AP Macroeconomics

1. AP Macroeconomics Macroeconomic Relationships a cheat sheet (Note: .: = therefore)

2. Key to Macroeconomic Symbols • MS – Money Supply • MD – Money Demand • ER – Excess Reserves • i% - nominal interest rate • DR – discount rate • RR – reserve ratio • OMO – open market operations (buying and selling gov’t bonds) • FOREX – foreign exchange market • D$ - demand for dollars in FOREX • S$ - supply of dollars in FOREX • $ - value of dollar in FOREX • ↑ - increase • ↓ - decrease • → - shift right (increase) • ← - shift left (decrease) • .: - therefore • Δ - change • GDPR – Real GDP (Output) • C – Consumption • IG – Gross Private Investment • G – Government Spending • XN – Net Exports (Exports – Imports) • w- wages (primary cost of production) • T – taxes • DI – disposable income • X – Exports • M – Imports • AD – aggregate demand • SRAS – short-run aggregate supply • LRAS – long-run aggregate supply • PL – Price Level • SRPC – short-run Phillips curve • LRPC – long-run Phillips curve • u% - unemployment rate • π% - inflation rate • SLF – Supply of loanable funds • DLF – Demand for loanable funds • r% - real interest rate

3. Self-correcting economy: below full-employment (recession) • Assume recessionary gap with flexible wages (w) u% ↑.: w↓ .: SRAS→.: GDPR↑ & PL↓.: u%↓ & π%↓ = SRPC← • Self-correcting economy: above full-employment (inflation) • Assume inflationary gap with flexible wages (w) u%↓.: w↑ .: SRAS←.: GDPR↓ & PL ↑.: u%↑ & π%↑ = SRPC→ • Expansionary fiscal policy on economy below full-employment (recession) • Assume recessionary gap with sticky wages (note: DI = disposable income) T↓.: DI↑.: C↑.: AD→.: GDPR↑ & PL↑.: u%↓ & π%↑ = move up/left along SRPC OR G↑.: AD→.: GDPR↑ & PL↑.: u%↓ & π%↑ = move up/left along SRPC • Contractionary fiscal policy on economy above full-employment (inflation) • Assume inflationary gap T↑ .: DI↓.: C↓ .: AD← .: GDPR↓ & PL↓ .: u%↑ & π%↓ = move down\right along SRPC OR G↓ .: AD← .: GDPR↓ & PL↓ .: u%↑ & π%↓ = move down\right along SRPC • Expansionary monetary policy on economy below full-employment (recession) • Assume recessionary gap with sticky wages Fed buys bonds, DR↓, and/or RR↓ .: ER↑ .: MS→ .: i%↓ .: IG↑ .: AD→.: GDPR↑ & PL↑.: u%↓ & π%↑ = move up/left along SRPC • Contractionary monetary policy on economy above full-employment (inflation) • Assume inflationary gap Fed sells bonds, DR↑, and/or RR↑ .: ER↓ .: MS ← .: i%↑ .: IG ↓ .: AD← .: GDPR↓ & PL↓ .: u%↑ & π%↓ = move down\right along SRPC

4. ‘Crowding Out’ of Gross Private Investment (effect of deficit spending) • Assume Expansionary Fiscal Policy (G↑ and/or T↓ .: government budget moves toward deficit) deficit spending .: DLF → or SLF ← .: r%↑ .: IG ↓ (partially or completely offsets intended increase in AD) • ‘Crowding In’ of Gross Private Investment (effect of budget surplus) • Assume Contractionary Fiscal Policy (G↓ and/or T ↑ .: government budget moves toward surplus) budget surplus .: DLF ←or SLF→ .: r% ↓ .: IG↑ (partially or completely offsets intended decrease in AD) • Expansionary Fiscal Policy Net Export Effect (counters policy) • Assume Expansionary Fiscal Policy (G↑ and/or T↓ .: government budget moves toward deficit) deficit spending .: DLF → or SLF ← .: r%↑ .: D$→ .: $↑ .: U.S. goods/services relatively expensive and foreign goods/services are relatively cheap .: X↓ and/or M↑ .: XN ↓ • Contractionary Fiscal Policy Net Export Effect (counters policy) • Assume Contractionary Fiscal Policy (G↓ and/or T ↑ .: government budget moves toward surplus) budget surplus .: DLF ←or SLF→ .: r% ↓ .: S$ → .: $↓ .: U.S. goods/services relatively cheap and foreign goods/services are relatively expensive .: X↑ and/or M↓ .: XN↑ • Expansionary Monetary Policy Net Export Effect (reinforces policy) • Fed buys bonds, DR↓, and/or RR↓ .: ER↑ .: MS → .: i%↓ .: S$ → .: $↓ .: U.S. goods/services relatively cheap and foreign goods/services are relatively expensive .: X↑ and/or M↓ .: XN↑ • Contractionary Monetary Policy Net Export Effect (reinforces policy) • Fed sells bonds, DR↑, and/or RR↑ .: ER↓ .: MS↓ .: i%↑ .: D$→ .: $↑ .: U.S. goods/services relatively expensive and foreign goods/services are relatively cheap .: X↓ and/or M↑ .: XN ↓