Macroeconomics

Front 1

Aggregate Demand is negative sloped because (3 reasons):

Back 1

1.international substitution effect
2.inter-temporal substitution effect
3.real wealth effect

Hint 1

int'l, inter-temporal, wealth

Front 2

International substitution effect:

Back 2

as Pus, Xus goes down, and Mus (X-M does down so AD goes down)

Hint 2

easiest to remember

Front 3

Inter-temporal substitution effect:

Back 3

if Pus temporarily, C,I,G,X go down temporarily and M temporarily causing AD to go down

Hint 3

temporary changes to CIGXM

Front 4

Real Wealth Effect:

Back 4

keeping expected lifetime Y the same, if Pus goes down, purchasing power  so C and I

Hint 4

purchasing power changes

Front 5

Current account

Back 5

trade balance (X-M) + loan payments + direct foreign investments

Hint 5

trade balance plus two exogenous things

Front 6

Purchasing Power Parity (PPP)

Back 6

absolute: P$ = ($/l)*Pl
relative: P$ = ($/l)*Pl + constant tax difference + constant tranportation costs -> P$ growth = ($/l) growth*Pl growth

Hint 6

difference between abs and rel

Front 7

Aggregate Expenditures Approach of GDP

Back 7

AE=AD=GDP= C + I + G + X - M

Front 8

private vs. public savings

Back 8

GDP = Y = C + I + G + X - M
Y - C - G - I = X - M
(Y - C - T)+(T - G)-I=X-M
private savings = Y - C - T
public savings = T - G
S - I = X -M

Hint 8

derivation of AD to capital account balance=trade balance

Front 9

deposit multiplier

Back 9

larger multiplier = larger shifts in AD -> mpc is large and mpm is small

Hint 9

think mpc and mpm

Front 10

mpc and mpm

Back 10

mpc = mpm = 0 is totally rational
mpc grows with irrationality

Front 11

3 Requirements of Money

Back 11

1.medium of exchange(method of payment)
2.unit of account(can value all goods/services)
3.store of value(can be used now or saved for later)

Hint 11

exchange, account, vale

Front 12

Quantity Theory of Money

Back 12

Money Supply*Velocity=Price*GDP, where V and GDP are determined exogenously and holds only in long run

Front 13

money multiplier

Back 13

the amount of money created by one deposit based on our fracitonal reserve system

Front 14

Reserve ratio

Back 14

required amount that banks must not lend on every deposited dollar; as the money multiplies increases rr down

Front 15

3 Goals of the FOMC and the Fed:

Back 15

1.low unemployment
2.stable prices
3.stable exchange rate

Hint 15

employment, inflation, e

Front 16

M0

Back 16

currency in circulation
currency in bank reserves

Hint 16

oldest, includes least

Front 17

M1

Back 17

currency in circulation
travellers' checks
checking deposits

Hint 17

middle of the road

Front 18

M2

Back 18

currency in circulation
travellers' checks
checking deposits
savings deposits
time deposits
mutual fund deposits

Hint 18

most inclusive

Front 19

contractionary policy

Back 19

more effective
less lending, r up, dollar appreciates (X down and M up)

Hint 19

pull on a string

Front 20

expansionary policy

Back 20

less effective
more lending, r down, dollar depreciates (X up and M down)

Hint 20

push on a string

Front 21

contractionary methods

Back 21

raise required reserves (rr): AD shifts left and S($) shifts left
raise federal funds rate (ffr): sell more gov bonds, M2 goes down, reserves go down so lending decreases, r increase and ffr increases

Hint 21

UP!

Front 22

expansionary methods

Back 22

lowering rr: AD shifts right, S($) shifts out
lowering ffr: buy more gov bonds, M2 increases, reserves increase so lending increases, r decreases and ffr decreases

Hint 22

DOWN!

Front 23

contraction:

Back 23

rr up, lending down, r up:
C down because S up
I down because r up so mpk up (p.c.) and I down (d.r.)
G unchanged
X down because dollar appreciates
M up because dollar appreciates

Hint 23

Start with rr (think UP), then lending, then r...

Front 24

expansion:

Back 24

rr down, lending up, r down:
C up because S down (low r)
I up because r down=mpk down (p.c.) and I up (d.r.)
G unchanged
X up because $ depreciates
M down because $ depreciates

Hint 24

Start with rr (think DOWN), then lending, then r...

Front 25

Why is it easier to reduce AD (pull string) than to increase AD (push string)?
2 Reasons

Back 25

1.risk up and ffr might not fall low enought to offset
2.rational banks will just raise nominal rates to cover long-term inflation with no change in real rate charged

Hint 25

risk and rationality (inflation)

Front 26

The role of risk when trying to increase AD:

Back 26

Risk up during downturns, so bank’s costs up, but the ffr may not fall low enough to offset the rising risk

Front 27

The role of rationality when trying to increase AD:

Back 27

Rational banks know expansionary policy leads to inflation, which raises their costs when borrowing cost (ffr) falls; long run rates should be unaffected because banks will just raise nominal rates to cover the long-term inflation with no change in the real rate charged (which is what affects saver and firm decisions).