AP Macroeconomics Macroeconomic Relationships a cheat sheet Note

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

Key to Macroeconomic Symbols • • • 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 • • 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

• Self-correcting economy: below full-employment (recession) – • Self-correcting economy: above full-employment (inflation) – • Assume recessionary gap with flexible wages (w) u% ↑. : w↓. : SRAS→. : GDPR↑ & PL↓. : u%↓ & π%↓ = SRPC← 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 downright along SRPC OR G↓. : AD←. : GDPR↓ & PL↓. : u%↑ & π%↓ = move downright 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 downright along SRPC

• ‘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 ↓