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Macroeconomics Key Concepts and Formulas

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  • Scarcity & Choice

    Economics studies choices made due to scarce resources.

  • Opportunity Cost

    The highest-valued alternative given up to engage in an activity.

  • Absolute Advantage

    Producing more of a good or service than competitors using the same resources.

  • Comparative Advantage

    Producing at a lower opportunity cost than others; basis for trade.

  • Productive Efficiency

    Producing goods at the lowest cost.

  • Allocative Efficiency

    Producing goods that consumers value most.

  • GDP (Gross Domestic Product)

    Total market value of all final goods and services produced in a country in a year.

  • Expenditure Approach Formula for GDP

    \(Y=C+I+G+NX\) where C=consumption, I=investment, G=government spending, NX=net exports.

  • Real vs. Nominal GDP

    Real GDP is adjusted for inflation (base-year prices); Nominal GDP uses current-year prices.

  • Inflation

    A general, ongoing rise in price levels across the economy.

  • CPI (Consumer Price Index) Formula

    \(\frac{\text{Cost of Basket}_{current}}{\text{Cost of Basket}_{base}} \times 100\)

  • Inflation Rate Formula

    \(\frac{\text{New CPI} - \text{Old CPI}}{\text{Old CPI}} \times 100\)

  • Natural Rate of Unemployment

    Sum of frictional (job searching) and structural (skills mismatch) unemployment.

  • Cyclical Unemployment

    Unemployment caused by business cycle fluctuations, such as recessions.

  • Aggregate Demand (AD)

    Relationship between price level and quantity of real GDP demanded.

  • Wealth Effect

    Lower price levels increase the real value of household wealth, boosting consumption.

  • Short-Run Aggregate Supply (SRAS)

    Upward sloping; shifts right with technological advances or lower input costs.

  • Long-Run Aggregate Supply (LRAS)

    Vertical at potential GDP, representing full employment output.

  • Potential GDP

    Maximum GDP an economy can produce when all factors of production are fully employed.

  • Federal Reserve Dual Mandate

    Maintain price stability (low inflation) and high employment.

  • Open Market Operations

    The Fed buys T-bills to increase money supply or sells to decrease it.

  • Expansionary Monetary Policy

    Lower interest rates, increase investment, and increase aggregate demand.

  • Contractionary Monetary Policy

    Raise interest rates, decrease investment, and decrease aggregate demand.

  • Quantity Theory of Money

    \(M \times V = P \times Y\) where M=money supply, V=velocity, P=price level, Y=real output.

  • Government Spending Multiplier

    \(\frac{1}{1 - MPC}\), where MPC is marginal propensity to consume.

  • Tax Multiplier

    \(\frac{-MPC}{1 - MPC}\)

  • Crowding Out Effect

    Government borrowing raises interest rates, reducing private investment.

  • Short-Run Phillips Curve (SRPC)

    Inverse relationship between inflation and unemployment.

  • Long-Run Phillips Curve (LRPC)

    Vertical at the NAIRU; no long-run trade-off between inflation and unemployment.

  • Rule of 70

    \(\frac{70}{\text{Growth Rate}} = \text{Years to Double}\)

  • Real Interest Rate

    \(\text{Nominal Rate} - \text{Inflation Rate}\)