Macroeconomics Exam Study Guide: Financial Markets, Economic Growth, Aggregate Expenditure, and AD-AS Model

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The market for loanable funds determines the equilibrium interest rate and the quantity of funds lent and borrowed in the economy.

Supply Curve Shifts: Influenced by changes in savings behavior, fiscal policy (e.g., government budget surplus/deficit), and economic outlook.
Demand Curve Shifts: Driven by changes in investment opportunities, business confidence, and government borrowing.
Example: An increase in government borrowing shifts the demand curve for loanable funds to the right, raising interest rates.

Growth rates measure the percentage change in a variable (such as GDP) over time.

Growth Rate Formula:
Rule of 70: Estimates the number of years required for a variable to double, given its annual growth rate.
Example: If GDP grows at 2% per year, it will double in approximately 35 years.

Long-run economic growth is driven by increases in productivity, capital accumulation, labor force growth, and technological progress.

Key Determinants: Physical capital, human capital, technology, and institutional factors.
Movement vs. Shift in Per-Worker Production Function: Movement along the curve is caused by changes in input quantity; shifts are caused by technological change or improvements in efficiency.

Technological change refers to improvements in the methods of production, leading to higher output with the same inputs.

Components: Innovation, research and development, education, and knowledge spillovers.
New Growth Theory: Emphasizes the role of ideas, innovation, and policies that foster technological progress.
Policies: Investment in education, R&D subsidies, protection of intellectual property.

Convergence theory predicts that poorer economies will grow faster than richer ones, eventually catching up in terms of income per capita.

Failures in Low-Income Countries: Poor institutions, lack of infrastructure, low investment in human capital.
Policies to Address Failures: Institutional reforms, investment in health and education, foreign aid, and trade liberalization.

The aggregate expenditure model explains short-run fluctuations in GDP based on spending decisions.

Components: Consumption (C), Investment (I), Government Spending (G), Net Exports (NX).
Macroeconomic Equilibrium: Occurs when aggregate expenditure equals total output (GDP).

Consumption depends on disposable income and is modeled by the consumption function.

Consumption Function: where is autonomous consumption, is the marginal propensity to consume (MPC), and is disposable income.
MPC (Marginal Propensity to Consume): Fraction of additional income spent on consumption.
MPS (Marginal Propensity to Save): Fraction of additional income saved.

These components are represented in the aggregate expenditure model and influence equilibrium output.

Example: An increase in government spending shifts the aggregate expenditure curve upward, increasing equilibrium GDP.

Equilibrium is found where the aggregate expenditure line intersects the 45-degree line (where AE = GDP).

Disequilibrium Points: Occur when planned spending does not equal output, leading to inventory changes.
Numerical Solution: Set and solve for .

The multiplier quantifies the change in equilibrium output resulting from a change in autonomous spending.

The aggregate demand (AD) curve shows the relationship between the price level and the quantity of real GDP demanded.

Negative Slope: Due to wealth effect, interest rate effect, and international trade effect.
Movements vs. Shifts: Movement along the curve is caused by changes in the price level; shifts are caused by changes in consumption, investment, government spending, or net exports.

The SRAS curve shows the relationship between the price level and the quantity of goods and services firms are willing to produce in the short run.

Positive Slope: Due to sticky wages and prices, and firms responding to higher prices by increasing output.
Movements vs. Shifts: Movement along the curve is caused by changes in the price level; shifts are caused by changes in input prices, technology, or expectations.

The LRAS curve is vertical, reflecting the economy's potential output at full employment.

Vertical Line: Indicates that in the long run, output is determined by resources and technology, not the price level.
Shifts: Caused by changes in labor, capital, or technology.

Equilibrium occurs where AD intersects SRAS and LRAS. Short-run equilibrium can differ from long-run equilibrium due to price and wage stickiness.

Expansion and Recession: Expansion occurs when equilibrium output rises; recession occurs when it falls below potential output.
Graphing: Use AD, SRAS, and LRAS curves to illustrate shifts and changes in equilibrium.