Christian's AP Macroeconomics Blog

The  balance of payments  is the measure of money inflows and outflows between the United States and the Rest of the World (ROW).  Inflows  are referred to as  credits  and  outflows  are referred to as  debits . The balance of payments is divided into three accounts:  current account ,  capital/financial account , and  official reserves account . Current Account Balance of trade or net exports exports of goods/services - import of goods/services exports  create a  credit  to the  balance of payments imports  create a  debit  to the  balance of payments Net foreign income income earned by U.S. owned foreign assets - income paid to foreign-held U.S. assets ex: interest payments on U.S. owned Brazilian bonds - interest payments on German-owned U.S. Treasury bonds Net transfers (tend to be unilateral) foreign aid -> a debit to the current account ex: Mexican migrant wo...

Monetary policy  is always conducted by  the Fed  and only affects  AD  through  investment spending . In  open market operations , the Fed can either buy bonds, which increases the money supply, or sell bonds, which decreases the money supply. The  discount rate  is used when FDIC member banks and other eligible institutions may borrow short-term loans from the Fed (banks borrow from the Fed). The  federal funds rate  is used when FDIC member banks loan each other overnight funds (banks borrow from each other). Reserve requirement  is a certain amount of reserves that banks must keep in the vault. The  prime rate  is the interest rate that banks charge to do their most creditworthy customers. If the Fed wants to  fight a recession , it will enact  expansionary monetary policy  to  increase the money supply  by using one or more of the following tools: Buying bonds ...

The  loanable funds market  is where savers and borrowers exchange funds  ( Q LF ) at the real interest rate (r%). The  demand for loanable funds , or  borrowing , comes from households, firms, government, and the foreign sector. The  demand for loanable funds is, in fact, the supply of bonds . The  supply of loanable funds , or  savings , comes from households, firms, government, and the foreign sector. The  supply of loanable funds is also the demand for bonds . Remember that  demand for loanable funds = borrowing   (i.e. supplying bonds) .  Changes in the demand for loanable funds  occur when there is: More borrowing = more demand for loanable funds (->) Example: Government deficit spending = more borrowing = more demand for loanable funds, therefore  D LF  -> and r% increases Less borrowing = less demand for loanable funds (<-) Example: Less investment demand = less borrowing = less ...

The  money market  is where the Federal Reserve and the users of money interact, thus determining the nominal interest rate (i%). It is composed of two parts: Money demand (MD)  comes from households, firms, government, and the foreign sector. Money supply (MS)  is determined only by the Federal Reserve. Money demand  is further divided into three parts: Transaction demand  is the demand for money as a medium of exchange (independent of interest rate). Asset demand  is the demand for money as a store of value (dependent of the interest rate). Total money demand MD is downward sloping because at high interest rates people are less inclined to hold money and more inclined to hold stocks and bonds At lower interest rates people sacrifice less when they hold money Money supply  is determined by the Federal Reserve because the Federal Reserve has monopoly control over the supply of money.

There are  three functions of money : medium of exchange, store of value, and unit of account. Medium of Exchange it serves to trade one product for another Store of Value where money holds its value over a period of time Unit of Account establishes economic worth There are  three types of money : commodity money, representative money, and fiat money. Commodity Money gets its value from the type of material from which it is made examples are gold and silver in products Representative Money paper money backed by something tangible that gives it value examples are gold-or-silver-backed money and IOUs Fiat Money money because the government says so There are  seven characteristics of money : Durability Portability Divisibility Uniformity Scarcity Acceptability Limited Supply Money supply  consists of M1 money, M2 money, and M3 money. M1 Money consists of currency in circulation, which can be: currency , which ...

Fiscal Policy - Changes in the expenditures or tax revenues of the federal government. Controlled by government (Congress, President) 2 Tools of Fiscal Policy Taxes: Government can increase or decrease taxes. Spending: Government can increase or decrease spending. -Fiscal policy is enacted to promote our nation's economic goals: full employment, price stability, economic growth Deficits, Surpluses, and Debt Balanced Budget Revenues = Expenditures Budget Deficit Revenues < Expenditures Budget Surplus Revenues > Expenditures Government Debt Sum of all deficits - Sum of all surpluses Government must borrow money when it runs a budget deficit. Government borrow from: Individuals Corporations Financial institutions Foreign entities or foreign government Fiscal Policy Two Options Discretionary Fiscal Policy (action) Expansionary Fiscal Policy- Think deficit Contractionary Fiscal Policy- Think surplus Non-Discretionary Fiscal Policy (no ...

Disposable Income (DI) - Income after taxes or net income 2 Choices With DI, households can either: Consume (Spend $ on goods and services) Save (Not spend $ on goods and services) Consumption Household spending The ability to consume is constrained by The amount of DI The propensity to save Do households consume if DI ≠ 0? Autonomous consumption Dis-saving Saving Household NOT spending The ability to save is constrained by The amount of DI The prosperity to consume Do households save if DI ≠ 0? NO APC & APS Average Propensity to Consume and Average Propensity to Save APC + APS = 1 1 - APC = APS 1- APS = APC APC > 1 (Dissaving) -APS (Dissaving) MPC & MPS Marginal Propensity to Consume (MPC)  ∆C / ∆ DI % of every dollar earned that is spent Marginal Propensity to Save (MPS) ∆S / ∆DI % of every extra dollar that is saved. MPC + MPS = 1 1 - MPC = MPS 1 - MPS = MPC Marginal Propensity to Consume (MPC) M...

Investment - Money spent or expenditures on: New plants (factories) Capital equipment (machinery) Technology (hardware and software) New homes Inventories (goods sold by producers) Expected Rates of Return How does business make investment decisions? Cost/Benefit analysis How does business determine the benefits? Expected rate of return How does business count the cost? Interest costs How does business determine the amount of investment they undertake? Compare expected rate of return to interest rate If expected return > interest cost, then invest If expected return < interest cost, then don't invest Real Interest Rate (r%) v. Nominal Interest Rate (i%) What's the difference? Nominal is the observable rate of interest. Real subtracts out inflation (π%) and is only known for ex post factor. How do you compute the real interest rate (r%)? r% = i% - π% What determines the cost of an investment decision? The real interest rate (r%) ...

The  AS/AD model  shows that the equilibrium of AS and AD determines the current output (real GDP) and the price level. Full employment:  equilibrium exists where AD intersects SRAS and LRAS at the same point Recessionary gap:  exists when equilibrium occurs below full-employment output An  inflationary gap  exists when equilibrium occurs beyond full employment output . Three ranges of SRAS :  Keynesian or horizontal range ,  intermediate range , and  classical or vertical range . Keynesian or horizontal range: recession or depression  not fully using all of our resources  below full employment. Intermediate-range: resources are getting closer to full employment levels, which creates upward pressure on wages and prices. Classical or vertical range   when real GDP is at a level below the full employment level where any increase in demand will result only in an increase in prices. ...

Aggregate supply (AS):  is the level of real GDP that firms will produce at each price level. Ways to measure: Long-run  is the period of time where input prices are completely flexible and adjust to changes in the price level. In the long-run, the level of real GDP supplied is independent of the price level. Short-run  is the period of time where input prices are sticky and don't adjust to changes in the price level. In the short-run, the level of real GDP supplied is directly related to the price level.  There are two types: long-run aggregate supply (LRAS) and short-run aggregate supply (SRAS). Long-run aggregate supply (LRAS): The long-run aggregate supply (LRAS) marks the level of full employment in the economy (analogous to production possibilities chart, or PPC).  Because input prices are completely flexible in the long-run, changes in price level don't change firms' real profits and therefore don't change firms' leve...

Aggregate demand (AD):  shows the amount of real GDP that the private, public, and foreign sector collectively desire to purchase at each possible price level. In other words, it is the demand by consumers, businesses, government, and foreign countries. Changes in price level cause a move along the curve, not a shift of the curve. The relationship between the price level and the level of real GDP is inverse. The formula for aggregate demand is  AD = C + Ig + G + Xn Aggregate demand is downward sloping, there are 3 reasons for that: Wealth Effect, Interest Rate Effect, and Foreign Trade Effect. Wealth Effect Higher prices reduce purchasing power of money This decreases the quantity of expenditures  Lower price levels increase purchasing power and increase expenditures Interest-Rate Effect As price level increases, lenders need to charge higher interest rates to get a REAL return on their loans Higher interest rates discourage consumer spending and busi...

Unit II: Gross Domestic Product Gross domestic product/ GDP: total market value of all final goods and services produced within a country's borders within a given year. Gross national product/GNP:  a measure of what citizens produce and whether they produce these items within a country's borders. GDP has four parts and these four parts are used to calculate it. The "C" stands for personal consumption expenditures, which are finished goods or services. 67% of the economy is spent on this section. The " I g " stands for gross private domestic investment. 17% of the economy is spent on this section. There are four things fall in this section: factory equipment maintenance new factory equipment construction of housing unsold inventories or products built in a year The "G" stands for government purchases of goods and services 20% of the economy is spent on this section. The " X n " stands for net export wh...