUN AGGREGATE SUPPLY

Law of Aggregate Supply

 CHANGE IN PL =  CHANGE IN CHANGE IN NATIONAL OUTPUT (GDP, EMPLOYMENT, NATIONAL INCOME)

DIRECT

CHANGE IN NPD= CHANGE IN SRAS

  • COST OF RESOURCE
  • UNEXPECTED SHOCKS
  • TAXES/SUBSIDIES ON BUSINESSES

CHANGE IN AS= PLAQ

CHANGE IN AS= PLAQ

LONG RUN AGGREGATE SUPPLY

 LRAS = PPF

PERFECTLY INELASTIC; UNRELATED TO CHANGES IN PL, LIMITS OF POTENTIAL PRODUCTION AT FULL EMPLOYMENT

CHANGE IN NPD= CHANGE IN LRAS

  • TRADE
  • INVESTMENT IN TECHNOLOGY
  • MORE OR LESS RESOURCES

CLASSICAL THEORY

  • JOSEPH SCHUMPETER
    • Y = C + S
    • S = I
    • Y = C + I
  • CYCLES ARE TEMPORARY DISEQUILIBRIUMS IN
    • PRODUCT MARKET
    • RESOURCE MARKET
    • MONEY MARKET
  • IF AD THEN S > I
    • SURPLUS; RECESSION
    • PRICES DROP
      • DEFLATION OR DISINFLATION
    • WAGES DROP
    • INTEREST RATES DROP
    • AS AND S = I
  • IF AD THEN S < I
    • SHORTAGE; INFLATION
    • PRICES RISE
      • INFLATION
    • WAGES RISE
    • INTEREST RATES RISE
  • AS AND S = I
NATIONAL INCOME ACCOUNTING
  • C + Ig + G + Xn = GDP
  • NY + KCA + IBT = GNP
 CONSUMER PRICE INDEX
  • NOMINAL = PxQ
  • REAL = NOMINAL/CPI x 100
  • MARKET BASKET = HOLD QUANTITY CONSTANT
  • CPI = MARKET BASKET OF THIS YEAR/MARKET BASKET OF BASE YEAR x 100
 UNEMPLOYMENT
  • LABOR POOL + NOT COUNTED = POPULATION
  • UNEMPLOYMENT RATE = UNEMPLOYED/LABOR POOL
  • UNEMPLOYMENT:

ACTUAL
FRICTIONAL
CYCLICAL
STRUCTURAL

OKUN'S LAW

CYCLICAL UNEMPLOYMENT x 2.5 = GDP GAP
UNIT THREE
KEYNESIANISM

 

CRITIQUES OF CLASSICAL THEORY

  • SAVINGS DOES NOT EQUAL INVESTMENT
  • RATCHET EFFECT
    • DOWNWARD INFLEXIBILITY OF PRICES AND WAGES
  • KEYNESIAN CONSUMPTION MULTIPLIER

KCM = 1/MPS

 

Aggregate Demand and Equilibrium
A. Equilibrium (E) is where planned and actual AD and AS are equal.
          1. Equilibrium is where all goods produced for sale are sold. 
          2. At points below equilibrium, AD < AS, inventories are building and business 
              activity is contracting. This level of economic activity was depicted by the 
              horizontal (Keynesian) range of AS explained in the previous model.
          3. At points above equilibrium AD > AS, inventories are decreasing and 
              business activity is expanding
              as depicted by the intermediate range and eventually the classical range of AS.
          4. Economic activity (Real GDP) will be wherever AD intersects AS. 
              Equilibrium seldom exists as 
              economic activity is usually in one stage or another of the business cycle.
     B. If economic activity is not in balance, a dynamic situation exists and will continue
             until equilibrium is reached.
     C. Keynes believed that E could settle at a level of economic activity with large amounts of unemployment.
         1. If potential Real GDP is greater than what actual AD yields, a recessionary gap exists and may persist indefinitely. The solution to this unacceptable
             equilibrium is to increase AD.
         2. If potential Real GDP is less than what actual AD yields, an inflationary gap exists and the inflation may persist indefinitely. The solution to this unacceptable level of economic activity is to decrease AD.

 

 

 

 

 
UNIT FOUR
MONETARY POLICY
MONETARY POLICY/SUPPLY SIDE
  • PERMANENT INCOME THEORY
  • EXPANSIONARY BIAS
  • CROWDING OUT
  • STRUCTURAL DEBT
  • EXPORT SHOCK

EQUATION OF EXCHANGE

MV = PQ 

FEDERAL RESERVE MONETARY TOOLS 

  • OPEN MARKET
    • BOND PRICES
  • DISCOUNT RATE
    • DISCOUNT WINDOW
  • RESERVE RATION
    • HAMMER
    • CHANGES BOTH M AND V
  • LONG RUN
    • IF EP > 0
      • FIRMS ENTER
      • ATC
      • P
      • EP = 0
    • IF EP < 0
      • FIRMS LEAVE
      • ATC
      • P
      • EP = 0
  • LONG RUN PRODUCTIVE EFFICIENCY
  • X-EFFICIENCY
    • OVERCAPITALIZATION FOR POTENTIAL EXPANSION
  • NOT ALLOCATIVE EFFICIENT

 
UNIT FIVE
INTERNATIONAL TRADE